A quick guide to small business taxes

Income Tax and National Insurance

When you’re self-employed, you get all of the rewards from your business, but you also have all of the responsibility – including the responsibility of liaising with Her Majesty’s Revenue and Customs office (HMRC).

That means you’ll have to maintain accurate records of all financial transactions so that you can work out how much you need to pay in taxes and National Insurance contributions.

Use our Tax and National Insurance Calculator to work out how much tax you’ll pay if you are self-employed. 

Choosing an appropriate legal structure

The first thing to do when you start a new business is to decide is whether you are going to operate as a sole trader or whether you are going to register a limited company with Companies House. This is an important decision, particularly when it comes to tax – so do consider it carefully. Depending on your legal structure, you’ll have different tax and admin liabilities. For example, a limited company does not have to submit a Self Assessment tax return but will need to file a Company Tax return. 

While corporations are notorious for having better tax opportunities, for a small business with a turnover of less than £50,000 a year, it is likely to be more straight-forward to remain operating as a sole trader. Thus, registering as a sole trader is typically the best option when starting a small business, as it will allow you to test your business model before you tie yourself in to all the paperwork that accompanies owning a registered company.

Registering as self-employed

If you want to start your own small business as a sole trader, you have to register as self employed with HMRC as soon as you become self-employed, so that the government knows how much you’re earning and can collect the correct amount of tax from you. Unlike registering a limited company, this process is quick and straightforward.

First, you’ll need to choose a name for your business. This could be your own name, or it might be a name which is in keeping with your brand or business purpose. The name must adhere to a few rules:

• It must not contain ‘limited’, Ltd, or any variation of such.
• It must not be offensive.
• It must not contain a ‘sensitive’ or misleading word or phrase unless you have already sought permission.
• It must not infringe upon an existing trademark.

If you want to ensure that other business can’t start trading with the same name your name, you will need to register your name as a trademark.

Once you’ve registered, you will receive a Unique Taxpayer Reference (UTR) in the post. This number will allow you to create an account and complete your Self Assessment tax returns.

How much can I earn tax free if I’m self-employed?

If you’re self-employed, the amount you can earn tax free is the same as for employed people. For the tax year of 2022/23, the standard personal allowance of money you can earn before you have to pay tax is £12,570. However, make sure to be aware of any changes for the current tax year.

If your small business is only an additional business and not your sole source of income (i.e. if you are still employed, you will only get your personal allowance once). In this situation, your personal allowance will usually be applied to the job which pays you most and is your main job.

You can use our Self Employed Tax Calculator to find out how much tax and national insurance you will pay for the current tax year.

Trading and Property Allowance

As a self-employed person, you can also get an additional allowance of £1,000 tax free income if you receive less than £1,00) for property or trading.

If your gross annual income for property or trading is less than £1,000 you do not need to complete a tax return. This is known as full relief.

In contrast, if your total income exceeds £1,000, you can still benefit from partial relief by electing to take the £1,000 property or trade allowance as a deduction from your income.  It is important to note that, if you claim partial relief, you cannot deduct any other expenses.

For many individuals the allowances will provide simplicity and allow them to make modest income with no tax implications, however, this simplified flat-rate allowance may not be the best option for your small business. For example, if you are going to have a trade income of less than £1,000, then disapplying the exemption of the income could benefit you in the future as it could increase your Net Relevant Earnings and lead to you receiving aa larger pension contribution without any additional taxation.