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Calculating tax
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What tax rates do small businesses pay?

In the United Kingdom, under tax law you must register your new business. But first, you must decide which legal structure is best for you. Whatever your choice, find out which corporate tax rates you’ll pay.

What taxes do sole traders pay?

As a sole trader under UK tax law, you pay personal Income Tax on your business’s taxable profits. This is calculated each year by you or your accountant when completing and filing your Self Assessment tax return, detailing your business sales revenue and outgoings after your tax allowances are taken into account.

The standard tax-free Personal Allowance (for 2019/2020) is £12,500, and you won’t pay any income tax until you earn more. This threshold figure will be higher if, as a basic rate taxpayer you claim a Marriage Allowance, or lower if your total taxable income is more than £100,000.

  • If your sole trader business’s annual net profit (i.e. sales minus costs and allowances)  combined with any other taxable income you receive falls in a range between £12,501-£50,000, you’ll pay the basic income tax rate of 20%.
  • A higher rate of 40% income tax applies to profits and other taxable income above £50,001 but not exceeding £150,000.
  • With an additional rate of 45% income tax payable on profits and other taxable income of £150,000 and above.
  • Income tax bands are different in Scotland than in the United Kingdom

Sole traders also must pay National Insurance contributions (NICs). If your sole trader business makes more than £6,365 a year (2019/20), you must pay flat-rate Class 2 NICs (£3 per week in 2019/20) at the same time as your income tax (ie after completing your Self Assessment tax return). 

If your sole trader business makes annual taxable profits of more than £8,631 (2019/20), you’ll also have to pay Class 4 NICs (9% on £8,632-£50,000 profit and 2% thereafter). This is also payable at the same time as your income tax and Class 2 NICs.

What rate of tax do private limited companies pay?

Limited companies pay Corporation Tax on their profits (minus any reliefs they can claim). Currently, the rate is 19%, but this will fall to 17% in 2020.

As an employee, you pay personal tax and NICs through the company’s PAYE (i.e. pay as you earn) scheme. Your limited company must pay employer’s NICs at 13.8% on employees with wages more than £166 per week.

As a company shareholder, you can pay yourself dividends (providing enough cash is available). You don’t pay any tax on the first £2,000 of dividend payments, but you must pay tax if you pay yourself anymore. Determined by income tax band, the basic rate payable is 7.5%, the higher rate is 32.5%, while the additional rate is 38.1%. Dividends that fall within your Personal Allowance don’t count towards your £2,000 dividend allowance.

You must pay your company’s Corporation Tax bill within nine months and a day of the end of your accounting period (companies with profits of more than £1.5m can pay in instalments) – calculate your Corporation Tax deadline

You or your accountant must file your company’s Corporation Tax return within 12 months in accordance with HMRC requirements, as well as calculate how much corporation tax is payable.

What taxes do partnerships pay?

Members of an ordinary partnership are usually self-employed and taxed accordingly, with income tax payable on their share of any profits after deduction of their personal allowances and other forms of taxable income are taken into account.

The standard tax-free Personal Allowance is £12,500 (2019/2020) and no income tax is due until you earn more. Then:

  • the basic income tax rate of 20% is payable on profits and other taxable income between £12,501 and £50,000
  • the higher rate of 40% applies to profits and other taxable income between £50,001 and  £150,000
  • the additional rate of 45% income tax is payable on profits and other taxable income more than £150,000
  • income tax bands are different in Scotland than in the United Kingdom

As with sole traders providing turnover, thresholds are met, partners must also pay Class 2 and Class 4 NICs at the same time as they pay income tax after they’ve completed and filed a Self Assessment tax return.

Non-corporate limited liability partnership members are taxed in the same way as partners, with income tax payable on their share of any profits, plus other taxable income and after any personal allowances are taken into account. If turnover thresholds are met, LLP members must also pay Class 2 and Class 4 NICs at the same time as they pay income tax, after they have filed a Self Assessment tax return.

What business tax will my UK company have to pay?

You pay business rates for use of commercial properties such as shops, offices, warehouses, industrial units, factories, etc.

You won’t pay business rates for using a small part of your home for business, for example, a spare room as an office. However, if you make significant alterations to your home for commercial reasons or sell products or services to visiting customers, business rates are payable to hm revenue from your bank account since you are operating as a UK company.

Local councils send business rates bills in February or March each year for the tax year to come.

  • Visit (government website) to find your business rates valuation and more information on tax charges, your lower earnings limit, dividend taxes, capital allowances and rates thresholds.
  • To estimate your UK trading business rates you multiply the “rateable value” by the appropriate “multiplier” (which the government sets).

The Valuation Office Agency (VOA) decides the property’s rateable value and your local council works out your business rates bill from this valuation. If you qualify for business rates relief, it will reduce your bill, but this isn’t always applied automatically, you might need to apply. If you have any questions about your business rates bill, get in touch with your local council. If you think your rateable value is wrong, contact the VOA. 

When do I need to register for VAT?

When your gross VATable year-to-date turnover reaches £85,000 (2019/20), you must register for VAT with HMRC (most businesses register online).

After registering, you’re sent a VAT registration certificate, showing your VAT number, the date you went over the threshold (i.e. your “effective date of registration”) and the date when you need to submit your first VAT return and make your first VAT payment.

From your effective date of registration, your business must charge the appropriate amount of VAT (in most cases this is the standard rate of 20% although some goods are subject to 5%, others are zero-rated or exempt).

You must hold and pay any VAT you charge to HMRC, after filing your VAT returns. You will need to keep detailed VAT records. Your business can reclaim VAT paid (possibly including VAT paid on purchases before you registered).

From April 1 2019, if your profits rates are above the VAT threshold you will need to submit your VAT return digitally using accounting software. This is part of the government’s Making Tax Digital scheme. However, there are a small number of businesses to whom this will not apply:

“For a small minority of businesses that have more complex requirements, we have made the decision to defer mandation by 6 months to ensure there is sufficient time for testing the service with them in the pilot before they are mandated to join. These businesses have until 1 October 2019 to start keeping records digitally and using MTD-compatible software to send their VAT returns to HMRC.”

via GOV.UK

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