What taxes do small businesses in the UK pay?

What taxes do sole traders pay in the UK?

If you are a sole trader, you don’t pay tax separately from your business. Instead, you may pay Income Tax and National Insurance contributions (NICs) personally based on your taxable business profits and other income.

Income Tax:

You’ll pay income tax if your total taxable income exceeds your available tax-free allowances. Your taxable business profit is generally calculated by deducting allowable business expenses and any other relevant tax reliefs from your business income.

Your business profits are then considered alongside other taxable income you receive, such as employment, pension or property income, to work out how much income tax you need to pay.

The income tax rates and bands that apply depend on your total taxable income and where in the UK you live. Different income tax rates and bands apply in Scotland.

See our How much Income Tax will I pay as a sole trader? guide for more information.

National Insurance:

Depending on the level of your business profits, you may also pay Class 4 National Insurance contributions.

You don’t normally have to pay Class 2 National Insurance contributions. However, if your profits are below the relevant threshold, you may be able to pay Class 2 contributions voluntarily to help protect your entitlement to certain state benefits, including the State Pension.

See our How much National Insurance will I pay as a sole trader? guide for more information.

Income tax and National Insurance due on your self-employed profits are normally reported and paid through Self Assessment.

What taxes do partnerships pay?

An ordinary business partnership doesn’t normally pay income tax on its profits itself. Instead, the partnership calculates its taxable profit and each partner is allocated a share, usually according to the partnership agreement.

Individual partners are normally treated as self-employed for tax purposes and may pay income tax and National Insurance contributions (NICs) on their share of the partnership profits.

Income Tax:

Each partner’s share of the taxable partnership profit is taken into account alongside their other taxable income when calculating their individual income tax liability.

The amount of income tax they pay will depend on their total taxable income, available allowances and the income tax rates and bands that apply to them. Different income tax rates and bands apply in Scotland.

Partners report their share of the partnership’s profits on their own Self Assessment tax return.

See our How much income tax will I pay if I’m in a partnership? guide for more information.

National Insurance:

Individual partners may also pay Class 4 National Insurance contributions depending on the level of their share of the partnership profits.

They don’t normally have to pay Class 2 National Insurance contributions. However, if their profits are below the relevant threshold, they may be able to pay Class 2 contributions voluntarily to help protect their entitlement to certain state benefits, including the State Pension.

Members of a limited liability partnership (LLP) are also generally treated as self-employed for tax purposes and taxed on their share of the LLP’s profits, although different rules can apply in some circumstances.

Different rules also apply if a partner is a limited company rather than an individual.

See our How much National Insurance will I pay if I’m in a partnership? guide for more information.

What taxes do private limited companies pay?

A private limited company is a separate legal entity from its owners and normally pays Corporation Tax on its taxable profits. The amount due depends on the company’s profits and any allowances or reliefs it can claim.

Corporation Tax is normally due nine months and one day after the end of the company’s accounting period, although different payment rules apply to some larger companies. The Company Tax Return normally has a later deadline and must be filed within 12 months of the end of the accounting period.

See our How much Corporation Tax do companies pay? guide and deadline calculator for more information.

If the company employs people, including directors who receive a salary, it will normally need to operate PAYE. Employees and directors may pay income tax and employee National Insurance contributions on their earnings, while the company may have to pay employer National Insurance contributions.

Company shareholders may also receive dividends if the company has sufficient profits available for distribution. Dividends aren’t subject to National Insurance, but shareholders may have to pay income tax on dividend income, depending on their circumstances.

When might I have to pay business rates?

You may have to pay business rates if your business uses a non-domestic property, such as a shop, office, warehouse or factory. Business rates can apply to sole traders, partnerships and companies.

If you run your business from home, you won’t usually have to pay business rates as well as Council Tax. However, you may have to pay them on part of your property if, for example:

• you employ people who work at your home;
• you’ve made changes to the property specifically for your business; or
• you sell goods or services to customers who visit the property.

Your local council normally calculates and collects your business rates. In England, the amount you pay is generally based on the property’s rateable value, which is set by the Valuation Office Agency (VOA), and the relevant business rates multiplier. Different systems apply in Scotland, Wales and Northern Ireland.

You may be entitled to business rates relief, which could reduce the amount you have to pay. Some reliefs are applied automatically, while others need to be claimed.

Find out more in our What are business rates? guide or check GOV.UK’s business rates guidance.

When might I need to register for VAT?

You must normally register for VAT if your business’s VAT taxable turnover exceeds the VAT registration threshold. You may also need to register if you expect your taxable turnover to exceed the threshold within the relevant period.

VAT taxable turnover is the total value of the goods and services you sell that aren’t exempt from VAT. It is turnover, not profit, that determines whether you need to register.

You can also choose to register voluntarily if your taxable turnover is below the threshold.

Once registered, you’ll normally need to charge VAT on taxable sales, keep VAT records and submit VAT returns to HMRC. You may also be able to reclaim VAT paid on eligible business purchases.

Find out more about the current threshold, when you need to register and how to do it in our Do I need to register for VAT? guide.