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What Tax Does A Small Business Pay

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  • 12-07-2022
What Tax Does A Small Business Pay

Are you looking for information about what tax a small business needs to pay in the UK? Find out more about PAYE and the types of tax expected for a small business to pay.

Introduction to small business taxes

There are several types of small business taxes that companies that fall into this category have to pay HMRC in the UK. The tax small businesses pay is determined by several factors, such as your business assets and whether it has any employees or not.

The types of tax small businesses usually have to pay include:

  • Income Tax
  • VAT
  • Corporation Tax
  • National Insurance
  • Capital Gains Tax
  • Business Rates

The biggest tax payment for most small businesses depends on the company profits they make within a set period. For businesses, taxable profits are the net sum of money they make once they have deducted their losses and business expenses from whatever they have earned.

Depending on how your business is structured, there are different ways in which your profits are taxed. For example, if your business is a limited company, then paying corporation tax bills on your profits to HMRC is the standard tax you'll pay. 

Conversely, if you are a sole trader, you will pay income tax instead. Partnerships also pay income tax on their profits, but the separate partners must return individual tax returns to HMRC to pay them.

You must pay the Employer's National Insurance contributions (NICs) if your company employs people to work for you. If you work from business premises you own, you will also have to pay business rates bills on it. 

Of course, you can always apply for small business rates relief if you qualify. Value Added Tax (VAT) is another consideration for those supplying goods or services that are registered for VAT.

If you have a turnover above £85,000 on VAT-able goods or services, you must register this with HMRC. Finally, if your business owns any assets you choose to sell once they have increased in value, you must pay Capital Gains Tax on it (corporation tax rate for limited companies).

What taxes does a small business pay?

Alongside paying different types of tax, depending on how your small business is structured, there are also different payment schedules for when you pay tax in the UK. 

Tax years in the UK start on the 6th of April and run until the 5th of April the following year. This section will take you through the different payment schedules within this tax year and when the different taxes have to be paid.

Your small business must pay how much corporation tax you are eligible for nine months and a day after your accounting period. For most businesses, this is typically on the 31st of March, meaning you must pay your corporation tax by the 1st of January.

You will be taxed on all profits from your company's income made throughout the financial year, which is currently set at 19%. It is crucial that you keep to the deadline for corporation tax. If you miss a payment or even submit a late filing to HMRC, you can wind up in a heap of trouble, with financial penalties being the most common punishment.

Income tax refers to your salary or any other taxable income you receive as an individual, such as dividend income on investments. If you are a sole trader, you will have to declare your income tax on your profits through your annual self-assessment tax return.

Alternatively, if you own a limited company or are a director in a company structured this way, your income tax will be deducted from your pay through the PAYE system. 

At the same time, you may have to declare dividend payments through self-assessments, especially if your company reports to the Prudential Regulation Authority. 

Everyone in the UK earning above a certain threshold must pay National Insurance contributions. This tax goes towards public services like the NHS as well as your state pension for your retirement. The same payment methods broadly apply to National Insurance as they do for your income tax.

Most limited company directors pay their taxes through the PAYE system, while self-employed people and sole traders pay their taxes through self-assessment tax returns. 

HMRC will calculate how much National Insurance sole traders owe through the self-assessment on the 31st of January and through your payment account on the 31st of July.

Value Added Tax is added to the costs of goods and services provided by small and large businesses as a consumption tax. Therefore, not all companies are VAT-registered businesses unless their annual turnover exceeds the VAT threshold of £85,000 selling these goods and services.

For those who do need to pay VAT, in the UK, it is paid quarterly throughout the financial year, with your VAT returns being due to HMRC at least 37 days after the end of the quarter.

Capital Gains Tax is applicable whenever you sell something for a profit. This usually means possessions for individual people, but for small business owners, CGT applies to assets, shares in your company or when you sell the company itself. 

The amount you have to pay depends on your income tax code. Basic rate taxpayers will pay 10% capital gains tax, while higher rate taxpayers or those with additional income tax rates will have to pay 20%.

However, there are other factors that affect the rate of capital gains tax you have to pay. For example, if you are selling a property that is not your main residence, the capital gains tax rises to 18% for those on the basic tax rate and 28% for higher or additional rate taxpayers.

Alongside this, making a large profit in capital gains may push you into a higher income tax rate, meaning you may have to pay higher rates than usual if you are pushed into the next tax bracket. 

If you choose to sell the entirety of your business, it is fairly simple to calculate how much tax you pay through CGT on your profits. Once the business is sold, take the sales price and deduct the amount you paid for it initially.

Don't forget to include any investments you have made in the business and any other costs involved in the sale, as these can be deducted from your overall profits. Whatever is left after these calculations is the profit. 

It's also important to remember that you can deduct personal capital gains allowance from this figure before paying tax.

For the 2022-23 tax year, you can earn up to £12,300 tax-free, with couples able to pool their tax allowances, reducing their capital gains obligations even further. You can also apply for deductions if you pay for private healthcare insurance or other business expenses.

Capital allowances permit you to claim certain expenses in running your business. This can include purchasing machinery, company cars or other tools essential to your work. When it comes to your taxes, you may be able to deduct a portion of these expenses from the amount you have to pay to HMRC.

In some cases, you may be able to deduct all of them from your tax bill, helping to reduce the tax burden on your small business. Luckily for those in small businesses with expenses like these, the annual investment allowance (AIA) for the 2022-23 tax year has been temporarily increased to £1m until March next year.

This allowance applies to the tax period for your small business that began on the 1st of January 2022. If your company has any assets that fall outside of the purview of the AIA rules, you can use the "writing down allowances" process to declare them with HMRC. 

Taxes paid by sole traders

When it comes to the tax-free personal allowances, it makes sense that sole traders and self-employed individuals are the only small business operators that qualify for it. Other company structures, like limited companies, are naturally exempt from the personal allowance.

Therefore, as a sole trader, you have the opportunity to earn up to £12,500 before you have to pay any income tax to HMRC. However, even if you don't have to pay tax, you still have to declare your taxable profits in your annual self-assessment tax returns.If you start to earn profits above this value, you will then be placed into a specific tax bracket and therefore begin paying income tax.

Initially, you will be placed on the basic income tax rate of 20% for yearly profits between £12,501 and £50,000. The next step up from this is for sole traders is the 40% tax bracket for profits between £50,001 and £150,000 per year. The final income tax band is for taxable income above £150,000 and is set at a 45% rate.

Of course, don't forget your council tax for your local council. As a sole trader or self-employed person, it's also incredibly important to remember to file your yearly self-assessment tax returns accurately and on time with the payment deadline. If you fail to do this and therefore fail to pay the right amount of income tax on your annual profits, you could face some hefty fines.

While sole traders do not pay corporation tax, you must also remember to pay your National Insurance contributions that everyone has to pay in the UK. Additionally, the final thing to remember for sole trader tax obligations, if you expect to have yearly profits over £85,000, you must register to pay VAT.

Taxes paid by limited companies

Limited companies are required to pay several kinds of tax in the UK throughout the financial year.

Of course, corporation tax is one of the most obvious contributions all limited companies must make when paying their taxes.

To do this, these companies must file a company tax return with HMRC to ensure they pay the right amount of tax.

Alongside this, they must also submit an annual tax return to Companies House to remain compliant with UK Government regulations.

Keeping statutory accounts is also a necessity for the lawful running of a limited company. 

Additionally, much like sole traders, self-employed individuals or any other business structure, if a limited company brings in yearly earnings over £85,000, it must register for VAT payments.

What Tax Does A Small Business Pay? UK

However, while this covers the operations of the limited company itself, the directors of these companies also have individual tax obligations. Any limited company director must file an individual self-assessment tax return to HMRC. This is done regardless of whether they receive a salary from their business and, therefore, would pay their income tax and National Insurance through the PAYE system - they must submit a self-assessment tax return as well.

Taxes paid by partnerships

Paying tax as a partnership business somewhat mixes together the two tax arrangements we've already covered, i.e. limited companies and sole traders. The first similarity is that the partners of these companies are required to pay tax on their share of their business's profits through income tax, declared in their self-assessment tax returns.

Alongside income tax, partners also have to pay the right National Insurance through their self-assessments and declare themselves eligible for VAT if their earnings from VAT-able goods and services exceed £85,000 per year.

Finally, all nominated partners within a partnership company must file a yearly partnership self-assessment tax return, much like a limited company tax return, to remain compliant with UK tax and payment services regulations. 

Taxes paid by partnerships and limited liability partnerships (LLP's)

We come to limited partnership and limited liability partnerships to blend all the tax obligations we've already covered together.

The first tax obligation for those working in these types of businesses is to file individual partnership self-assessments for each of the designated partners within the company.

Again, as with most of the other company structures mentioned in this article, you must pay VAT if your limited or limited liability partnership deals in VAT-eligible goods and services with profits over the designated threshold.

Also, all partners within these companies are required to pay individual income tax on their earnings, determined through their self-assessment tax returns and pay the appropriate amount of National Insurance for their tax bracket.

TAXES PAID BY PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS (LLP'S)

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