What taxes do small businesses pay?
The type of tax you pay when you run a small business, and the method you pay it, will depend on your company's business structure.
A sole trader's tax bill will differ from that of a limited company, or a partnership.
In this guide, we'll outline the taxes you can expect to pay when running a business, and how they're calculated. You can find out more detailed information on our guide to each specific tax.
19% - limited companies
Corporation tax is applied to the profits earned by limited companies - not sole traders or partners.
It's calculated after salaries and other business expenses have been paid, but before dividends are withdrawn.
Unlike income tax, companies don't benefit from any kind of personal allowance, so tax must be paid on all profits.
Corporation tax has a flat 19% charge, regardless of how much profit the company makes.
How to pay
As each business's accounting year is different, filing and paying corporation tax can be tricky.
Each year, you'll need to submit a CT600 form to HMRC - also known as a company tax return - providing details of the company's income, as well as deductions for tax allowances and expenses. This is due 12 months from the end of your company's accounting date.
However, you'll need to pay your corporation tax bill nine months and one day after the end of your company's accounting date. So, in practice, it makes sense to complete your company tax return early to find out how much corporation tax you owe.
It's down to the business to declare how much corporation tax it needs to pay. HMRC won't instruct you.
You could risk a HMRC fine if you pay your tax late, file your tax return after the deadline, or providing inaccurate information.
To pay, you must log into your HMRC account and choose a payment method, including online payment, direct debit, company credit card, or via your bank. You can also make payments over the phone.
You can't use a private credit card, and you can no longer pay at a Post Office.
Find out more: what is corporation tax?
Value Added Tax (VAT)
20% - customers of VAT-registered businesses
VAT is a tax that's added to most goods and services. Most things attract the standard VAT rate of 20%, but some - including children's car seats and home energy - have a reduced rate of 5%.
If your company is VAT-registered, you must charge your customers VAT on top of your prices. But you'll also be able to reclaim VAT that you pay on business expenses.
Companies don't have to register for VAT unless their annual taxable turnover exceeds the VAT threshold, which in 2020-21 is £85,000.
However, you can do so voluntarily. This gives you the advantage of claiming VAT back for anything you purchase for your business - including the likes of laptops, tools and stationery. However, it does mean you'll have to submit VAT returns to HMRC.
How to pay
You have to submit VAT returns every three months, even if you have no VAT to pay or reclaim.
As of 1 April 2019, businesses must send their returns under the new Making Tax Digital initiative.
This requires you to register for Making Tax Digital, keep digital VAT records and submit your VAT returns to HMRC using compatible software.
Find out more: self-employed VAT return
If your business is run from an office, shop, factory or warehouse - anywhere that isn't a domestic property - then it's likely you'll be charged business rates on this property.
In a similar way to council tax, business rates bills are calculated and sent out by local authorities. You'll usually receive the bills in February or March, detailing what you need to pay for the financial year starting on the following 1 April.
Business rates are calculated on the property's 'rateable value' meaning its estimated value on the open market if you were to sell it. The Valuation Office Agency (VOA) carries out revaluations of commercial properties. The most recent revaluation came into effect on 1 April 2017, and refers to values as of 1 April 2015.
There are a few instances where you can be charged business rates if you run a business from your home. This could happen if:
- you employ staff who come and work at your home
- you sell goods or services from your home to customers who visit the property
- you've adapted your home to work there - for instance, converted a garage
- the property is part-business and part-domestic - for instance, a pub with living quarters above it.
HMRC has further details on how to estimate your business rates.
Small business rates relief
If your property's rateable value is less than £15,000, and your business only uses one site, you may be able to get business rates relief.
For properties with a rateable value of less than £12,000, you'll pay no business rates. For properties with a rateable value between £12,001 and £15,000, the rate of relief will gradually reduce from 100% to 0%.
So, for example, if your property's rateable value is £14,000 you'll get 33% off your business rates.
To apply for this relief, you'll need to contact your local council.
How to pay
Business rates are paid to the local authority where your business premises is located. Like council tax, most councils split the bill into 10 payments, to be paid over the course of 12 months.
Most will accept various payment methods such as direct debit, paying by phone, online and at your own bank.
7.5% - basic rate
32.5% - higher rate
38.1% - additional rate
If you're a company shareholder, you can pay yourself in dividends. The first £2,000 are tax-free, but if you receive any more than this, you'll have to pay dividend tax.
The rate you'll pay depends on your income tax band. Basic-rate taxpayers pay at 7.5%; higher-rate taxpayers pay 32.5% and it's 38.1% for those who pay additional-rate tax.
If your only income is from dividends, you can use up your personal allowance in addition to your dividend allowance.
For the 2020-21 tax year, that means you can earn the £12,500 personal allowance, plus the £2,000 dividend allowance - meaning you could earn a total of £14,500 from shares before having to pay any tax.
To reduce the tax you pay further, you could transfer shares into a stocks and shares Isa to avoid paying tax in the future. However, you'll be limited to deposits of £20,000 into an Isa in each tax year.
How to pay
You need to include any dividend income in your self-assessment tax return.
Find out more: dividend tax
20% - basic rate
40% - higher rate
45% - additional rate
Income tax is only payable by individuals, so business owners won't have to pay any income tax for the business itself.
However, if their wage is above the personal allowance (£12,500 for the 2020-21 tax year), they'll be liable to pay income tax.
The amount you pay will depend on your tax band. Keep in mind that other earnings - like dividends, savings interest or capital gains - may also count towards your income, and push you into a higher tax band.
How to pay
If you're a sole trader, you'll pay income tax on the profit you make from your business. You'll need to submit a self-assessment tax return to HMRC to calculate how much you owe.
If you're paid by the company, income tax will be taken through the company's PAYE scheme. It's at this point you'll also pay any personal National Insurance contributions you owe.
Find out more: tax rates and allowances
13.8% - employer NI contribution
If your business employs people, you'll need to pay the employer's portion of National Insurance contributions directly to HMRC. Businesses pay 13.8% in NICs for employees with earnings above £9,500 per year in 2020-21.
However, you may be able to reduce your NICs by up to £3,000 if the business is eligible for the Employment Allowance. This was launched in April 2014 with an aim to help small businesses recruit more staff.
From April 2020, only organisations with NICs of less than £100,000 will be eligible.
In addition, if you're employed by your limited company, your National Insurance contributions will be taken automatically through payroll.
Sole traders pay National Insurance as part of self-assessment tax.
For the 2020-21 tax year, self-employed NIC works like this:
- those with profits of less than £6,475 won't be required to pay.
- those earning between £6,475 and £9,500 will pay Class 2 contributions of £3.05 per week
- profits between £9,500 and £50,000 will qualify for 9% class 4 contributions (plus Class 2)
- anything over £50,000 will be charged a Class 4 rate of 2%.
Find out more: National Insurance rates
Capital Gains Tax (CGT)
10% - basic rate
20% - higher and additional rate
CGT is payable when you sell something for a profit. For individuals, this tends to be possessions. For small business owners, it's paid if you sell or give away an asset, shares or your whole company.
The rate you pay will depend on your individual income tax - basic-rate taxpayers pay 10%, while higher-and additional- rate taxpayers pay 20%. If you're selling a property that's not your main home, the rate rises to 18% for basic-rate payers and 28% for higher- or additional-rate payers.
Bear in mind that capital gains will count towards your income for the year, so a large profit could push you into a higher tax bracket.
To work out how much you'll pay on the sale of your business, you can take the sales price, and deduct what you paid for it, as well as any investments in the business and costs related to buying or selling it. Then you're left with the gains.
From this, you can deduct your personal capital gains allowance. In 2020-21 individuals can earn up to £12,300 before tax, and couples can pool their allowances.
You can find out more in our guide to how capital gains are taxed
In some circumstances, you may be able to claim entrepreneurs' relief to reduce the CGT you have to pay. If you qualify, you'll pay a lower CGT rate of 10% on the first £1m of gains. In 2019-20 this applied to the first £10m of gains.
This allowance is applied per person, rather than per business that you sell.
You may be able to claim if:
- you are a sole trader or partner selling part or all of your business or its assets
- you control at least 5% of the company's net assets, of which you are selling and are entitled to 5% of it distributable profits
- you sell assets from the business within three years of closing down.
You'll need to have been in qualifying circumstances for at least two years, and the relief doesn't apply to property portfolios - though the one exception is furnished holiday letting businesses.
Any gains above the £1m threshold will be taxed at the full CGT rate.
How to pay
You'll need to include capital gains as part of your income tax return.
You can claim capital allowances when you buy certain tools to use in your business, such as company vehicles, equipment and machinery.
You can deduct some or all of the cost of these items from your profits before paying tax, which will reduce your tax bill.
In 2020-21, you can invest up to £200,000 in capital assets and offset these against your tax bill - known as the Annual Investment Allowance (AIA). You can also use the 'writing down allowance' for assets that fall outside the AIA rules.
We explain how it works in our guide to self-employed capital allowances
How to claim
Sole traders can claim as part of their tax return. Partners claim through a partnership tax return and limited companies can use a company tax return.
If you're a sole trader or partner with an income of less than £150,000 a year, you may be able to use a simpler 'cash basis' system instead.