What Tax Small Businesses Need To Pay

Understanding the different taxes can be overwhelming for a small business owner, mainly because the taxes can vary depending on whether the business is a limited company, partnership, or something else. This is why we are creating this guide – to help explain which taxes small businesses need to pay. From corporation tax to VAT, we help provide a tax overview to help small businesses get started.

Corporation Tax  

Let’s start with corporation tax. This tax is applied to any profit made but only applies to limited companies. If you are a partnership or sole trader, this tax will not apply to you. Corporation tax is only applied after salaries and business expenses have been paid. However, this does not include dividends. Currently, corporation tax stands at 19% and this does not vary depending on the amount of profit the company is making.

A business will need to submit a company tax return (CT600 form) at the end of the business’s accounting year, which varies from business to business. The form includes how much income the company is bringing in and a list of business expenses. The form needs to be completed within 12 months from the end of the company’s accounting year.

Having said this, whilst you have 12 months to fill out the form, you only have 9 months and 1 day to pay the corporation tax bill. Therefore, it makes accounting sense to complete this form as soon as you can so that you have an understanding of how much corporation tax you have to pay. You need to declare how much corporation tax you owe and if the information is inaccurate or you missed the deadline, a fine will be issued.

Value Added Tax (VAT) 

VAT is only applicable for those businesses that register or meet the VAT threshold and comes in at 20% of most goods and services. There are only some instances where there is a reduced VAT rate such as children’s car seats and home energy. If you are a VAT-registered company, you need to charge your customers an additional 20% VAT. You will also be able to reclaim the VAT you have to pay on business expenses.

Your company must be VAT registered if your turnover is over £85,000. This is the VAT threshold until at least 31^st March 2024. You can still register for VAT voluntarily if your turnover is not this high. Many companies opt to do this as it allows them to claim their VAT back on business expenses such as machinery or computer equipment. Bear in mind that as soon as you are VAT registered you will need to start completing VAT returns and submitting them to HMRC.

Once you have registered for VAT, you’ll need to submit returns online regularly, often every 3 months, and make your payments to the HMRC promptly. Once you have a VAT bill, you normally get one month and seven days in order to pay it. This payment can be made via internet banking, debit card or credit card. You can also set up a direct debit which allows HMRC to withdraw the VAT you owe directly from your bank account on the relevant due date which often makes it more convenient to both parties.

Business Rates 

If your company is being run from somewhere other than a domestic property you will likely be charged business rates on your office, shop, or factory building. This works similarly to domestic property’s council tax. The rates are calculated based on the estimated rental value of the property and are determined by the local council. Bills are usually distributed in February or March stating what the business rates will be for the following financial year.

If you run your business from your house, you may still be charged business rates if you have staff work from your house, you sell goods and services to customers that visit your house, or if your house is part of your business (ie a pub) or if you have deliberately adapted your house to run a business from it.

Small business rates relief  

If your property’s rateable value is deemed to be less than £15,000 your business may be able to receive business rates relief. If your rateable value is less than £12,000, no business rates will apply. The rate for values between £12,000 and £15,000 will gradually decrease the lower the value is.

Income Tax 

Income tax only applies to you as the business owner and not to the business itself. The current personal allowance is £12,570. Anything earned above this is subject to income tax. Basic rate taxpayers pay 20%, higher rate pays 40%, and additional rate pay 45%. These brackets apply on progressive basis. Dividends can also count towards your income so bear this in mind when you are calculating. If you are a sole trader, this income tax will be calculated by HMRC once you have submitted your self-assessment tax return. If you pay yourself a salary through the company, income tax will be taken through the company’s PAYE scheme along with National Insurance contributions which we discuss later.

Dividend Tax 

If you own shares in your company you can pay yourself up to £2,000 tax-free, but any more than this will be subject to dividend tax. The rate of this tax depends on your income band. Basic rate taxpayers pay 8.75% dividend tax, higher rate is 33.75% and additional rate is 39.35%. This tax is paid as part of your self-assessment tax return.

Currently, this means that you can earn £12,570 which is the personal allowance, plus the additional £2,000 dividend allowance before you need to pay tax. There are also some ways you can reduce your dividend tax, for example by transferring your shares into a specific stocks and shares ISA.

Capital Gains Tax 

Finally, we have capital gains tax which is payable when you sell something as a business asset for a profit. Similar to other taxes, the amount you will need to pay depends on your income tax bracket. Basic rate taxpayers will need to pay 10% whereas higher and additional rate will pay 20%. Assets can include machinery, other equipment, and even property. If you sell property which has a residential element some of this could be taxed at 18% or 28% instead. You pay your Capital Gains Tax (CGT) as part of your income tax return.

You may be eligible for entrepreneur’s relief/business asset disposal relief which can help reduce the amount of CGT you would need to pay. If you qualify you pay 10% on the first £1 million of gains your company makes.

This guide has hopefully provided you with an overview of what tax small businesses need to pay. If you still have questions regarding your taxes, please can in touch with a member of the Wright Vigar tax team.