6 Important UK Business Taxes Every Small Business Owner Should Understand
One moment, you’re sure that you understand everything there is to know about UK business taxes. The next minute you’ll find yourself receiving a brown envelope you were never expecting or paying a large tax bill. It doesn’t have to be that way.
The UK tax system is complicated, made up of a load of legislation, layered with court cases impacting the implementation of that legislation and changing each year with subsequent Finance Acts.
All that might make you want to bury your head in the sand; however, as business owners, legally, that’s not an option; therefore, we should try our best to understand everything there is to know about these taxes so we can save ourselves a big headache down the line.
Here are the six important taxes in the UK
Corporation Tax
Corporation tax is relevant for UK Limited Companies. It is a tax on profit, and the current corporation tax is at 19% for all companies [as of March 2022].
The profit of the business needs to be calculated in order to calculate how much Corporation Tax is payable.
Corporation tax rates are set to increase.
From 1 April 2023, the Corporation Tax main rate will be increased to 25% where business profits are over £250,000.
A small profits rate (SPR) will also be introduced for companies with profits of £50,000 or less so that they will continue to pay Corporation Tax at 19%.
Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective Corporation Tax rate.
Corporation tax is payable nine months and one day after a company’s accounting year ends. However, the Corporation Tax return is due one year after the year-end. This is an odd situation, as, of course, you need to prepare the return to know how much you have to pay, yet the return is due after the payment. This means, in practice, that the return needs to be prepared prior to the payment deadline.
For example, if your business year-end is 31st March 2021, your corporation tax payment is due 1st January 2022, and the return is due for filing by 31st March 2022.
Income Tax
Income tax is a personal tax rather than a business tax. However, it is relevant to all business owners.
How income tax applies to you depends if you are running a limited company or a sole trade business:
- For sole traders, your income tax is based on your business profits. You declare this via your annual self-assessment (personal tax) return.
- For directors of a limited company, your income tax is based on the salary or dividends that your limited company gives you. Again, it is declarable via your annual self-assessment (personal tax) return
Therefore, both a limited company director and self-employed sole trader need to submit an annual self-assessment (personal tax) return.
The self-assessment (personal tax return) is due to be submitted annually on or before 31st January each year.
The income tax payment is due to be paid by the 31st January annually. However, if your tax payable is more than £1000, you will be required to make payments on account.
‘Payments on account’ are advance payments towards your tax bill (including Class 4 National Insurance if you’re self-employed).
You have to make two payments on account every year unless:
- your last Self Assessment tax bill was less than £1,000
- you’ve already paid more than 80% of all the tax you owe, for example, through your tax code or because your bank has already deducted interest on your savings.
Each payment is half your previous year’s tax bill. Payments are usually due by midnight on 31 January and 31 July.
If you still have tax to pay after making your payments on account, you must make a ‘balancing payment’ by midnight on 31 January next year.
The rates of income tax in England and Wales are:
Band | Taxable income | Tax rate |
Personal Allowance | Up to £12,570 | 0% |
Basic rate | £12,571 to £50,270 | 20% |
Higher rate | £50,271 to £150,000 | 40% |
Additional rate | over £150,000 | 45% |
In Scotland the rates are:
Band | Taxable income | Scottish tax rate |
Personal Allowance | Up to £12,570 | 0% |
Starter rate | £12,571 to £14,667 | 19% |
Basic rate | £14,668 to £25,296 | 20% |
Intermediate rate | £25,297 to £43,662 | 21% |
Higher rate | £43,663 to £150,000 | 41% |
Top rate | over £150,000 | 46% |
Dividend Tax
You may get a dividend payment if you own shares in a company. That is if you are paying yourself via dividends as the director and shareholder of your UK Limited company.
You can earn some dividend income each year without paying tax.
You do not pay tax on any dividend income that falls within your Personal Allowance (the amount of income you can earn each year without paying tax).
You also get a dividend allowance each year - currently £2000 (as of March 2022). You only pay tax on any dividend income above the dividend allowance.
You do not pay tax on dividends from shares in an ISA.
Dividend tax rates at March 2022 are:
- First £2,000 of dividends is free of tax
- 7.5% for dividends within the basic rate tax
- 32.5% for dividends within the higher rate tax
- 38.1% for dividends within the additional rate tax
From April 2022 tax on dividend income will increase by 1.25 percentage points to support the NHS, health and social care. Therefore from April 2022 the dividend tax rates are:
- First £2,000 of dividends is free of tax
- 8.75% for dividends within the basic rate tax
- 33.75% for dividends within the higher rate tax
- 39.35% for dividends within the additional rate tax
Value Added Tax (VAT)
VAT in the UK is a business tax levied by the government on the sales of goods and services.
A business needs to register for VAT when the taxable revenue for the business, over a rolling 12 month period, exceeds £85,000.
Once the business is registered for VAT it must charge VAT at the appropriate rate on its VAT-able supplies (ie those that are not exempt or zero-rated).
A business can also choose to register for VAT before the revenue reaches the threshold.
When registered for VAT, a business owner acts as a tax collector. You charge VAT on your sales, and you suffer VAT on your purchases. You then pay the difference over to HMRC, typically quarterly.
Your VAT return and payment are due one calendar month and seven days after the end of your VAT quarter when using the standard VAT system. You can check when that is via your VAT online account.
National Insurance (NI)
While this isn’t technically a type of tax, it is still money that we need to pay the government so we’ll be qualified for state pension and various government benefits.
You pay mandatory National Insurance if you’re 16 or over and are either:
an employee earning above £184 a week (which includes if you are a director of your own limited company and paying yourself a salary from that business)
, self-employed and making a profit of £6,515 or more a year
The class of National Insurance you pay depends on your employment status and how much you earn.
National Insurance class | Who pays |
Class 1 | Employees earning more than £184 a week and under State Pension age - they’re automatically deducted by your employer |
Class 1A or 1B | Employers pay these directly on their employee’s expenses or benefits |
Class 2 | Self-employed people earning profits of £6,515 or more a year. If you’re making less than this, you can choose to pay voluntary contributions to fill or avoid gaps in your National Insurance record |
Class 3 | Voluntary contributions - you can pay them to fill or avoid gaps in your National Insurance record |
Class 4 | Self-employed people earning profits of £9,569 or more a year |
If your business falls on the Small Profits Threshold (below £6,515), you can choose to pay Class 2 NI on a voluntary basis. However, since this is a voluntary contribution, you will need to get in touch with HMRC directly. The Class 2 NI is a weekly flat rate NI, which amounts to £3.05.
For businesses (sole traders) with profits beyond £9,569, you’ll have to pay Class 4 NI, which is a percentage of your profits. For the 2021-22 tax year, Class 4 NI is at 9% of profits between £9,569 and £50,270. Where profits are higher than £50,270, the rate is at 2% of your profits.
For business owners of a limited company who pay themselves a salary, this calculation of how much you are to pay for NI is at work: if the company pays you more than £184, you have to deduct Class 1 NI from your wages. 12% when the salary is £184 to £967 a week (£797 to £4,189 a month) and 2% for salary over £967 a week (£4,189 a month).
The company will also have to deduct Class 1 Employer’s NI on your salary. Both the employer and employee’s NI are paid to HMRC with any income tax that’s also deducted from your salary.
From 6 April 2022 to 5 April 2023 National Insurance contributions will increase by 1.25 percentage points. This will be spent on the UK's NHS, health and social care.
The increase will apply to:
Class 1 (paid by employees)
Class 4 (paid by self-employed)
secondary Class 1, 1A and 1B (paid by employers)
The increase will not apply if you are over the State Pension age.
That means the new rates for 6 April 2022 are as follows.
Class 1 National Insurance from April 2022:
Your pay | Class 1 National Insurance rate |
£184 to £967 a week (£797 to £4,189 a month) | 13.25% |
Over £967 a week (£4,189 a month) | 3.25% |
Class 4 National Insurance from April 2022
Class 4 | 10.25% on profits between £9,569 and £50,270 3.25% on profits over £50,270 |
Business Rates
Business rates are applicable if you’re running your business in a commercial space or in a warehouse. Business rates do not apply if you work from home.
The due date for paying your business rate depends on your local council, but it usually arrives in February or March of every year, and in some instances can be paid monthly over 10 months.
Your business might also be entitled to small business rates relief.
You can get small business rate relief if:
your property’s rateable value is less than £15,000
your business only uses one property - you may still be able to get relief if you use more
You must contact your local council to apply for small business rate relief.
You will not pay business rates on a property with a rateable value of £12,000 or less.
For properties with a rateable value of £12,001 to £15,000, the rate of relief will go down gradually from 100% to 0%.
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