• 6 MIN READ
Tax Tips for Small Businesses to Make Filing Easier in 2024. Part I
February 20, 2024
Small and medium-sized business owners always have a lot on their minds. While figuring out how to pay employees for their work and suppliers for raw materials is easy, novice entrepreneurs often find themselves confused when it comes to business taxes in the UK.
No one wants to pay more tax than they have to. In this Payrow article, we will explain how to pay business taxes, how much and when, as well as how to avoid frequent mistakes and simplify your financial management.
Business Taxes in the UK: An Overview
The taxes you pay may depend on the type of business you run, as well as its structure, profits, and assets. However, the most common UK taxes a business owner should know about are:
- VAT
- Corporation tax
- Business rates
- Income tax
- National Insurance
- Capital gains tax
VAT — an indirect tax, paid as a surcharge on the price of goods and services. The standard VAT rate is 20%. VAT is included in the price of a product or service throughout the entire chain of production and distribution. VAT registration for UK companies is a must if they have a turnover over £85,000 per year.
Corporation tax — a tax imposed on the income and capital profits of British companies. It is paid annually, and the rate is determined by the size of the profits. The rate ranges from 19% to 25% and can be reduced through marginal relief.
Business rates — a tax charged on most shops, offices, factories, pubs, warehouses, etc. A company pays business rates to its local council for the following tax year. The small business multiplier in the UK will remain frozen at 49.9p in the tax year 2024/25.
Income tax — a tax on individuals and the largest source of revenue for the government. Rates vary from 0% to 45%, depending on earnings. Scotland sets its own bands and rates. While this is not a business tax, it is also important to know about it.
National Insurance — a tax on earnings and self-employed profits used to fund various state benefits, including the state pension, statutory sick pay, and maternity leave. There are different classes of NI (1, 2, and 4) and different rates.
Capital gains tax — a tax on the profit when an asset that has increased in value is sold or disposed of. It’s the profit you make that is taxed, not the amount you receive. Some assets are tax-free. You can find capital gains tax rates on the HMRC website.
The Essentials of UK Business Taxes
If you want to learn what a business tax is and how to pay taxes in the UK, you will need to know more than just the types and percentages. You have to:
- Know your company tax obligations
- Understand tax planning and best practices
- Calculate and deduct taxes accurately
- Simplify and automate tax payments
- Handle tax challenges wisely
All of this is covered in this article. In the early days of our startup’s development, we at Payrow were worried about all these issues ourselves. But now we are helping companies sort them out. As a FinTech company that specialises in financial transactions and statement automation, we will be happy to make your life easier.
Small Business Tax
What business owners most often mean when talking about the small business tax rate is corporation tax. In contrast, individual entrepreneurs and freelancers are typically concerned about income tax.
How Much Is a Business Tax for Small Companies in the UK?
For the 2024/25 tax year, the main rate of corporation tax for small businesses in the UK is 25% for all limited companies. The rate of 19%, which was the main rate until April 2023, will still apply to companies with a profit of less than £50,000. Companies with a taxable profit of between £50,000 and £250,000 pay tax at a rate of 25%; however, this is reduced due to marginal relief, so they pay on a sliding scale from 19% to 25%.
Sole traders, freelancers, and the self-employed will pay income tax on their profits if they exceed their personal allowance of £12,570 for the 2024/25 tax year. The rates are as follows.
Do I Need to Pay Taxes for My Small Business?
Yes, if you choose to engage in any activity that generates income for you, you must pay taxes. If you are a limited company — this is a corporate tax; if you are a sole trader or self-employed — it’s income tax. Moreover, it may not be limited to this, as other taxes depend on the type of activity, industry, and annual turnover of the company.
Read more: Who Has to Pay Tax in the UK?
When Does a Small Business Have to Pay Tax in the UK?
Corporate tax must be paid nine months and one day after the end of your accounting period. Income tax is most often paid through PAYE (Pay As You Earn) or through Self Assessment. The deadline for when a small business has to pay taxes, for example, submit a Self Assessment tax return, is posted on the HMRC website.
How Much Can a Small Business Make Before Paying Taxes in the UK?
Any profits of a limited company are taxable. However, if you want to pay tax at the lowest rate currently available, your business must make a profit of no more than £50,000. Then, your rate will be 19%. Freelancers, sole traders, and self-employed business owners pay income tax only when their profits are more than their personal allowance of £12,570.
How to Keep Tax Records for Self-Employment
It is a must to track records of income, costs, and profits if you are self-employed. It’s advisable to maintain record keeping for tax purposes and save supporting documents, including receipts, cheques, and bank statements. Consider using software to simplify accounting; for example, use Excel tables or multifunctional apps like Payrow.
Does HMRC Know How Much I Earn in Self-Employment?
HMRC maintains records of taxpayers’ income and transactions, so reporting all income and paying the correct amount of tax is important. If you file your tax return late or have submitted a fraudulent return, it can lead to a tax investigation. HMRC could check your tax affairs to make sure you are paying the right amount of business taxes.
Read more: Strategic Tax Planning for UK Entrepreneurs in the Upcoming Year
What Are National Insurance Contributions for Businesses?
NICs are taxes paid to fund various social benefit programmes, including the public pension system, universal health care, and unemployment benefits. An employer takes NICs from wages before an employee gets paid.
Employer’s Allowance and Its Impact
The Employment Allowance is an incentive provided by the UK government. It’s aimed at reducing the National Insurance contributions of some businesses. To be eligible for this allowance, a business must pay Class 1 National Insurance contributions. Every eligible employer can claim up to £5,000 off their Class 1 NICs each year. The allowance can significantly reduce an employer’s NICs liability, providing them with more resources.
Streamlining Your Tax Filing Process
An experienced entrepreneur would say that automating and carefully organising your tax filing process helps save time, reduce frustration, and ensure accuracy. You also reduce the risk of error and lower the chances of being investigated by HMRC.
To streamline the process, you may consider preparing all the documents in advance, organising them in folders or an app, and asking for the professional help of an experienced tax expert.
Essential Tax Filing Terminology
Of course, not only is it useful to simplify document collection and reduce the amount of work, but it is also extremely important to understand exactly what you’re dealing with. That’s why education, in this case, learning common terms, is crucial. You’ve already come across a lot of these points so far in this article. Explore the following concepts:
- Corporation tax
- Income tax
- VAT
- PAYE
- Self Assessment
- Personal Allowance
- National Insurance
- Taxable income
- Business tax return
- Deductions
- Tax credits
Small Business Tax Return
Small businesses are required to file a Company Tax Return if they receive a notice to deliver a Company Tax Return from HM Revenue and Customs. They do not need to send a Company Tax Return if they are self-employed, a sole trader, or in a partnership, but then they must send a Self Assessment return.
You may find a corporate tax account a useful instrument to file small business tax returns in the UK. Such an account is provided by HMRC, and it allows companies to manage their tax affairs in one place.
Do Small Businesses Get Tax Relief?
Tax breaks, also known as tax relief, are a way to reduce your tax liability and pay less tax. Both small and large businesses can reduce their tax payments, depending on the type of business, the way they spend money, and the investments they make. For any tax relief, your business must meet certain criteria.
Small Business Rate Relief (SBRR), R&D tax credits for innovation, Annual Investment Allowance (AIA), National Insurance relief, Creative Industry Tax relief (CITR), and several other schemes are available for small companies.
FAQ
What Are the Latest Small Business Tax Rates in the UK for 2024?
For the 2024/25 tax year, the rates of corporation tax for limited companies range from 19% to 25%. Sole traders and the self-employed pay income tax if they exceed their personal allowance, and these rates range from 20% to 45%.
How Can UK Small Businesses Accurately Calculate Their Corporation Tax Payments?
A small business owner and/or their accounting team can use the ten-step methodology presented in the article to calculate their corporation tax accurately. It consists of collecting information on time, educating oneself on the subject of taxes and the businesses to which they apply, mathematical calculations, and double-checking. We always recommend using up-to-date software and consulting with experts to make sure you don’t miss anything.
What Is the Minimum Earnings Threshold for Small Businesses to Start Paying Taxes in the UK?
In the UK, the minimum earnings threshold for small businesses is determined by the personal allowance if we talk about income tax. As of the 2024/25 tax year, individuals have to pay income tax on earnings above the £12,570 threshold. For small businesses, the corporation tax rate is 19% for profits under £50,000 and 25% for profits over £50,000.