Business Tax: A Tax Guide for Self Employed Businesses

Business tax is something that all owners and directors have to deal with as part of running their own business.

Meeting your business tax obligations is key to making sure your business is ran properly and HMRC compliant.

While you may not be required to pay every single business tax, it’s a good idea to have a clear understanding of the key business taxes to ensure you’re structuring and operating your business effectively.

Being aware of the types of tax that your business may be subject to, the associated deadlines and payment methods, and the available tax relief options, you’ll be better equipped to make informed decisions and minimise your businesses tax bill.

HMRC expects your business to only pay the tax that it needs to, placing the responsibility on business owners to correctly report all taxable income and claim applicable allowances and tax reliefs.

Whether you’re a sole trader, partnership or a limited company, we’ll explore the important taxes you may encounter, providing insights on what, when, and how to pay business tax.

What type of business tax do I have to pay?

The type of business tax that you will need to pay depends on a variety of factors, including your business structure, profitability, and how you choose to pay yourself as a business owner.

Understanding the differences of each type of tax and how they may apply to your specific business is crucial for effective tax planning and compliance.

The primary business taxes you should be aware of include:

• Income tax: Relevant for sole traders, partnerships, and self-employed individuals, as well as for employers with directors or employees.
• Corporation tax: Applicable to limited companies, foreign companies with a UK presence, and certain unincorporated associations.
• National insurance: Payable by the self-employed and employers on their employees’ earnings. This can include limited company directors who pay themselves a salary through PAYE.
• Value Added Tax (VAT): Charged on the sale of most goods and services by VAT-registered businesses.
• Business rates: Levied on commercial properties, such as offices, shops, and factories.
• Dividend tax: Applicable when you pay yourself dividends as the owner of a business.
• Capital gains tax: Charged on the profit made when selling certain business assets.

Income tax for businesses

Income tax can impact your business in two primary ways:

As a sole trader, freelancer, or self-employed individual: You’ll need to pay income tax on your business profits that exceed your personal allowance through your self-assessment tax return.

As an employer: You’ll be responsible for deducting income tax and national insurance contributions from your employees’ salaries through the PAYE (Pay As You Earn) system.

For self-employed individuals the income tax rates (which are not permanent and can be changed) in England, Wales, and Northern Ireland are as follows:

• Personal Allowance: Up to £12,570 – 0% tax rate.
• Basic Rate: £12,571 to £50,270 – 20% tax rate.
• Higher Rate: £50,271 to £125,140 – 40% tax rate.
• Additional Rate: Over £125,140 – 45% tax rate.

The income tax rates can be changed and different rates apply in Scotland which are set by the Scottish government.

If you have directors or employees, you’ll need to register your company with HMRC’s PAYE system to facilitate the collection of income tax and national insurance contributions from your payroll.

Corporation tax for businesses

If your business is structured as a limited company, you’ll be liable for corporation tax.

This tax is paid annually on the profits your business generates during the financial year, including trading profits, investment income, and gains from asset sales.

The corporation tax rate you’ll be charged depends on the size of your profits:

• Profits under £50,000: You’ll be taxed at the small profits rate of 19%.
• Profits over £250,000: You’ll be taxed at the main rate of 25%.
• Profits between £50,000 and £250,000: You’ll be charged the 25% main rate, but you may be able to reduce your effective rate through marginal relief.

To pay your corporation tax, you’ll need to:

• Register for corporation tax: This is typically done when you register your business with Companies House.
• Maintain accurate accounting records: You or your accountant must keep your financial records up to date to prepare your company tax return.
• Pay your corporation tax: The deadline for paying corporation tax is nine months and one day after the end of your accounting period. Businesses with profits over £1.5 million may need to pay in instalments.
• File your company tax return: You have 12 months following the end of your accounting period to submit your company tax return.

National Insurance: The self employed and employer obligations

National insurance contributions (NICs) are another tax consideration for businesses, and they can be encountered in two ways:

One: As a sole trader, partnership, or self-employed individual:

• From the 2024/25 tax year onwards, the class 2 NIC (a flat-rate contribution) has been abolished.
• However, you’ll still need to pay class 4 NICs, which are calculated as a percentage of your profits. The 2024/25 rates are 6% on profits between £12,570 and £50,270, and 2% on profits over £50,270.

Two: As an employer:

• You’ll need to make class 1 NICs for each of your employees, at a rate of 13.8% on income above the secondary threshold..
• There are different rules for certain categories of employees, such as apprentices, those under 21, veterans, and freeport workers.

Ensuring proper PAYE registration and accurate NIC calculations are crucial to avoid penalties and maintain compliance.

Dividends tax: Paying yourself as a business owner

If you pay yourself dividends as the owner of a business, you’ll be subject to dividends tax on any amount exceeding the £500 dividend allowance.

The dividends tax rate you’ll pay is determined by your overall income tax band, which is calculated by adding your total annual dividends to your base salary under PAYE.

The rates are as follows:

• Basic Rate: (£12,571 to £50,270): 8.75% on dividends over the allowance.
• Higher Rate: (£50,271 to £125,140): 33.75% on dividends over the allowance.
• Additional Rate: (over £125,140): 39.35% on dividends over the allowance.

Business expenses reducing your taxable profit

To help lower your overall tax bill you can deduct certain costs and expenses (called tax deductible expenses) from your business’s turnover to reduce your taxable profit.

The types of expenses that you can claim tax relief on are typically similar for sole traders and limited companies but can vary.

For self employed individuals eligible business expenses may include:

• Office costs, such as rent and stationery.
• Staff costs, including salaries.
• Travel costs (but not commuting).
• Specific work clothing and protective gear.
• Advertising and marketing (excluding client entertainment).
• Legal and financial fees.
• Accountancy fees.
• Use of home.
• Banking charges.
• Insurance policies for example public and/or employer liability and professional indemnity.
• National insurance contributions paid on director and employee salaries.
• Health insurance and tests.
• Training courses.
• Corporate charitable donations.

HMRC legislation “disallows any expenditure not incurred wholly and exclusively for the purposes of the trade, profession or vocation”.

In some specific cases you can claim tax relief on a proportion of an expense if it is used for both business and private purposes by satisfying the HMRC ‘wholly and exclusively’ test.

Business asset disposal relief

BADR is also known as entrepreneurs tax relief and may be used to reduce capital gains tax payable on business assets.

For qualifying assets BADR reduces capital gains tax to 10% and the relief can be claimed by individuals who are selling their own businesses or their stakes in a partnership, as well as by directors and employees who are selling shares in the company where they are employed.

R&D tax relief

Research & Development Tax Credits serve as a governmental incentive designed to support UK enterprises by fostering and acknowledging innovation.

R&D tax credits are accessible to companies involved in research and development activities, irrespective of their scale.

Companies receive the tax relief through a reduction of their corporation tax liability.

Tax free business allowances:

HMRC gives businesses the option to use tax free allowances which cover a wide range of scenarios and can help bring down your taxable income:

Trading allowance

The self-employed trading allowance offers tax relief for those earning small incomes from self employment.

The trading allowance allows individuals to earn up to £1,000 annually from sole trader activities and some other income streams without the need to pay income tax or national insurance contributions on that amount.

Dividend allowance

The dividend allowance is significant for limited company directors who pay themselves with dividends. Automatically given the dividend allowance means the first £500 of dividends received is tax free.

Capital allowances

Capital allowances have to be claimed back and may offer your business tax relief allowing you to deduct the cost of certain business assets, like a company car or machinery from your pre-tax profits.

There are a number of different types of capital allowances available for both limited companies and self employed businesses which can be a valuable way of reducing your taxable profit.

National insurance employment allowance

The employment allowance permits qualifying employers to decrease their national insurance obligations by up to £5,000.

This scheme aims to assist smaller businesses with their staffing expenses, enabling them to claim and reduce their employers’ class 1 national insurance contributions each payroll period until the £5,000 allowance is fully used.

Value Added Tax for businesses

VAT or value added tax is a tax charged on the sale of most goods and services by VAT-registered businesses.

The standard VAT rate in the UK is currently set at 20%.

As a VAT-registered business you’ll have several responsibilities including:

• Registering for VAT: You must register for VAT if your taxable turnover exceeds £90,000 over a 12-month period. You can also choose to register voluntarily if your turnover is below this threshold.
• Calculating your VAT taxable turnover: This is done on a rolling 12-month basis, not just your financial year. If you cross the £90,000 threshold, you have 30 days to inform HMRC and register for VAT.
• Charging and collecting VAT: You must add VAT to the price of most goods and services you sell and collect it from your customers.
• Paying VAT to HMRC: If you have charged more VAT to customers than you have paid to other businesses, you’ll need to pay the difference to HMRC.

It’s important to note that certain goods and services are eligible for reduced or zero-rated VAT, so be sure to familiarise yourself with the applicable rules.

Business tax record keeping

HMRC expects all businesses to keep records with the accounting records necessary dependent on the business type, size and income level.

In general maintaining your accounting records for six tax years should cover most eventualities and avoid potential HMRC fines of up to £3,000 per tax year for not maintaining or having insufficient accounting records.

Business income and expenses:

• Sales and purchase invoices.
• Stock and goods invoices.
• Bank statements.
• Hire purchase and loan statements.
• A record of personal funds paid used for the business.
• All purchase receipts.

Capital allowance schedules and calculations:

All claims for capital allowances must be supported by HMRC-compliant evidence, which requires keeping thorough records and documentation, including pertinent case law and legislation.

Should HMRC examine your capital allowances claim, they will expect comprehensive details about the asset(s), their related expenses, and the qualifying conditions for the capital allowances claimed.

VAT records:

The records you will need to back up your VAT returns include sales and purchase invoices, annual accounts, bank statements, and cash books.

Due to making tax digital for VAT almost all records for VAT have to be kept electronically.

PAYE records:

If you have employees and pay them through the pay as you earn system you will need to keep a range of information, such as the salaries of employees, their tax and national insurance contributions, statutory payments, expenses and benefits, tax code notifications, records of leave and sickness absence, as well as details of returns and payments made to HMRC.

Personal tax records:

To maintain accurate records, it is essential to retain documents related to personal income, such as bank interest certificates, dividend receipts, P60 forms, and P11D forms.

Maintaining a separate business bank account can make it easier to track and document your tax-deductible expenses, as opposed to using your personal current account for business transactions.

Capital gains tax for business assets

Capital gains tax (CGT) is payable on the profit you make when selling certain business assets that have increased in value, such as:

• Land and buildings.
• Plant and machinery.
• Shares.
• Registered trademarks.

You may be able to reduce the amount of CGT you pay when selling all or part of your business through Business Asset Disposal Relief. BADR was previously known as entrepreneurs’ relief.

Other forms of CGT relief may be available if you are selling assets that are replaced or gifted to another business or individual.

Understanding the intricacies of CGT and the available relief options can help you minimise the tax burden when making business decisions affected by capital gains tax.

Business tax and making tax digital

Making tax digital is part of HMRC’s strategy to improve the tax system by using digital solutions.

Businesses are affected by making tax digital in different ways and at different times with the role out of making tax digital gradually being introduced.

For example making tax digital for VAT has been successfully launched for all qualifying VAT registered businesses since 2022.

Knowing when your business has to comply with MTD regulations is important to ensure that you avoid unnecessary penalties.

Part of the MTD requirements focuses on the need to keep records electronically and in a particular format.

Another key change brought in by MTD is how income and expenses have to be submitted and the frequency of the reporting to HMRC.

Business Rates: Understanding the Costs of Commercial Premises

If your business operates from a dedicated commercial premises, such as a shop or office, you’ll be liable for paying business rates to your local council.

Business rates are calculated by multiplying your property’s ‘rateable value’ (an estimate of its open market rental value) by the applicable ‘multiplier’ or tax rate.

The multiplier varies across the different regions of the UK and is subject to change.

There are several levels of business rate relief you may be able to apply for to reduce your bill, including:

• Small Business Rates Relief (SBRR): Available for properties with a rateable value of less than £15,000 in England.
• Retail, Hospitality and Leisure Relief: Eligible businesses in these sectors can receive a 75% discount in England and 40% in Wales for the 2024/25 tax year.
• Rural Rate Relief: Applicable for businesses in certain rural locations.

Your local authority will send you a business rates bill ahead of the new tax year, typically in February or March each year.

Key tax takeaways for businesses

As you navigate the complex world of business taxes, there are several key considerations to keep in mind:

Seek professional advice: Consulting with a qualified accountant or tax advisor can be invaluable in ensuring you comply with all relevant regulations and optimise your tax planning.

Stay organised: Meticulous record-keeping and up-to-date accounting practices are essential for accurate tax calculations, timely filings, and smooth interactions with HMRC.

Leverage tax reliefs and allowances: Familiarise yourself with the various tax reliefs and allowances available, such as capital allowances and business rate relief, to minimise your tax burden.

Plan ahead: Proactive tax planning, including forecasting your tax obligations and making timely payments, can help you avoid penalties and late fees.

Monitor changes: Stay informed about any changes in tax legislation or rates, as they can significantly impact your business’s financial responsibilities.

Staying organised, seeking professional advice when you need to, and proactively planning your tax strategy are key to navigating the tax landscape successfully and it let’s you focus on the growth and success of your business.