Your Full Guide to Small Business Tax Planning in the UK

No matter whether you’re a sole trader or run a limited company, you’ll need to fully understand the different taxes you need to pay. This can help you stay on the right side of the law and ensure full compliance with tax regulations in your area.

In the following sections, we explore the nature of small business tax. We shed light on how your business should pay taxes, what tax relief you can enjoy, and more. 

What taxes do small businesses pay?

All small business owners need to plan for paying taxes, regardless of the type of business or its size. 

However, the type of tax you need to pay depends on the structure of your organisation. For example, sole traders are obliged to pay a different tax bill than limited companies.

Let’s find out which small business tax you need to pay based on the type of business you own and operate.

Corporation tax

One of the small business tax types is corporation tax.

Only limited companies are obliged to pay corporation tax bills based on business profits. Sole traders or partners are exempt from this tax.

Once you’ve started setting up your limited company, you’ll need to register for corporation tax.

How much corporation tax you need to pay depends entirely on your company’s profits for the financial year. The calculation of this type of tax takes place after salaries and other business expenses have been paid out. However, the calculations must take place before dividends. 

With corporate tax, businesses don’t have the option to enjoy any personal allowance. In other words, the corporation tax rate must be paid on all generated profits. 

At the same time, there are different allowable expenses that you can take advantage of to decrease your bill. These include business equipment, salaries, pensions, and more. 

Corporation tax rates vary depending on how much profit you’ve recorded over the financial year.

Here are the rates you need to know:

• 19% for profits under £50,000;
• 25% for profits over £250,000;
• 25% for profits between £50,000 and £250,000, with options to decrease the effective rate via Marginal Relief.

Note that it’s key that the right amount is paid. Make sure you keep adequate small business tax accounting and file a Company Tax Return according to deadlines. 

Paying corporation tax

One of the most important things to understand about corporation tax is that it won’t be automatically reduced from your taxable income. Instead, you’ll need to take care of this yourself by following a few steps.

First, you’ll need to register for corporation tax when starting your limited company. In most cases, this takes place when registering with Companies House. All you’ll need is your Government Gateway account information. Log into your business tax account using your Unique Taxpayer Reference. 

Use your accounting records to get your company tax return ready. 

Next, pay your corporation tax. Make sure this happens within nine months and a day of the end of your accounting period. Keep in mind that the deadline for filing your small business tax return is after the corporation tax payment. You can submit your return 12 months after your accounting period has ended. 

Income tax

Small business income tax represents a tax that must be paid by individuals instead of the business itself. 

You’ll need to pay income tax based on two scenarios:

• You’re a sole trader, freelancer or self-employed business owner. In this case, income tax is paid on your personal profits that exceed your personal allowance.
• You’re an employer, where each employee is obliged to pay income tax on their salary. This sum is taken from their pay.

It’s worth noting that there are three income tax rates:

• Basic rate – 20%
• Higher rate – 40%
• Additional rate – 45%

Paying income tax 

If you are to start paying income tax as a sole trader, freelancer, or self-employed, you’ll need to do so through your self-assessment tax return, which should be submitted before the 31st of January. 

Submitting it later than this date is likely to accumulate fees and penalties. If you’re brand new at submitting a self-assessment tax return, you’ll need to get in touch with the HM Revenue & Customs and inform them prior to October 5th following the end of the applicable tax year.

Employers’ National Insurance contributions

If you’re a business that employs personnel, you’ll be obliged to pay the employees’ National Insurance contributions. This tax is paid directly to HMRC and represents 13.8% of earnings over  £12,570.

In some cases, you may have the option to lower your National Insurance contributions by up to  £5,000. This is possible if the company is eligible for the Employment Allowance. 

Similar to National Insurance, there are two different scenarios you can come across: 

• Sole traders, freelancers, and self-employed – Since the 2023/24 tax year, sole traders, and freelancers are no longer obliged to pay both Class 2 and Class 4 NICs. Instead, they must only pay Class 4. Self-employed individuals with earnings exceeding £12,570 must continue to pay Class 4 National Insurance Contributions (NICs). In the 2023/24 tax year, these contributions were set at a rate of 9%. However, for the 2024/25 tax year, the rate has been reduced to 6% on profits ranging from £12,570 to £50,270. For profits exceeding £50,270, the rate is set at 2%. These contributions are submitted via your self-assessment tax return.
• Employers – in addition to your employees’ National Insurance contributions, it’s important to factor in Class 1 NICs for each employee at a rate of 13.8% for income that exceeds the secondary threshold, with some exceptions. 

In regards to National Insurance, you’ll need to be registered with PAYE in case you have employees or directors. 

Paying National Insurance contributions 

When it comes to paying National Insurance contributions, as long as you’re properly registered – there’s nothing to worry about.

National insurance contributions are directly taken out from the employee’s payroll and automatically paid. 

Value Added Tax (VAT)

Value Added Tax or VAT applies to VAT-registered businesses and is added to the majority of products and services sold on the market. 

In most cases, the VAT rate is 20%. However, some types of products, like mobility aids, home energy, and others, have a reduced rate of 5%. 

At the same time, if you supply VAT-able goods like food or children’s clothing, your VAT rate will be 0%. 

Those registered for Value Added Tax are obliged to charge clients VAT as a rate added to products’ or services’ prices. In addition, this rate can be reclaimed when paying on business expenses. 

If your VAT taxable turnover isn’t above the threshold of £85,000, you don’t have to register for VAT. Meanwhile, businesses can volunteer to register in order to take back VAT for company purchase. This includes money spent on office costs, business property rent, and other business assets.

If this is the case, you won’t be obliged to submit VAT returns to HMRC.

It’s also important to keep in mind that there’s a 0% VAT rate on products exported abroad. You’ll still have to outline the VAT on your invoices, but they’ll be marked at 0%.

Paying VAT

Businesses registered for VAT are required to utilise Making Tax Digital or MTD. This demands that all companies rely on MTD-supported software to store data and submit VAT returns.

This is a requirement that applies to all companies that exceed the £85,000 taxable turnover rate until 2019. As of 2024, it applies to any business registered for VAT.

Before you pay this small business tax rate, you’ll need to calculate it. You can do so by adding the total of all products and services sold over a 12-month period. This calculation shouldn’t include any zero-rate products. It’s important to calculate your VAT taxable turnover at the end of each month.

Business rates

If your business operates from a business premise (an office, a shop, a factory, or others) instead of a domestic property, it must also pay a business rates bill on the property. 

The principle of business rate is very similar to that of council tax. It’s calculated by local authorities who send the bills out to businesses from February or March indicating the sum that needs to be paid for the financial year from the 1st of April. 

The bill is calculated based on the business property’s rateable value or estimated rental value. However, on some occasions, you may be charged business rates even if you don’t run your company from business property.

Some examples include hiring staff to work from your home, selling products or services from home where clients visit the property, converting your home property to meet business needs or working from a part-business, part-domestic location. 

Paying business rates

When the time comes to pay business rates, it’s important to understand that your business bill will be sent to you by your local authorities at the start of the new tax year. 

For businesses in England, Scotland, and Wales, these bills are sent in February or March. If you’re registered in Northern Ireland, you may receive it in April. 

Keep in mind that retail, hospitality, and leisure businesses in England can take advantage of business rates relief and rural rate relief. 

Small business rates relief

Businesses that work from a single site and their rateable value is lower than £15,000 can enjoy small business tax relief. 

For example, if your rateable value is below £12,000, no business rates must be paid. If this value is between £12,001 and £15,000 the range can be decreased from 100% to 0% over time. 

To be able to take advantage of small business tax relief, you’ll need to get in touch with your local council. 

Dividend tax

If you’re a business owner or shareholder and pay yourself a dividend, it’s compulsory that your business pays tax on that money in the cases where it exceeds £500.

The exact dividends tax rate that you’re obliged to pay will depend on your income tax band. To establish how much you need to pay, you simply need to add your annual dividends to your base salary.

Here are the rates you need to know about:

• Basic rate – applies to income between £12,571 and £50,270, where dividends above your allowance are charged at 8.75%.
• Higher rate – applies to income between £50,271 and £125,140, where dividends over the allowance are charged at 33.75%.
• Additional rate – applies to income over £125,140, where if you pay the additional rate of income tax, your post-allowance dividends are calculated at 39.35%.

Understanding these different dividend tax rates will help you accurately calculate your expenses. 

Paying dividend tax 

In order to pay your dividend tax, all you have to do is add any dividend income to your self-assessment tax return.

It’s important to note that you can’t pay dividend tax unless your company makes a profit. All dividend expenses should be recorded and officially declared. This applies even to sole shareholders. 

Capital gains tax

If your company sells assets for a profit, it’s also required to pay capital gains tax of CGT. Individuals must also consider this form of tax if they sell possessions to others. In the case of running a small business, capital gains tax should be paid if you sell assets, shares, or the entire company. 

How much capital gains tax you’ll need to pay depends on your individual income tax. 

For example, basic rate taxpayers are subject to 10%. At the same time, additional rate and higher rate taxpayers are subject to 20%.

It’s important to note that capital gains tax is evaluated as part of your year’s income. Registering a large profit means that you’ll enter a higher tax bracket.

There are options to decrease your capital gains tax by selling a portion of your business or the whole company via Business Asset Disposal Relief. 

Capital allowances

In case you purchase specific equipment for your business, like company vehicles, machinery, or other tools, you have the opportunity to claim capital allowances. This enables you to reduce part of the costs of the purchased equipment prior to taxes, naturally lowering your tax bill.

For sole traders, partners, and limited companies, the annual investment allowance is £1m.

If you’re a sole trader, you can claim your capital allowance via your tax return. For partners, you can do this via your partnership tax return, while limited companies can rely on their company tax return. 

Cash in hand

If your business supports cash-in-hand payments, it’s obligatory to declare them to HMRC in order to pay the appropriate tax on these amounts.

For sole traders, any received cash must be taxed at your personal tax rate. To stay on the right side of the law, include this income in your self-assessment, ensuring that it’s added to your tax liability calculation. 

For limited companies, the accepted cash will accumulate corporation tax. 

Tax deductions and allowances for small businesses

Most businesses search for opportunities related to small business tax deductions in order to cut the general tax bill that must be paid. 

The good news is that there are several tax deductible expenses that can help you bring down the profit that you’re taxed on. 

If you’re self-employed, these feature:

• Office expenses, like company property rent, and stationery; 
• Employee costs, like salary;
• Travel costs;
• Business or work clothing;
• Marketing expenses; 
• Financial and legal expenses; 
• Banking fees; 
• Training courses.

It’s key to note that if you’ve used your trading allowance as a self-employed individual, you won’t be able to claim expenses. 

How to manage tax compliance and deadlines effectively

As a small business, it’s essential to make sure you’re fully compliant with tax regulations and expectations. 

In order to make sure you’re paying your tax bill according to deadlines, you can take the following measures:

• Stay informed – make sure you fully understand tax requirements and stay up to date with tax laws.
• Stay organised with your documents – keep records of all necessary documents, like receipts, invoices, and payroll records. Make use of technology and digital tools to record and process information.
• Plan ahead – don’t leave your tax information and processing for the last moment, Instead, plan ahead and stay organised.

By following these tips and tricks, you can ensure that you’re tax compliant, enabling you to enjoy peace of mind and you’re protected from fines and legal disputes. 

Avoiding common tax mistakes

Tax requirements can turn into a complex part of your business if you fail to set the foundations and ensure you’re compliant at all times.

There are several common tax mistakes that we strongly recommend avoiding. 

These include:

• Missing deadlines – filing tax returns after the deadline can result in substantial penalties and charges.
• Incorrectly classifying workers – inadequately classifying workers in your business can lead to improper tax calculations.
• Missing out on deductions – not filing for eligible deductions can lead to higher tax liability.
• Processing business expenses and personal expenses as a whole – combining personal and business costs can put additional pressure on accounting and can result in disallowed deductions. 

These are just some of the most popular tax mistakes that small businesses make. To prevent them and avoid additional challenges, make sure you’re fully aware of all details around taxes. 

When and why should you work with a tax professional?

A tax professional is recommended for any small business, no matter the size or structure. This is a result of the complicated nature of tax billing and the significant consequences of mistakes in this area.

By working with a tax professional, you can ensure you’ve properly calculated your due tax, you’ve filed all necessary documents on time, you’ve paid according to deadlines, and more.

Most importantly, a specialist can help you save valuable time that you can invest in other parts of your business.

Frequently asked questions

What records should I keep for my small business, and how long should I keep them?

As a small business, it’s fundamental to keep income records, expense records, asset records, payroll records, and more. It’s recommended to store this information for at least three years.

What are some of the small business tax bills you need to consider?

There are multiple business tax types that can apply to your business. Some of them include income tax, dividend tax, corporation tax, VAT, and more./p>

What are some of the most common tax deductions for small businesses?

Some of the tax deductions you can consider include home office deductions, business supplies and equipment, vehicle and travel expenses, salaries, rent, and others.