Understanding small business tax: Essential tips for compliance and savings
If you’re running a small business, you may be wondering how to stay compliant while keeping your tax bill low. This article covers the key taxes affecting UK small businesses, outlines crucial deadlines to keep your business penalty-free and shares strategies for maximising your deductions.
Overview:
- Understanding small business tax obligations
- Key tax deadlines for small businesses
- Maximising tax deductions
- Paying yourself: Salaries, dividends, and National Insurance
- Understanding Corporation tax for small businesses
- Marginal relief explained
- Business rates and relief opportunities
- Record-keeping and reporting requirements
Understanding small business tax obligations
The structure of your business plays a pivotal role in determining the type of taxes you’re subjected to. As a small business in the UK, you may need to deal with:
- Corporation Tax
- Income Tax
- National Insurance
- VAT
But how do these taxes apply to different business structures?
Sole traders
If you’re a sole trader, you’re liable to pay Income Tax on your business profits after allowable deductions for expenses. You also have a tax-free Personal Allowance, currently set at £12,570, and your income is taxed at different rates including:
- 0% for income up to £12,570 (your Personal Allowance)
- 20% for income between £12,571 and £50,270
- 40% for income between £50,271 and £125,140
- 45% for income above over £125,140.
Limited companies
In contrast, if you’re operating as a limited company, your business is subject to Corporation Tax on its profits. The current rate starts at 19% and goes up to 25% for profits exceeding £250,000.
Partnerships
Partners in a partnership are required to pay Income Tax on their share of the business profits and need to pay tax by sending both a personal and a partnership Self-Assessment tax return each year.
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Key tax deadlines for small businesses
Now that we have discussed the various tax obligations for different business structures, it’s crucial to understand the key tax deadlines. Missing these deadlines can result in penalties.
Corporation Tax deadlines
For Corporation Tax, it’s crucial to remember that the tax must be paid no later than nine months and one day after the end of your accounting period, with the company tax return due twelve months after the end of the accounting period it covers.
Income Tax deadlines
For income tax, sole traders and partnerships must submit their online Self-Assessment tax return and pay any balance of tax due by 31st January following the most recent tax year.
National Insurance deadlines
For National Insurance, sole traders and partnerships have to pay their contributions by 31st January and as part of the payment on account by 31st July.
VAT deadlines
As for VAT, businesses are typically required to file VAT returns quarterly post-registration with HMRC, with payments allowed to be made annually, quarterly, or monthly.
Maximising tax deductions
Shifting gears, let’s talk about maximising tax deductions. Reducing taxable profit can lead to significant tax savings for small businesses by deducting expenses from turnover. Deductible expenses include office costs, equipment purchases, and travel expenses, among others.
Office expenses
Office expenses that can be claimed as tax deductions include:
- Rent or lease payments for office space
- Utilities such as electricity, water, and heating costs
- Office supplies
- Larger office items such as furniture
- Cleaning services
- Repair and maintenance costs
- Security systems
- Postal expenses
Equipment purchases
When it comes to equipment purchases, capital allowances allow small businesses in the UK to claim tax relief on tangible capital expenditures, like equipment, machinery, and business vehicles.
Travel expenses
As for travel expenses, they must be solely and exclusively incurred to run the business to be tax-deductible. This includes:
- public transport costs
- hotel accommodation
- meals during overnight trips
- parking fees
- congestion charges
tolls - business phone calls
- printing costs specifically for business trips
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Paying yourself: Salaries, dividends, and National Insurance
As a small business owner, how you choose to pay yourself can significantly impact your tax obligations, including paying Iincome Ttax based on salaries, dividends, and National Insurance contributions.
Salary vs. dividend
In a limited company, the money earned belongs to the company itself, and after expenses and corporation tax have been accounted for, profits can be distributed as dividends to shareholders.
National Insurance Contributions
National Insurance contributions are a key consideration for small business owners, particularly for limited company directors and sole traders who must pay National Insurance.
Tax implications
Choosing between salary and dividends involves understanding their respective tax implications. Dividends paid to company shareholders are taxed at the dividend tax rate, which is dependent on the shareholder’s Income Tax band, excluding any dividend allowance.
Understanding Corporation tax for small businesses
Understanding Ccorporation tax is critical for small businesses in the UK. As a form of tax levied on company profits, Ccorporation Ttax constitutes a significant part of a business’s financial obligations.
What is corporation tax?
Corporations tax is a type of tax that businesses must pay on their profits. It applies to limited companies, foreign companies with a UK branch or office, and some clubs and societies.
What small businesses who pays Corporation Tax for Small Businesses?
Corporation Tax is a financial obligation that limited companies and other organisations classified as ‘taxable entities’ need to pay corporation tax.
Marginal relief explained
Another critical aspect to consider is the concept of marginal relief. Marginal Relief helps to reduce the amount of Corporation Tax payable for companies whose profits are below the lower limit (£50,000) but above the upper limit (£250,000).
How to claim Marginal Relief
If your small business falls into the category where you can claim Marginal Relief on Corporation Tax, you’ll need to calculate your taxable total profits and determine whether they fall within the appropriate thresholds.
To do this efficiently, consider using a business tax accountant like Sleek to manage your financial records.
Navigating VAT for small businesses
Now, let’s delve into the realm of Value Added Tax (VAT). Navigating VAT is crucial for small businesses as it affects how they account for VAT, which is determined by their annual taxable turnover.
Registration thresholds
Small businesses in the UK must register for VAT if their taxable turnover exceeds the current VAT threshold of £85,000; this threshold is set to increase to £90,000 from 1st April 2024.
VAT rates and exemptions
In the UK, VAT is charged at different rates depending on the goods and services provided, including a standard rate (20%) for most goods, a reduced rate (5%) for goods such as children’s car seats and home energy, and a zero rate (0%) for goods such as food and children’s clothes.
Invoicing and record-keeping
For each sale, UK small businesses must issue VAT invoices with pertinent information such as business name, address, VAT number, and details of the goods or services provided.
Business rates and relief opportunities
Another significant area of focus for small businesses is business rates and the relief opportunities available.
Calculating business rates
Business rates are calculated by applying a tax multiplier to the rateable value of a property that is used for business purposes, and it’s essential to pay business rates accordingly to avoid an unexpected tax bill.
Small business rates relief
A single property with a rateable value of £12,000 or less in England is entitled to 100% relief on business rates.
Record-keeping and reporting requirements
Maintaining accurate and detailed financial records is a legal requirement for businesses and is crucial for managing tax affairs effectively.
In this section, we’ll discuss key record-keeping and reporting requirements for small businesses.
Receipts and expenses
For tax reporting, businesses must maintain records of all receipts, including day-to-day food receipts, as bank transactions alone are not sufficient.
Financial statements
Financial statements such as the income statement, the balance sheet, and the cash flow statement are essential for understanding a company’s financial performance and health.
Making tax digital (MTD)
The Making Tax Digital for VAT (MTDfV) initiative mandates VAT-registered businesses to keep digital records and use MTD-compatible software to submit VAT returns.
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Summary
In summary, understanding and managing small business tax obligations in the UK can be complex, but with the right knowledge and resources, it is certainly manageable.
FAQs
The main business taxes in the UK are corporation tax, income tax, National Insurance, and VAT. These are the key taxes that businesses need to be aware of in the UK.
As a sole trader in the UK, you must pay Income Tax once your business profit exceeds the personal tax allowance, which is £12,570 in 2023.
As a director of a limited company, your business will have to pay Corporation Tax on all business profits.
The Corporation Tax rate in the UK is 19% for profits under £50,000 and 25% for profits over £250,000.
As a sole trader, you will need to pay Income Tax on your business profits after deducting allowable expenses. The rate of tax payable is based on Income Tax rates, starting at zero and reaching up to 45%. You will also have to pay Class 4 National Insurance Contributions.
Yes, new businesses in the UK are required to pay tax in the first year of operation. For instance, if you started your business in June 2020, you will be required to pay taxes by January 2022.
If you’re a sole trader and your income is under £10,000 per year, you will not have to pay tax, as your tax-free Personal Allowance is £12,570.
You will need to register as a sole trader if you’ve earned more than £1,000 from self-employment.
