Starting your own business is a truly exciting life decision, allowing you to pick your own gigs and do things your way. On the other hand, failure to get familiar with the small business taxes you’ll need to pay can have major consequences when the taxman cometh.
To help you get a better idea about what you’re expected to pay as a freelancer, contractor, or small business owner, here’s a quickfire explanation of the main small business taxes.
This article covers the following topics (click to go to straight to the section):
Check out our separate article if you’re looking for the current tax rates, thresholds, and allowances.
What is Corporation Tax?
Corporation Tax is applied to limited company profits after salaries and other business expenses have been paid, but before dividends are withdrawn.
Sole traders don’t pay Corporation Tax.
How and when do you pay Corporation Tax?
UK-based limited companies are required to submit an online form to HMRC annually called a CT600. This contains details of your company’s income, minus any tax allowances and expenses.
Any Corporation Tax you owe must be paid by nine months and one day after your company’s accounting period ends (a date known as your company’s ‘year-end’). You have the option to pay at any time during this period, but we highly recommend getting this out of the way as soon as possible to avoid fines.
In order to pay your Corporation Tax, you’ll need to log into your HMRC online account and choose a payment method, you can choose from online or telephone payment, direct debit, via your bank, or use a company credit card.
You cannot use a personal credit card and you can no longer pay at a Post Office. You can find all the information about paying your Corporation Tax bill at the Gov.uk website.
What is Income Tax?
Income Tax is paid on certain income you personally receive, such as salary and dividends and rental income. Income Tax is not payable on any income from the sale of assets, such as share disposals or if you sell a property which is not your main residence – this would be taxed under Capital Gains.
How and when do you pay Income Tax?
If you’re a limited company director and draw a salary above the annual personal allowance, Income Tax will be paid at source through your company’s PAYE scheme. Any dividends you take from the company are taxed through your annual Self Assessment, which has to be completed by all company directors.
For sole traders, Income Tax is paid on the profit you make from your business, which you include on your annual Self Assessment tax return.
The amount you owe should be paid to HMRC before 31st January every year with any Payment on Account due on 31st July each year.
What is National Insurance?
National Insurance contributions build up your state pension entitlement and help pay for public services. You’re only required to pay National Insurance if you are over 16 and are making a profit equal to or above the primary threshold.
How and when do I pay National Insurance?
As with Income Tax, if you’re a limited company director, any National Insurance contributions due will be taken via PAYE.
National Insurance for sole traders is calculated in the annual Self Assessment and paid to HMRC by 31st January every year. You can read our article self-employed National Insurance explained for further details.
What is VAT?
Value Added Tax (VAT) is added to the price of most goods and services. VAT-registered companies must charge VAT to customers, but also have the benefit of being able to reclaim any VAT that they have paid on business expenses.
Companies are not automatically registered for VAT and don’t need to register unless their annual turnover exceeds the VAT threshold. We’ve written a short article explaining VAT registration, the types of VAT schemes that may apply and when you might consider registering for VAT even if you are below the threshold.
How and when do I pay VAT?
VAT is paid quarterly from the date of your company’s registration. VAT returns must be submitted to HMRC and paid online within 37 days of the end of the relevant quarter.
From 1st April 2019, the government is bringing in Making Tax Digital (MTD) for business, this means all VAT registered businesses will need to use MTD compatible software (such as Crunch).
If you’re registered for VAT, you must submit a return even if you have no VAT to pay or reclaim.
What is the VAT Flat Rate Scheme?
If your business has a turnover below £150,000, it might be beneficial to register for HMRC’s VAT Flat Rate scheme. This simplifies VAT reporting for small businesses, meaning there is no need to record VAT for individual purchases and sales.
Doing this can often also result in an increase in your company’s income, as you can still charge the basic rate of VAT but only pay HMRC a flat percentage rate (based on your trading activity).
What are business rates?
If you run your business from a non-domestic property (e.g. an office, shop or factory), you’ll likely have to pay business rates.
How and when do I pay business rates?
You’ll be sent a business rates bill from your local authority in either February or March each year for the financial year that starting on the following 1st April. Details of how to pay will be included on the bill, and you can opt to pay in 12 monthly instalments.
Need accounting help?
Monitor the performance of your business at the click of a button, whenever you want and wherever you are, with a super-secure, cloud based system.