Your guide to small business taxes

When you run your own business, it is almost a certainty that you will have to pay taxes.

With so many complex tax rules in place in the UK, it can be difficult to know which ones apply to you or your business. You may also be unsure which types of tax you'll have to deal with.

The following five taxes are important for small businesses:

Income tax

The sole trader tax is paid on the profits of your business. Unless you have other income, such as a salary from your job, along with the profits your business generates, your business's profits will be subject to income tax once they exceed your personal allowance, which is £12,570 if you're under 75 (2022/2023 rates will be the same as 2021/2022).

Any salary or dividends you receive from your limited company could be subject to income tax. The amount of income tax you pay depends on how much you take out.

Your salary becomes taxable if it exceeds £12,570, you're under 75, and you have no other income (2022/23 rates). You may need to pay income tax on your salary sooner if your circumstances differ - for instance, if you work for both your company and another job.

Under the PAYE (Pay As You Earn) scheme, your employer, in this case your own company, will deduct income tax from your salary. HMRC uses PAYE to collect income tax. It is not a tax in itself.

National Insurance

Although it's not strictly a tax, National Insurance (NI) is money paid to the government, so it's often referred to as a tax!

There are two types of NI paid by sole traders. You'll pay a flat weekly rate of NI if you're a sole trader, unless your business's profits are under the Small Profits Threshold in 2022/23, which is £6,725. The class 2 NI rate will be £3.05 per week. Under the Small Profits Threshold, you can still pay Class 2 NI voluntarily to protect your State Pension and other benefits. If your business's profits are between £9,880 and £50,270, you'll also have to pay Class 4 NI (10.25%), and 3.25 % for profits over £50,270 (2022/23).

Limited companies will have to deduct Class 1 employee's NI from your wages and pay it over to HMRC if they pay you. Unless the employment allowance covers it, the company must also pay Class 1 employer's NI to HMRC. In April 2022 to April 2023, National Insurance will be calculated at 13.25 percent for pay between £9,880 and £50,270, and at 3.25 percent for pay over £50,270. In the 2023/24 tax year, the National Insurance rate will return to its normal level due to the health and social care levy.

Corporation tax

Corporation tax is paid by limited companies on their profits. There’s no equivalent of the personal allowance for limited companies, so as soon as a company makes any profit, unless it’s previously made losses, it will start paying corporation tax.

Corporation tax is payable nine months and one day after a company's accounting year end for 2022/23 at a rate of 19 per cent and 25 per cent. It is applicable to profits over £250,000. For example, a company with a year end of March 31 must pay its corporation tax by January 1.

A sole trader does not have to pay corporation tax.

VAT

If your business makes VATable sales of more than £85,000 a year, you'll need to register for VAT, regardless of whether you are a sole trader, partnership, LLP or limited company.

When a VAT-registered business sells goods or services, VAT will be charged on them. The pandemic has skewed this somewhat. As of April 2022, the standard VAT rate for hospitality, holiday accommodation, and attractions will revert to the previous 20 percent. The standard rate for all other businesses is 20%. There is a reduced rate of 5% on food and nonalcoholic drinks eaten on restaurant premises or taken away, and a 0% (Zero) rate on some exceptional items such as children's clothes, newspapers, and water.

Business rates

You may have to pay business rates if your business is located in an office or retail space; business rates are similar to council tax, but for businesses.

Some premises are automatically exempt from business rates, such as farm buildings, while others may qualify for business rates relief.

Typically, you won't have to pay business rates and council tax if you run your business from home.

Exceptions include:

• Hiring staff who work at your home as well

• Providing goods or services to visitors from your home

• You have converted your garage or shed into a dog grooming parlor (for example, you have converted your garage into a dog grooming parlor).

• Your property is part business and part domestic, for example you run a pub and live above it

If you are in any doubt about what taxes your business might be subject to and when you might have to pay them, speak to the Zyla Accountants team or HMRC for assistance.