Time To Grow: tax for small businesses

For every small business owner, it’s exhilarating when your venture starts to gain momentum, customers and sales.

But with this newfound success, there will inevitably be new responsibilities and considerations that need to be made.

One of these is tax, and from your first transaction, it should be a priority, as compliance is crucial, and the implications could be crippling for your business.

With so many different types of business tax, understandably, it can get confusing.

To help you navigate the confusion, in the first blog of our Time To Grow series, we’ve explained the five primary small business taxes.

1)  Income Tax

Employees pay Income Tax on their salaries once they exceed the tax-free annual personal allowance, which is £12,570 for the 2022/23 tax year.

As an employer, it’s your duty to deduct the tax from your employees' pay and send it to HMRC on their behalf.

Income Tax for limited companies

For limited companies, you could also pay Income Tax on any salary or dividends you take from the company, however, this is dependent on how much you take out.

Income Tax for sole traders

As a sole trader, you pay Income Tax on profits and any earnings you receive through the PAYE system that exceed your personal allowance.

You must keep records of your business’ sales and expenses, submitting them annually via a self-assessment tax return.

MTD changes to Income Tax

From 6 April 2024, all those who are self-employed or landlords that have qualifying incomes greater than £10,000 per year will see changes due to Making Tax Digital.

Records will need keeping and quarterly income/expenses require submitting digitally via compatible MTD software under Making Tax Digital for Income Tax (MTD for ITSA) rules.

Browse our range of professional accounting packages for small businesses today or find further information on MTD for ITSA can be found on HMRC’s website.

2) National Insurance Contributions (NICs)

While not technically a tax, National Insurance Contributions are money that’s paid to the Government, making it a point you need to understand.

NICs essentially go towards Government benefits programs, including state pensions and the NHS.

As an employer, it’s your duty to deduct the NICs from your employees' pay and send it to HMRC on their behalf as well as also sorting your own Employer's Class 1A NICs.

For more information on National Insurance and the various classes, visit the Gov.co.uk page.

National Insurance Contributions for Limited Companies

If your business is a Limited Company, you’re classified as both an owner and employee, which means Class 1 National Insurance Contributions (NICs) are taken from your salary and paid over to HMRC.

National Insurance Contributions for sole traders

If you’re a sole trader, you’ll typically pay two types of National Insurance Contributions (NICs).

Firstly, you’ll pay a flat weekly rate, Class 2 NICs, if your profits are more than £6,151, which is £3.05 per week.

If your profits are greater than £9,569, you’ll pay Class 4 NICs, which equates to 9% on profits between £9,569-£50,270 and 2% on profits over £50,270.

To qualify for a state pension when you retire, you need to be at least paying Class 2 NICs.

If you don’t qualify for either of the NICs but still want to benefit from a state pension, you’re able to make voluntary contributions.

The 2022/23 Health and Social Care Levy

The Government are introducing a UK-wide Health and Social Care Levy, raising NICs by 1.25%; effective from April 2022, the levy will apply to all working-age employees, self-employed and employers.

As an employer, if your business pays Class 1, 1A or Class 1B National Insurance contributions, you’ll be required to pay the additional 1.25% in contributions from 6 April 2022.

From April 2023, NICs will return to the 2021/22 levels and the levy will become a separate tax of 1.25%.

Find out more in our recent Payroll Year End 2022 blog.

3) Corporation Tax

If your business is set up as a limited company, you should pay Corporation Tax on any profits.

Unlike income tax, which is paid by an individual who earns more than their personal allowance, Corporation Tax starts as soon as you turn a profit.

MTD for Corporation Tax

Similar to MTD for Income Tax, MTD for Corporation Tax will also be coming into play, but not before 2026.

MTD’s impact on Corporation Tax is likely to be a fundamental shake-up of record-keeping, requiring businesses to:

• Maintain digital income/expenditure records
• Provide HMRC quarterly updates via compatible software
• Send annual CT returns via compatible software

4) Value-Added-Tax (VAT)

VAT, also known as Sales Tax, is a type of tax added to the cost of a product or service’s purchase price.

For businesses, VAT is often profit neutral, designed to be paid by the consumer.

Registering your business for VAT

Once your annual VAT taxable turnover exceeds £85,000 per annum, you must register your business for VAT, regardless of whether you’re operating as a sole trader, limited company, LLP or partnership.

Your VAT taxable turnover is the sum of everything you sell that is not VAT exempt.

Do note: if your VAT taxable turnover is less than the designated annual threshold, you can still voluntarily register your business.

MTD for VAT

As of 1 April 2022, all VAT registered businesses must sign up for MTD for VAT, regardless of annual VAT taxable turnover.

Making Tax Digital for VAT essentially means that you need to keep digital records and submit your VAT returns using compatible software.

5) Business Rates

Business Rates are charged on most non-domestic properties, for example, shops and offices.

If you run your business from your bedroom or only sell goods by post, you likely won’t have to pay Business Rates.

However, you may need to pay Business Rates if your property is part business and part domestic, for example:

• You live above your shop
• You sell goods or services to people who visit your property
• You employ other people to work at your property
• You’ve made changes to your home for your business, for example, converted a garage to house your business

For a definitive answer on whether you need to pay Business Rates, contact the Valuation Office Agency (VOA).  

Time To Grow

While tax may be complicated, we’ve got a wide range of solutions that can help simplify your responsibilities, as well as a range of business software that can optimise your day-to-day processes.

What’s more, for a limited time, as part of our Time To Grow initiative, we’re offering up to 50% off all IRIS software!

Click here to find out more.

*Tax rules can be complicated, so please only treat this blog as a guide, and speak to a professional advisor for legal advice.