When you start a small business, there are a host of things you need to think about.

While your tax responsibilities might not be at the forefront of your mind, it’s important to fully understand what they are.

When does a small business have to pay tax in the UK, and is small business tax relief available?

What taxes do small businesses pay?

The specific taxes that a small business pays will depend on its structure and turnover:

Income Tax

Income tax is levied on personal incomes, typically salary and dividends. Sole traders pay income tax based on the business profits included on a self-assessment tax return. A limited company director who receives an income from the business will pay tax through the PAYE scheme.

National Insurance

National Insurance for sole traders is calculated as part of the annual HMRC self-assessment process. Limited company directors who receive an income from the business will pay National Insurance via PAYE.

VAT

Once a company’s turnover exceeds the VAT threshold, it will need to register for VAT with a consumption tax added to the cost of goods and services and collected by the vendor. Currently, the VAT threshold is £85,000, with VAT usually being paid quarterly. VAT returns are submitted to HMRC and paid within 37 days of the end of the quarter.

When does a small business have to pay tax in the UK?

When a small business begins to pay tax will depend on its structure:

Sole Traders

Sole traders have a tax-free personal allowance that is currently set at £12,500. Earnings up to £50,000 will be taxed at the current basic rate of 20 per cent. Earnings between £50,001 and £150,000 are taxed at 40 per cent. A 45 per cent tax rate is applied to sole traders with an income above £150,000. Meanwhile, sole traders with a turnover of £85,000 and above will need to register for VAT.

Partnerships

Partnerships are taxed similarly to sole traders, with each partner paying income tax and National Insurance based on their share of the business profits.

Limited companies

Limited companies are required to compile statutory accounts and to send a tax return to HMRC. The director of a limited company is also required to send a self-assessment tax return. They are also required to pay tax and National Insurance through PAYE if they receive a salary from the business.

What can a small business write off on taxes UK?

Small business tax deductions can significantly reduce the tax liability of a small business. 

These can include business expenses like office rent, utilities, insurance and professional fees, vehicle costs, training and professional development, capital allowances, and research and development.

Experienced financial professionals who understand the current tax regulations can help your take full advantage of tax loopholes for small businesses.

Top 10 tax deductions for small businesses

Taking advantage of tax reliefs is a legitimate way for businesses to reduce their tax liability.

Here are 10 small business tax deductions that can help you retain more of your profits:

Self-Employed Business Allowances

The most common form of tax deductions for small businesses is tax deductible business allowances, such as rent, travel expenses, insurance premiums, stock and business-specific clothing.

Small Business Rate Relief

If your business property has a rateable value of less than £150,000 and you have sole business use, then you may be eligible for small business rate relief.

Employment Allowance

If you employ staff then you can claim Employment Allowance on National Insurance contributions. This is taken directly from your businesses and charities with Class 1 NI Contributions below £100,000 and could save you up to £5,000.

Annual Investment Allowance

Annual Investment Allowance (AIA) is a capital allowance that allows you to deduct the full value of any qualifying ‘plant and machinery’ purchases from your business profits before tax.

Research & Development Tax Relief

R&D relief provides tax incentives to companies involved in innovative research and development work.

Creative Industries Tax Relief

This is a sector-specific tax relief designed to support businesses working in the UK creative sector, such as film, theatre and museums.

The Patent Box Scheme

Companies that patent inventions may be able to apply a lower rate of corporation tax on any profits through the Patent Box Scheme.

Business Asset Disposal Relief

If you are planning on selling your business you may be able to reduce your Capital Gains Tax liability through Business Asset Disposal Relief.

Marginal Relief

If you’re a company with annual profits of over £50,000 but under £250,000, then you’ll automatically be able to claim marginal relief. In 2023, the Chancellor also introduced a Small Profits Rate for businesses with profits below £50,000.

Seed Enterprise Investment Scheme (SEIS)

Seed Enterprise Investment Scheme (SEIS) is a venture capital scheme that offers new company investors tax breaks when they buy new shares in companies on the scheme. To qualify companies must have less than £200,000 in assets, fewer than 25 employees and carry out a qualifying trade.

Small business tax planning with Digital Accounting & Finance

Understanding small business tax reliefs can be complicated.

To ensure you are taking advantage of any reliefs your business may be entitled to it’s important to receive professional advice.

The expert small business accountants at Digital Accounting & Finance (DAAFL) is experienced in helping businesses reduce their tax liability and plan for the future.

 Contact us for further advice on maximising your small business tax reliefs and business tax planning.

Looking for more ways to reduce tax for your company? Check out our guide on improving tax efficiency

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