Whether you’re an established business or new to the world of small businesses, getting your taxes right can sometimes be overwhelming. But, navigating the tax landscape is a crucial aspect of running a small business in the UK. Understanding when you need to start paying tax on your earnings can help you avoid unnecessary penalties and ensure your business stays compliant with HMRC regulations.
With some help from our experts at Kirkwood Wilson, this guide breaks down when small businesses need to pay tax, how much they can earn before being taxed, and the current tax rates to help you stay on track with your finances.
How Much Can I Earn as a Small Business Before Paying Tax?
One of the most common questions from new business owners is: how much can I earn before I have to start paying tax? The answer to this depends on the type of business structure you have chosen, as well as the type of tax you’re referring to.
For individuals operating as sole traders, you will need to pay Income Tax once your income exceeds the Personal Allowance, which is currently £12,570 for the 2024/25 tax year. This threshold applies to your total income, which includes earnings from your business and any other sources of income, such as a second job or investments. If you earn below this amount, you won’t need to pay Income Tax on your business earnings.
It’s also important to note that if you’re running a business and earning over £1,000 a year, you must register with HMRC, even if you won’t necessarily pay tax right away. The trading allowance allows you to earn up to £1,000 from self-employment in a tax year without needing to declare the income, but if you exceed this threshold, you’ll need to inform HMRC and file a tax return.
If your business is set up as a Limited Company, things work a little differently. Instead of Income Tax, you’ll pay Corporation Tax on your profits. Currently, the Corporation Tax rate for the 2023/24 tax year stands at 19% for profits less than £50,000, rising to 25% on profits over £250,000.
For new business owners navigating the world of taxes for the first time, managing start-up business accounts and staying on top of your income can feel overwhelming. That’s where professional support, such as that offered by a chartered accountant, can make a significant difference in helping you maintain financial clarity.
Small Business Tax Rates
Understanding the tax rates applicable to your business is crucial for proper financial planning. Here are some of the key taxes that small businesses in the UK need to be aware of:
Income Tax (For Sole Traders and Partnerships)
As mentioned earlier, if you’re a sole trader or in a partnership, you’ll pay Income Tax based on your earnings over the Personal Allowance of £12,570. The current rates for the 2023/24 tax year are:
- Basic Rate: 20% on income from £12,571 to £50,270
- Higher Rate: 40% on income from £50,271 to £125,140
- Additional Rate: 45% on income over £125,140
It’s also worth noting that National Insurance Contributions (NICs) are an additional tax that sole traders need to consider. For the 2023/24 tax year, you’ll pay:
- Class 2 NICs: £3.45 per week if your profits are over £12,570
- Class 4 NICs: 9% on profits between £12,571 and £50,270, and 2% on profits above £50,270
Corporation Tax (For Limited Companies)
If you’ve set up a Limited Company, the main tax you’ll be concerned with is Corporation Tax, which is paid on your company’s profits. For the 2024/25 tax year, the Corporation Tax rate is 19% for companies with profits below £50,000.
For companies with profits over £250,000, a main rate of 25% applies, while profits between £50,000 and £250,000 are taxed at a marginal rate that gradually increases to 25%. It’s crucial to keep accurate records of your business profits and expenses in your start-up business accounts to ensure you’re paying the correct amount.
VAT (Value Added Tax)
While VAT is not always a concern for smaller businesses, it becomes mandatory once your taxable turnover exceeds the VAT registration threshold, which is currently set at £90,000 for the 2024/25 tax year. Once your business reaches this threshold, you will need to register for VAT and start charging VAT on your goods or services.
The standard rate of VAT in the UK is 20%, though some products and services are subject to a reduced rate of 5% or a zero rate. Managing VAT can be complex, and it’s essential to seek professional advice to ensure you’re complying with HMRC’s regulations. This is especially important for those handling accounting for entrepreneurs, as VAT registration and returns add a layer of responsibility to your financial operations.
What Other Taxes Should Small Businesses Consider?
Apart from Income Tax and Corporation Tax, there are other taxes that small businesses may need to consider, depending on the type of business and industry:
- Business Rates: If you operate from business premises, you’ll likely need to pay Business Rates, which are similar to council tax but for commercial properties.
- Dividend Tax: If you’re a limited company owner and you take profits in the form of dividends, you’ll pay Dividend Tax on any dividends exceeding the tax-free Dividend Allowance, which is £500 for the 2024/25 tax year.
- Capital Gains Tax (CGT): This applies if you sell a business asset, such as property or shares, for a profit. The rates for CGT range from 10% to 24%, depending on your total income and the asset that you are selling.
Many small business owners find that partnering with a chartered accountant can help ensure that they are aware of all relevant tax obligations and have a strategy in place to manage them efficiently. Having an expert guide you through the process can save you time, stress, and potentially money.
If you’re unsure about your business’ tax obligations or need help managing your finances, it’s always best to seek advice from a professional. At Kirkwood and Wilson, our team of experienced chartered accountants are here to support you with accounting for entrepreneurs and small business owners.
Contact us today for expert guidance on managing your taxes and ensuring your business stays on track to success.
