If you have recently registered a small business in the United Kingdom, it is crucial to have a solid understanding of the country’s business tax system. Knowledge of these tax obligations is essential for compliance and financial planning.
It can seem daunting, but learning about tax doesn’t have to tax your brain. Here we will explore the different types of UK business taxes, including Corporation Tax, Value Added Tax (VAT) and National Insurance Contributions (NICs), so you can fly through your tax returns.
Different Types of UK Business Taxes
Corporation Tax
Corporation Tax is a tax levied on the profits of limited companies and some organisations operating in the United Kingdom. It applies to resident and non-resident companies with a permanent establishment or business activities within the UK. The tax is calculated based on the company’s taxable profits, which are the profits earned from its trading activities, investments and any other sources of income.
Corporation tax (CT) is forecast to raise £74.4 billion in 2022/23. It is the fourth largest contributor to government tax revenues after income tax, National Insurance contributions (NICs) and VAT. Nearly all corporation tax receipts are accounted for by onshore CT, which is forecast to raise £68.1 billion in 2022/23.
Corporation Tax has several key features that small business owners should be aware of.
In the Spring 2021 Budget, Chancellor Rishi Sunak significantly changed the corporate tax system. The main highlights include raising the tax rate from 19% to 25% for companies with profits over £250,000, starting from April 2023.
A separate rate of 19% was introduced for companies with profits under £50,000, with a tapered rate for businesses earning between £50,000 and £250,000. The budget also introduced a “super-deduction” allowing companies to claim a 130% first-year capital allowance for new plant and machinery investments until March 2023. This initiative aims to encourage business investment and stimulate economic growth.
Additionally, a two-year extension was granted for “loss carry-back,” enabling companies to offset losses against previous years’ profits. The reforms were initially projected to raise £11.9 billion in 2023/24, increasing to £17.2 billion by 2025/26. However, in September 2022, the plan to increase the tax rate was cancelled but later reinstated by Chancellor Jeremy Hunt in October 2022 for implementation from 6 April 2023.
Value Added Tax (VAT)
Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production and distribution. It is charged as a percentage of the final selling price and is collected by VAT-registered businesses on behalf of the government. Small companies must determine whether they need to register for VAT based on their taxable turnover.
For most small businesses, the standard VAT rate of 20% applies to their products. However, two other types of VAT may apply:
- Reduced Rate VAT: This is a 5% VAT rate that applies to luxury necessities such as car seats for children, energy-saving activities, certain fees for charities and mobility aids for older adults.
- Zero Rate VAT: This is a 0% VAT rate where no VAT is charged on sales. Zero-rated products and services are considered essentials and include various types of food, children’s clothing, bookings, medical supplies and equipment.
It is important to record both these rates, including zero-rated products, on your VAT return. However, goods and services exempt from VAT, such as medical services, finance and credit and charity fundraisers, do not need to be recorded for VAT purposes.
You can refer to the government website for a comprehensive list of items categorised under reduced rate, zero rate and VAT exemption.
VAT registration thresholds determine when a business is required to register for VAT. As of the current threshold, you must register for VAT if your taxable turnover exceeds £85,000 in any 12-month period. However, it’s important to note that these thresholds are subject to change, so it’s crucial to check for any updates from HM Revenue and Customs (HMRC).
VAT operates through a system of input and output tax. Input VAT is the VAT paid on purchases and expenses related to your business activities, while output VAT is the VAT charged on your sales. The difference between the two (output VAT minus input VAT) is either payable to or reclaimable from HMRC, depending on the situation. Understanding how to calculate and account for input and output VAT is vital for managing your VAT obligations effectively.
Although taxation is mandatory for all UK businesses, not all companies must register for VAT if they do not meet the threshold. The Office for National Statistics (ONS) reports that only 45% of businesses are registered for VAT or Pay As You Earn (PAYE). However, some companies voluntarily register for VAT to take advantage of the benefits associated with being a VAT-registered business.
Related Reading: The Advantages and Disadvantages of Voluntary VAT Registration
Register for VAT with Mint FormationsAre you looking to register for VAT? Mint Formations can help. We are a professional company formation agency based in the UK, and we can help you with all aspects of registering your business for VAT. The process is straightforward, and we will ensure everything is handled correctly and efficiently.
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National Insurance Contributions (NICs)
National Insurance Contributions (NICs) are payments made by employees, employers and self-employed individuals to fund various state benefits and services. NICs are relevant to small business owners who are self-employed or have employees. They help fund essential benefits like the state pension, statutory sick pay and maternity pay.
NICs are divided into different classes, each with its own rules and rates. Employees and employers pay Class 1 NICs, while Class 2 and Class 4 NICs apply to self-employed individuals.
Class 1 NICs are calculated based on the employee’s earnings, and the employer and employee contribute to these contributions. Class 2 NICs are flat-rate contributions paid by self-employed individuals who earn above a certain threshold. Self-employed individuals pay Class 4 NICs on their profits above a specific threshold.
NIC Class (Tax Year 2023/2024)
| Class | Who Pays | Amount to Pay |
| Class 1 | Employee and Employer | • 0% on earnings under £1048 per month (£242 a week)
• 12% on earnings between £1048 to £4189 a month (£242 to £967 a week) • 2% on earnings over £4189 a month (£967 a week) |
| Class 2 | Self-Employed Person | £3.15 per week |
| Class 4 | Self-Employed Person | • 0% on profits below £12,570 a year
• 10% on profits between £12,570 and £50,270 a year • 2% on profits over £50,270 a year |
NICs are subject to changes and updates by the government. It’s essential to stay informed about any recent updates or changes to ensure compliance with your NICs obligations. Changes could include adjustments to rates, thresholds or additional allowances that may impact small business owners.
Understanding the different types of UK business taxes is essential for small business owners to manage their tax obligations effectively. By having a solid grasp of Corporation Tax, VAT and NICs, you can ensure compliance, make informed financial decisions and maximise available tax reliefs and allowances.
Tax Obligations and Deadlines
Record-keeping and bookkeeping requirements
Accurate record-keeping is crucial for small business owners to fulfil UK business tax obligations. It helps you maintain a clear financial overview, ensures compliance with tax regulations and simplifies the process of filing tax returns. Good record-keeping also enables you to track deductible expenses, claim applicable tax reliefs and provide evidence in case of an audit.
To meet your tax obligations, you need to keep and organise various financial documents. These may include invoices, receipts, bank statements, payroll records, expense reports and other documents related to your business’s income and expenses. Retaining these records for the required period, usually at least six years, is crucial.
Self-Assessment Tax Returns
Self-Assessment Tax Returns are how individuals report their income and calculate the tax they owe. As a small business owner, you may need to file a Self-Assessment Tax Return to report your business income, alongside any other personal income you may have. This includes self-employment income, dividends, interest, rental income and capital gains.
Staying aware of important dates and deadlines is crucial to avoid penalties and interest charges. The tax year in the UK runs from April 6th to April 5th of the following year. Here are some key dates to keep in mind:
- April 6th: Start of the tax year
- October 5th: Deadline for registering for Self-Assessment (if you’re newly self-employed)
- January 31st: Deadline for filing online Self-Assessment Tax Returns and paying any tax owed for the previous tax year.
It’s essential to be proactive and prepare your tax return well before the deadline to allow enough time for accurate completion and any necessary adjustments.
When completing your Self-Assessment Tax Return, avoid common mistakes that can lead to errors or penalties. Some common mistakes to watch out for include:
- Mathematical errors in calculations
- Forgetting to include all sources of income
- Failing to claim eligible expenses and tax reliefs
- Misreporting income or expenses
- Not keeping accurate records to support your tax return
- Taking the time to double-check your tax return and seek professional advice if needed can help you avoid costly mistakes and ensure accurate reporting.
Related Reading: When Is the UK Tax Self-assessment Deadline?
Tax Deductions and Allowances for Small Businesses
Allowable Expenses
Allowable expenses are legitimate business costs that can be deducted from the business’s income to reduce taxable profit. These expenses must be incurred wholly and exclusively for business purposes. Common examples of allowable expenses for small businesses include rent, utilities, office supplies, marketing expenses, professional fees and employee salaries.
Specific examples of allowable expenses can vary depending on the nature of your business. For instance, if you run a retail business, allowable expenses may include inventory costs, packaging materials and shop maintenance. If you’re a freelance writer, allowable expenses might include computer equipment, software subscriptions and professional development courses. Keeping accurate records and retaining supporting documentation for all permissible expenses is essential.
Capital Allowances
Capital allowances are deductions that businesses can claim on certain types of capital expenditure, such as purchasing assets used in the business, like machinery, vehicles or computer equipment. Instead of deducting the total cost of the asset in one go, you can claim capital allowances over a period of time. This helps to reduce your taxable profit and provides tax relief for investments in business assets.
Not all business assets qualify for capital allowances. Eligibility depends on the type of asset and the specific capital allowance scheme. Some common assets that may be eligible for capital allowances include machinery, equipment, vehicles, fixtures and fittings and certain types of renovation or improvement costs for commercial properties.
Research and Development (R&D) Tax Relief
The Research and Development (R&D) tax relief scheme is designed to incentivise innovation and technological advancement. It offers tax relief to companies that undertake qualifying R&D activities. This scheme applies to small businesses engaged in innovative projects that seek to advance science or technology, including new product development, process improvement or finding solutions to technical challenges.
To qualify for R&D tax relief, your business must meet specific criteria set by HMRC. The requirements include undertaking activities that aim to achieve scientific or technological advancements, facing technical uncertainties and employing a systematic approach to resolve those uncertainties. Small businesses can claim either the SME R&D relief, which provides enhanced deductions for R&D expenditure, or the Research and Development Expenditure Credit (RDEC) scheme, depending on their size and circumstances.
Claiming R&D tax relief can provide significant benefits for small businesses. It helps reduce innovation costs, encourages research and development investment and can provide a valuable cash flow boost. Depending on the scheme and the specific circumstances, you may be able to claim enhanced deductions or receive a tax credit.
Seeking Professional Advice about UK Business Tax
At Mint Formations, we specialise in helping small business owners navigate the complexities of UK business tax. Our dedicated services are designed to provide comprehensive support and guidance throughout the tax journey.
We offer a comprehensive and hassle-free all-inclusive core accountancy service specifically tailored for limited companies in the UK. We believe a core accountancy service goes beyond mere paperwork and filing obligations. When you choose our service, you gain access to ongoing support and the opportunity to seek professional tax advice whenever you need it.
As part of our service, we will assign a dedicated senior accountant as your main point of contact. This expert will always be available to answer your questions and address any concerns.
Our core accountancy service includes the standard filing of all company accounts and tax returns. However, we go above and beyond by providing additional services at no extra cost, ensuring you receive excellent value for your money. We are committed to supporting you comprehensively throughout your business journey.
Included in our core accountancy service package:
- Company year-end accounts (including Companies House filing)
- Company corporation tax return (to HMRC)
- Dealing with HMRC and becoming your authorised agent
- Company annual confirmation statement filing (with Companies House)
- Company secretarial services — e.g. filing changes to company officers, address or structure
- Registering director(s) and shareholder(s) with HMRC for self-assessment
- Filing self-assessment tax returns with HMRC for director(s) and shareholder(s)
- VAT registration
- Ad-hoc ongoing advice
- Legal tax planning discussions
- Management accounts
- Payroll (including annual payroll for directors)
Optional extras:
- Filing quarterly VAT returns
- Bookkeeping and management accounts preparation
Explore our legal and business packages today, and let us help you with your UK business tax and accounting. If you have any questions, feel free to contact us. We’re always happy to help.