Small business taxes: A guide

If you’re starting your own business, you’re about to enter an exciting world of being your own boss. But before tallying up your profits and losses, it’s essential to know what taxes you’ll need to pay and when. 

Read this article to discover your tax obligations as a small business owner or partner.

When do you have to start paying taxes?

The current tax year started on April 6th 2021 and will end on April 5th 2022. However, various business taxes have different due dates. Understandably, new business owners might find this confusing when filing small business taxes for the first time. 

In this article, we’ll explain the different taxes you need to pay, but first it’s important to understand business structures.

What is a business structure?

A business structure means the organisational structure of the company in legal terms. Your business needs to be classified under a specific structure so it's clear what your legal obligations are, including which taxes you'll need to pay. 

There are many kinds of business structures, but sole traders, partnerships and limited companies are the most common.

Sole traders

Sole traders are 'solely' responsible for running the business and meeting any legal requirements. As an individual, you will keep all the business's post-tax profits, but you'll also be personally liable for any debts or losses that the company incurs. 

Partnerships

Partnerships are just like sole traders, except that all partners are liable for the debts and losses of the company. Similarly, profits from the business are shared, and each partner will pay tax on their respective shares.

Limited companies

Simply put, limited companies are more complicated to run than sole traders and partnerships. Limited companies are separate legal entities, which means that the owner (or director) isn’t 'personally' responsible for the business’ debts and legal obligations. As a result, there are more taxes and paperwork involved in running a limited company.

Types of small business taxes you need to know about

Once you understand your business structure you can work out what taxes you’re required to pay. The following overviews will help you work out where your business fits in.

Small business corporation tax

Corporation tax is the tax that limited companies pay on their profits over the financial year. Currently set at 19%, corporation tax is due nine months and one day after your ‘accounting period’ ends. 

Usually, it's March 31st, which means you'll need to pay corporation tax on January 1st. New businesses will typically get a letter from HMRC stating their accounting period after registering for corporation tax.

Small business income tax

Businesses don't pay income tax, but business owners do. If you earn over £12,570 as a sole trader, limited company director or partner during the tax year, you'll need to pay income tax. In the UK, earnings can sometimes include dividends, savings interest or capital gains. 

Some earnings will be either tax-exempt or qualify for income tax relief. These include:

• The first £1,000 you earn as a sole trader, otherwise known as a ‘trading allowance’

• The first £1,000 you make from a rental property (note that if you’re part of the Rent-a-Room scheme, you can earn up to £7,500 per year tax-free).

• Income from tax-exempt accounts, such as Individual Savings Accounts (ISAs)

• Dividends from company shares below your dividends allowance

You’ll need to pay your income tax when you file a self-assessment form before January 31st (online tax returns) or October 31st (paper tax returns). If you’re a limited company director, income tax is paid through your business’s Pay As You Earn (PAYE) scheme. 

National insurance for small business

For limited company directors, National insurance contributions (NICs) are taken via PAYE. 

For sole traders and partners, however, the process of paying NICs is a little different. Essentially, it’s calculated as part of the annual self-assessment tax return and needs to be paid by January 31st and as part of your payment on account on July 31st.

'Payments on account' are additional self-assessment payments that self-employed people need to make on top of their bill for the previous tax year.

VAT

VAT stands for 'Value Added Tax' and is a consumption tax added to the cost of goods and services. Although VAT needs to be paid quarterly, a VAT return has to be submitted within 37 days of the end of the quarter. 

It's worth mentioning that only businesses that exceed the annual VAT threshold of £85,000 in turnover have to pay VAT, although businesses with a lower turnover can voluntarily register if they wish.

Relevant resources

• Making Tax Digital for VAT: New rules and how to register

• The tax and benefit implications of hiring your first team member

• How to fund your start-up with the tax system