SMEs are the engine of economic growth and job creation— that’s why the government has focused strongly on making taxation an avenue for enterprises to grow and progress. Knowing the tax basics for small businesses in the UK will help you prepare better for what’s coming.
The UK business taxes vary depending on the type and size of your entity. All small businesses and their owners are subject to a wide range of taxes, including corporate taxes and national insurance taxes.
It’s essential for business owners to ensure that operations remain in compliance with government laws and policies.
Let’s discuss this further.
What taxes do UK businesses pay?
This is the tax imposed upon limited companies’ taxable income or profits. Corporation tax requires you to calculate your business’s tax liabilities then settle it with Her Majesty’s Revenue and Customs (HMRC).
Companies with an annual profit of up to £300,000 are to pay their corporation tax at the small profits rate of 19%. The main rate of corporation tax—for profits of £1.5 million or more—has also been reduced to the same rate as the small profits tax.
Value Added Tax (VAT)
This is the tax on the final consumption of specific goods and services in the local market. This is collected at all stages of production and distribution, which is why most business-related goods and services are subject to VAT.
While there are a number of UK VAT rates, the standard rate remains to be 20%. However, due to Brexit, there came a few changes in business tax compliance regarding VAT.
Read Next: In Customs, Imports and Exports: Changes in Post-Brexit VAT
To fund state benefits such as the National Health Service (NHS), the state pension, and several other welfare schemes, the government developed the National Insurance. The National Insurance Contributions (NIC) are deducted through payroll.
Pay As You Earn (PAYE)
PAYE was developed and is currently operated by the HMRC. Its focus is to require employees to pay income tax and national insurance as they earn it.
Sole traders are exempted from the PAYE. However, if you are a business owner of a limited company and are receiving a salary, then you are subject to the PAYE.
Different types of transfer transactions done by small businesses may require owners to pay stamp duty taxes. This is for transfers of land or land interests, grants or assignments, or changeable securities like company shares.
There are two types of stamp duties:
- Land tax – applicable to purchasing property or land in England and Northern Ireland
- Reserve tax – this is charged in shares when investors trade in electronic transactions without any written instrument of transfer
Capital Gains Tax (CGT)
Also known as the ‘entrepreneurs relief’ scheme, CGT allows business owners to pay a rate of 10% on business disposals. They are also given a lifetime allowance of up to £10 million. There is more to the CGT that might be best if discussed with professionals.
Related: The Global Minimum Tax, Explained
Learning the small business tax guidelines will help you file accordingly, and spare you from any lawsuits and penalties from the government. In a way, you also boost the economy when you settle your dues. The higher the tax, the higher the standard of living is.
To get a better grasp of tax basics for small business, your best move is to speak to accounting experts and seek assistance on this complicated subject. You can contact our specialists today or download our latest whitepaper Finding the Right Talents: D&V Philippines’ Solutions to Modern Accounting Firms to know how our tax planning and management strategies can keep your business efficient and compliant with the regulatory laws.
This post was first published 15 April 2015 and edited 8 July 2021.
Edited by: Maria Katrina dela Cruz