Small business tax: what do you have to pay HMRC?

Running a small business in the UK comes with its fair share of challenges, and small business tax is just one of them. Oh, the joys!

So, what tax do I have to pay as a small business, you ask? Let’s break down the different taxes you’ll owe HMRC and check out some of the tax reliefs you might be eligible for.

Let’s talk about small business tax

You might be wondering what exactly counts as a small business. According to the government, a small business will usually have:

• A turnover of £10.2 million or less
• £5.1 million or less on its balance sheet
• 50 employees or less

This means you can apply for an exemption so your company’s accounts aren’t audited. You can also choose whether or not to send a copy of your directors’ report and profit and loss to Companies House.

Now, let’s find out what taxes you’ll need to pay.

Corporation Tax

Corporation Tax is a tax on your limited company’s profits. You’ll need to file a company tax return, also known as a corporate tax return, to find out your corporation tax bill.

The main rate of corporation tax is 25% for the 2024/25 financial year. This applies to companies with a profit over £250,000. If your profits are below £50,000, a lower rate of 19% applies. For companies with profits between £50,000 and £250,000, there is a sliding scale of tax rates.

Your accountant will calculate this for you when submitting your corporate tax return. If you don’t have an accountant, we can put you in touch with one.

Value Added Tax (VAT)

VAT is a tax on the value added to goods and services. If your small business turnover goes over the VAT registration threshold (£90,000 for 2024/25), it’s time to register for VAT.

Once registered, you’ll need to charge VAT on your sales and reclaim VAT on your purchases. So, make sure to keep your records tidy!

Income Tax

Income tax isn’t a tax for your small business, it’s a tax for you as an individual. 

So, who needs to pay it? If you earn a salary over £12,570, you’ll need to pay income tax even though you’re a company director. The tax thresholds are exactly the same as any employee in a company.

The current income tax brackets are:

• 0% up to £12,570 (this is your personal allowance)
• 20% from £12,571 to £50,270
• 40% from £50,271 to £125,140
• 45% over £125,140

National Insurance Contributions (NICs)

If your business has employees, you’ll also need to pay National Insurance contributions. 

For the 2024/25 tax year, businesses will need to pay 13.8% on employee earnings over £12,570.

You’ll also need to pay Class 1 National Insurance contributions as an employee of your company. This will be automatically deducted through payroll. As a small business director, you can decide whether you pay it monthly throughout the year (like employees), or in one lump sum at the end of the tax year.

Business Rates

Does your business run from a commercial property, like an office, shop or warehouse? Then you’ll need to pay Business Rates. Think of this as a council tax for your business.

Business Rates are calculated based on your commercial property’s rental value. Your local council will send a bill, and you’ll need to pay this in quarterly instalments.

Dividend Tax

Do you take dividends as part of your income? Then you’ll need to pay a Dividend Tax, too! 

For the 2024/25 tax year, the first £500 in dividends is tax-free. Anything above that is subject to tax at the following rates:

• 8.75% for basic rate taxpayers
• 33.75% for higher rate taxpayers
• 39.35% for additional rate taxpayers

So, if you’re a basic rate taxpayer and take £10,000 in dividends, you’ll need to pay £831.21 in dividend tax. This should be included in your Self Assessment tax return so HMRC can calculate how much you’ll need to pay.

Capital Gains Tax (CGT)

Capital Gains Tax is a tax you pay when you sell or dispose of an asset for a profit. For small business owners, this could be land, buildings, or even shares in your company. 

The rate of CGT you pay depends on your total taxable income (including the gain) and the type of asset sold. 

For the 2024/25 tax year, CGT is charged at a rate of either 10% or 18% for basic rate taxpayers, and 20% or 25% for higher or additional rate taxpayers.

Sounds a little complicated, right? Your accountant will include this as part of your self assessment tax return, and HMRC will let you know how much you need to pay.

Am I eligible for tax relief as a small business owner in the UK? 

Great news, there are a few tax relief options for small businesses in the UK. And they could help to significantly lower your tax bill!

Small Business Rates Relief (SBRR)

SBRR is a government initiative that helps small businesses reduce their Business Rates. 

To qualify for SBRR, your property’s rateable value should be £15,000 or less. If it’s under £12,000, you could get 100% relief, meaning you don’t have to pay any Business Rates. If the value is between £12,001 and £15,000, the relief gradually decreases.

If you have more than one property, you can still qualify for SBRR on your main property. But your other properties must have a rateable value below £2,900, and the total rateable value of all your properties should be under £20,000 (or £28,000 if you’re in London).

Business Assets Disposal Relief (Entrepreneurs’ Relief)

This is a tax relief for business owners when they sell or dispose of business assets. 

You would usually pay Capital Gains Tax on the profit of this sale. With Business Asset Disposal Relief, you pay a lower tax rate of just 10% on those profits.

You need to be a sole trader, partner, or company director to claim. And you’ll need to own at least 5% of the shares and voting rights in your company if you’re a director.

You’ll also need to have held your assets for at least 2 years, and your business should be your main activity. 

Capital Allowances

Capital Allowances is another generous tax relief that’s worth taking advantage of if you can.

Capital Allowances let you deduct the cost of certain items from your profits before calculating your tax. The annual investment allowance (AIA) is £1m.

You can claim this on:

• equipment
• machinery
• business vehicles, like vans, lorries or business cars

Some purchases even qualify for a 100% first year allowance. This includes:

• electric cars and cars with zero CO2 emissions
• plant and machinery for gas refuelling stations, like storage tanks
• gas, biogas and hydrogen refuelling equipment
• zero-emission goods vehicles
• equipment for EV charging points

Limited Companies can claim Capital Allowances as part of their corporate tax return.