As a small business owner in the UK, various taxes must be paid to HM Revenues & Customs (HMRC) and the government. Let’s look at the most common types of tax a small business has to pay.
Corporation tax
This is a tax on your business’s profits. Essentially, HMRC takes a percentage of what you make, after costs. The current rate of corporation tax on small businesses is 19%.
Income tax
Another tax on what you make is income tax but this tax is on what you earn as an individual. How much you pay in income tax depends on how much your income is, as there are several different levels of tax.
National Insurance (NI)
This tax is paid by the employer and the employee. This, along with how much you earn as an individual, determines how much National Insurance each party will pay.
Value Added Tax (VAT)
This is a tax on goods and services bought and sold in the UK, whether you are a business or an individual. The standard rate of VAT is currently 20%.
How much tax do small businesses pay?
How much tax you are liable for as a small business depends on a number of different factors, including the size of your business, how much profit you make and how many employees you have.
However, as a general rule of thumb, small businesses in the UK should expect to pay around 20% of their profits in tax, which includes corporation tax, income tax and National Insurance.
How can small businesses reduce their tax bill?
Want to reduce your tax bill? There are a number of ways you can do this, such as:
- Claiming business expenses. Businesses can claim a deduction for various business expenses (but not all), including travel expenses, office supplies and equipment.
- Make use of tax reliefs. There are a variety of tax reliefs that businesses can apply if they are eligible. These include the small business rate of corporation tax and a research and development tax credit.
- Set up a limited company. Businesses that are set up as a limited company can benefit from lower rates of corporation tax.
- Use tax planning strategies. Various tax planning strategies can be used to lower the amount of tax your business has to pay. But before you implement any such strategy, get the help of an accountant or tax advisor to make sure that (a) the plan is right for your business and (b) it does what it says on the tin!
Taxes are a necessary evil for businesses. They can be complex and confusing, so it’s important to not only understand the different taxes you have to pay but also to seek the advice of professionals to help reduce your tax bill.
Paying your taxes: extra tips
Here’s some extra tips to help small businesses lower the tax bill:
- Keep good records. It’s important to keep good records of your income and expenditure, as this will help when it’s time to file your tax returns.
- Use accounting software. Accounting software packages and apps are great at helping you keep track of all your financial incomings and outgoings. They can also help with the preparation of your annual tax returns.
- Get professional help. As we always recommend, if you’re unsure about anything related to personal or business taxes, always seek professional advice from an accountant or tax advisor.
We know tax can seem scary, but by following these tips and advice, you can make sure you’re not only paying the right amount of tax but are also taking advantage of all the tax deductions and reliefs you’re entitled to.
