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Tax 101 for small businesses

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Deadline for annual returns for employment-related securities (ERS) – 6 July 2022

Companies operating ERS arrangements such as Enterprise Management Incentive (EMI), Company Share Option Plan (CSOP), Share Incentive Plan (SIP and Save As You Earn (SAYE) (and any non-taxed arrangements) are obligated to register any new schemes established within the 2021/22 tax year and file returns electronically for the same tax year by 6 July 2022.

As part of the annual returns process, companies must also provide details of any alterations or variations of any tax-advantaged plans.

If you have not started to gather together the necessary information, you should begin to do so immediately. The process to register any new schemes takes up to 10 days so you need to take this into account if you’re going to meet the deadline.

Failure to file your return on time will result in automatic penalties from HMRC and will have particularly serious consequences for tax- advantaged plans.

Further information can be found on the HMRC’s website here and the required templates for completing and submitting the annual returns are also available here

Spring Statement 23 March 2022:

National Insurance

As previously outlined in September, the planned 1.25-percentage-point rise in national insurance contributions will come into force from April and will be allocated for health and social care. But the threshold for employees increases by £3,000 this year from July 2022, up from a planned rise of £300. This equalises the national insurance contributions threshold with the personal income tax allowance of £12,570.

The threshold also changes for the Self-employed too from July 2022. In addition, from April 2022, the self-employed will not pay Class 2 NICs on profits between the Small Profits Threshold (£6,725) and Lower Profits Limit, but they will continue to be able to build up National Insurance credits.

Further details on the national insurance rates can be found here. And more information on the health and social care levy can be found here.

Increasing the Employment Allowance from £4,000 to £5,000

Employment Allowance is a relief that allows eligible businesses to reduce their employer National Insurance contributions bill each year. The Government estimates that around 495,000 businesses will benefit from this increase. To check if you’re eligible, click here.

Business rates relief on green technology

The Government is bringing forward an exemption on business rates for green tech businesses to April 2022. For example, business installing solar panels and heat pumps will benefit from this. There is also a 100% relief for eligible low-carbon heat networks which have their own rates bill. Although this will immediately benefit only certain sectors, it does help promote the agenda of decarbonisation, and counter-balances the reduction in fuel duty.

Budget update: October 2021

The government announced a slew of changes to business rates in the October 2021 budget, briefly summed up below…

Business rates reform

Revaluations

After a review of the way business rates were levied, the system will see more frequent revaluations every three years starting from 2023.

Business rates improvement relief

There will also be a new ‘business rates improvement relief’ where from 2023, businesses will be able to make property improvements and pay no additional business rates for the following 12 months.

This includes things such as a hotel adding extra rooms or offices adding bike shelters.

Business rates discount

50% business rates discount will apply to the hospitality, retail and leisure sectors for at least one year. This means that businesses such as pubs, music venues, cinemas, theatres, hotels and gyms will be able to claim a discount on bills of up to 50% to a maximum of £110,000.


Support for the arts

The October 2021 budget announcement also included a temporary increase of the headline rates of tax relief for museums, theatres, galleries and orchestras until 31st March 2024. The Government has also promised to invest £850 million to protect culture in England including libraries.

HGV levy suspension extended

The Government confirmed that they would continue the HGV road user levy suspension past August 2022.

The suspension will now apply until 31st July 2023. Vehicle Excise duty for heavy goods vehicles will also be frozen from 2022-2023.

Investment allowance extension

Finally, it was also announced that the £1 million Annual Investment Allowance will be extended past December, to March 2023.

You can read more about claiming capital allowances here.

When you start your own business, you'll probably run into the UK tax system at an early stage. In fact, tax for businesses of all sizes is a detailed and generally unavoidable obligation.

But knowing which of the rules are relevant to your small business - and when they're relevant, won't just help you to avoid any unwelcome penalties, it will also help to ensure that you don't miss out on any exemptions or tax reliefs (of which there are a number that small businesses who are tax compliant can claim).

Tax compliance is also considered compelling evidence of good business management and integrity; factors often critical to success in sales, investment and recruitment opportunities.

Here are some of the most common taxes, and reliefs or exemptions, that you're likely to encounter as a small business owner.

Income tax

Different approaches apply to different types of business model.

Sole traders

If you're a sole trader, you'll pay income tax on your business's profit. (Profit is what you make once you've deducted all your costs of running your business from the sales or other income that you've received, within a defined time period.)

If you're at a pre-sales stage and don't have any income yet, then you'll only start paying income tax on your business's profit once it goes over the legal personal allowance threshold. You can check the current threshold on the government's website.

Partnerships

Partnerships established in the UK can be divided into:

  • General partnerships
  • Limited partnerships
  • Limited liability partnerships
  • Scottish partnerships

The rules regarding the different types of partnership are detailed and only very brief details have been given here. We recommend taking both tax and legal advice to help you draw up any of these types of partnership and to consider the related options and risk mitigation solutions applicable to you. Each model has its pros and cons.

(1) General partnership

The most common form of partnership in the UK is a general partnership. A general partnership is not a separate legal entity like a company, but an association of persons, usually individuals, and sometimes including one or more companies. You can find out more on how to set up a general partnership in our guide to setting up a partnership. And you can use our template partnership agreement (coming soon) to help too.

(2) Limited partnerships

You won't come across these often. Limited partnerships are formed under the Limited Partnership Act 1907. They have one or more general partners and one or more limited partners.

Limited partners restrict their overall liability for how the business is run and whether it succeeds longer term, to a pre-determined sum.

These type of partnerships are not used much except in certain specialised areas, such as venture capital investments.

It's important not to confuse limited partnerships with limited liability partnerships.

(3) Limited liability partnerships

Legislation introducing the possibility of limited liability partnerships (LLPs) came into existence for the first time in 2000.

LLPs combine the flexibility of partnerships with the benefit of limited liability for their members. The liability of an LLP member for the LLP's debts is restricted to their capital contribution, unless that partner is negligent in relation to the work carried out for a client.

Far more like limited companies than general partnerships, LLPs are regarded as 'bodies corporate' in commercial law and have a legal personality separate from their members. Each LLP must be registered at Companies House and file audited accounts.

You can find out more on how to set up an LLP in our guide to setting up limited liability partnership. And you can use our template limited liability partnership agreement to help too.

(4) Scottish partnerships

A Scottish partnership is similar to a general partnership, but it's treated as a legal entity. This means that the partnership can enter into contracts and hold property in its own name.

Tax treatment of partnerships

All UK partnerships are treated as transparent for tax purposes (including LLPs and Scottish partnerships, despite the fact that they have a legal personality). This means that you 'look through' the partnership vehicle and tax the partnership income in the hands of the partners themselves.

Even though the partnership is transparent, the first step in working out the partners' tax position is to calculate the profits from a trade or profession as if the partnership were a UK resident individual, using the normal rules.

Once the overall tax-adjusted trading profit or loss is established, it's divided up between the partners in their agreed profit-sharing ratios. These are normally set out in the partnership agreement.

Each individual's share is taxed or relieved as if it derived from a trade or profession carried on by him/her alone. This means there is a 'notional trade' carried on by each partner separately.

Limited companies

If you run your business as a limited company, you'll pay income tax on any salary or dividends that you take from the company.

Whether you pay income tax, and how much you pay, depends on how much salary and/or dividend that you take out.

Income tax is payable on your salary if it's over £12,570 and you have no other income.

If your situation is different - for example you have another job as well as working for your own company - then you may start paying income tax on your salary sooner.

If you're paying income tax on your salary, your employer, in this case your own company, should deduct it from your salary under the PAYE (Pay As You Earn) scheme. PAYE is a method HMRC use to collect income tax and National Insurance contributions.

Your company is legally required to use the PAYE process for all employees who receive a salary above the current PAYE salary threshold and who must pay National Insurance contributions above a given threshold also (see below). There are a few other conditions that you can also explore in the link provided above.

Our guide to NI and PAYE for employers (coming soon) contains more information on how PAYE works and what you should expect.

National Insurance

Strictly speaking, National Insurance (NI) is not actually a tax but is a contribution paid to the government to fund certain state-provided benefits, including unemployment benefits and the state pension.

You pay National Insurance if you're 16 or over and are either:

  • An employee earning above a certain threshold each week (currently £184)
  • You're self-employed and making a profit above a defined level each year (currently £6,515)

There are different types of National Insurance (known as classes). You can find out which apply to your business here. The type of NI that you pay depends mainly on your employment status and how much you earn.

(1) Self-employed

If you're self-employed, you usually pay 2 types of National Insurance (for all National insurance classes check out this link).

  • Class 2 - if your profits are £6,515 or more a year, but below £9,568
  • Class 4 - if your profits are £9,568 or more a year

The class 2 and class 4 NI rates for 2021/22 are as follows:

  • Class 2: £3.05 a week
  • Class 4: 9% on profits between £9,568 and £50,270, and then 2% on profits over £50,270

For the government's official figures, click this link.

To protect your entitlement to the state pension and other state benefits, you might want to pay NI voluntarily if your profits are below £6,515 per year according to this guide from the gov.uk website.

(2) Limited companies

There are rates applicable to both the corporate employer and any employees.

If your business is a limited company and you're employed by the company and/or the company has other employees, the employees are liable to pay Class 1 National Insurance contributions. The company will pay this to HMRC for the employees, deducting the amount from the employees' wages, at the same time as paying income tax under PAYE - usually monthly.

The current Class 1 NI rates for most employees for the 2021 to 2022 tax year are:

  • On pay of £184 to £967 a week (£797 to £4,189 a month): 12%
  • On pay of over £967 a week (£4,189 a month): 2%

And then there are the additional rates that apply to the company, as an employer.

The company will also have to pay Class 1 employer's NI to HMRC, usually at the rate of 13.8%, unless, exceptionally, you're a business covered by the Employment Allowance.

When do you stop paying NI?

If you're employed, you stop paying National Insurance when you reach the state pension age.

If you're self-employed you stop paying:

  • Class 2 National Insurance when you reach State Pension age
  • Class 4 National Insurance from 6 April (the start of the tax year) after you reach State Pension age.

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