Tax 101 for small businesses
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
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.
News update: National insurance increase
From April 2022, there will be an increase in national insurance contributions for employees, self-employed persons and employers. National insurance contributions will increase by 1.25% which the Government has confirmed will be spent on the recovery of the NHS and social care following the pandemic. As these are national insurance contributions, they aren't paid by those who are over the state pension age, even if they are still working.
From April 2023, the national insurance rate will return to it’s current rate but there will be a ‘Health and Social Care Levy’ that is collected as an additional tax at the same rate. Unlike national insurance contributions, this will be paid by those who are over state pension age but only if they are still working.
News update: Tax Changes: March 2021 Budget Announcements
Corporation tax: Rishi Sunak has announced that the rate of corporation tax paid on company profits will increase to 25% in 2023. Businesses with £50,000 or less in profits will still be taxed at 19%. Beyond this, there will be a tapered rate for profits greater than £50,000. Businesses will only be taxed at the 25% rate if they earn £250,000 or greater profits.
A 130% 'super deduction' will be introduced for capital investments in qualifying new plant and machinery. Trading losses can temporarily be carried back for three years.
The Diverted Profits Tax rate will also increase to 31% from April 2023, acting as a deterrent for anyone tempted to divert profits out of the UK.
VAT reduction: The 5% reduced VAT rate for tourism and hospitality businesses has been extended for a further 6 months. Following those 6 months, there will be a rate of 12.5% for another 6 months.
The threshold of £85,000 for VAT registration and deregistration will be fixed for two years from 1st April 2022 until 31st March 2024.
VAT Deferral New Payment Scheme: Businesses who took advantage of the previous VAT deferral on returns from 20th March – 30th June 2020 can now utilise the New Payment Scheme from March 2021 to pay deferred VAT in 11 equal payments as opposed to a lump sum due by the end of March 2021.
Business rates relief: From 1st April 2021 to 30 June 2021, eligible retail, hospitality and retail properties will now benefit from 100% business rate relief. Following this, from 1st July 2021 to 31st March 2022, there will be a 66% relief. This will be capped at £2 million per business only for properties that were forced to close on 5th January 2021. Additionally, £105,000 will be available for any other eligible properties including nurseries.
Business rates repayments: legislation will come into force to ensure that business rate relief repayments made by some businesses will be deductible from corporation tax and income tax. Repayments made to devolved administrations and those made in relation to England will be covered.
Income tax: The personal allowance (i.e. the amount of earnings not subject to income tax) is to be frozen at £12,570 from 2021/22 to 2025/26. Basic and higher rate income tax thresholds are to be frozen at £37,700 and £50,270, respectively, from 2021/22 to 2025/26. The effect of that is that many people getting a pay rise, even in line with inflation, will pay more income tax because they will get drawn into a higher tax bracket.
National insurance The Government says that it is also freezing the upper earnings limit for National Insurance contributions (NICs) at £50,270 (£967 per week or £4,189 per month) for the next five years.
News update 3rd March 2021: Budget Announcement: SEISS
The Self Employment Income Support Scheme (SEISS) will be extended until September with two more grants.
The fourth grant: covering February-April i.e. 3 months, at 80% of average trading profits (£7,500 cap) can be claimed from the end of April.
The fifth grant: covering May-September. The system will still be open for claims from the end of July and grants received will be worth 3 months’ total average profit. The fifth grant will be the final one. For this grant, the Government will turn its attention to those hit hardest by the pandemic, prioritising those who have suffered a 30%+ decrease in turnover. These people will still receive the 80% grant (£7,500 cap) in support. However, those suffering less than a 30% decrease will only be entitled to a grant of 30% (£2,850 cap).
Provided that self-employed persons have filed their 2019-20 tax return by 12am on 3rd March 2021, those who are self-employed or became self-employed last year will now be able to claim for the fourth and fifth grants, which extends the scheme to 600,000 people.
News update 5th November 2020
Further to the update below, the forthcoming SEISS grant will now cover 80% of profits. This means the maximum grant payable has increased from £1,875 to £3,750. You can read more on the .gov.uk site here.
Update: 24th September 2020
Self Employment Income Support Scheme (SEISS) - The SEISS is being extended for up to 6 months. This will be made via an initial taxable grant to cover the period from November 2020 to January 2021, with a second additional grant available for the period from February 2021 to the end of April (although this may be adjusted nearer the time, in response to changing circumstances)
Hospitality & Tourism - On the 24th September the government announced that the temporary 15% reduction in VAT for hospitality and tourism sectors would be extended until 31st March 2021.
Deferred VAT bills - Under the New Payment Scheme, businesses and individuals who deferred their VAT bills will be given the option to pay what they owe in smaller interest free installments throughout the 2021-22 financial year.
Details of all these measures - along with the other support announced for jobs and businesses - are included in the government’s official announcement here.
Update: 4th May 2020
The government have announced today that those people making a claim under the self-employed income support scheme must do so directly themselves. In other words, an accountant can not submit claims on behalf of their clients (although they may be able to help prep an application).
The claims service is due to open on 13th May, sooner than originally thought. When it does go live, those making a claim will need to do so via the government’s HMRC gateway, using their HMRC account details, also known as your Government Gateway ID.
In order to make your claim as quickly as possible, head to the government’s HMRC services site now and attempt to log in to make sure you have access. If not, setup is fairly straightforward, but may well delay your ability to make a prompt application once the scheme begins.
In light of the ongoing threats to business posed by the COVID-19 crisis, we’ve prepared the following guidance to assist sole traders and limited companies. For more information on what measures are available to you now and in the future to protect you and your business, please follow one of the following two links that’s most relevant to you:
Sole traders – How to manage money risks when you’re a sole trader
Ltd companies – Managing and taking money out of your limited company
As well as updating our guidance, we’re also keeping up to date with the latest announcements over on our blog:
You may also want to keep up to date with the government’s own COVID-19 guidance and documentation via the gov.uk website
If you're unable to run your business during this time, you should talk to your accountant and to your bank as soon as possible. They know of, and have early access to, the finance options that will be most suitable, and fastest, to help your particular business.
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.
Different approaches apply to different types of business model.
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 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.
(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.
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.
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.
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.
Read the full guide
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