Skip to main content
Calculating tax
8 min read

What tax rates do small businesses pay?

In the United Kingdom, under tax law you must register your new business. But first, you must decide which legal structure is best for you. Whatever your choice, find out which corporate tax rates you’ll pay.

For information related to coronavirus and paying taxes, plus funding support, visit our coronavirus hub

What taxes do sole traders pay?

As a sole trader under UK tax law, you pay personal Income Tax on your business’s taxable profits. This is calculated each year by you or your accountant when completing and filing your Self Assessment tax return, detailing your business sales revenue and outgoings after your tax allowances are taken into account.

The standard tax-free Personal Allowance (for 2020/2021) is £12,500, and you won’t pay any income tax until you earn more. This threshold figure will be higher if, as a basic rate taxpayer you claim a Marriage Allowance, or lower if your total taxable income is more than £100,000.

  • If your sole trader business’s annual net profit (i.e. sales minus costs and allowances)  combined with any other taxable income you receive falls in a range between £12,501-£50,000, you’ll pay the basic income tax rate of 20%.
  • A higher rate of 40% income tax applies to profits and other taxable income above £50,001 but not exceeding £150,000.
  • With an additional rate of 45% income tax payable on profits and other taxable income of £150,000 and above.
  • Income tax bands are different in Scotland than in the United Kingdom

Sole traders also must pay National Insurance contributions (NICs). If your sole trader business makes more than £6,475 a year (2020/21), you must pay flat-rate Class 2 NICs (£3.05 per week in 2020/21) at the same time as your income tax (ie after completing your Self Assessment tax return). 

If your sole trader business makes annual taxable profits of more than £9,500 (2019/20), you’ll also have to pay Class 4 NICs (9% on £9,501-£50,000 profit and 2% thereafter). This is also payable at the same time as your income tax and Class 2 NICs.

If you’re working out your 2019/20 income tax and national insurance payments, use our interactive calculator below. 

Self employed tax and national insurance calculator

Use our handy calculator to find out how much tax will you will pay*

£

Please note that the results you see on your screen are estimates only. This is based on base rates and does not include things such as student loans. For full details of tax allowances, please see our article on 2019/20 tax rates.

Your take home pay and calculation

Please note that the results you see on your screen are estimates only. This is based on base rates and does not include things such as student loans. For full details of tax allowances, please see our article on 2019/20 tax rates.

What rate of tax do private limited companies pay?

Limited companies pay Corporation Tax on their profits (minus any reliefs they can claim). Currently, the rate is 19% and plans to cut this to 17% have been put on hold.

As an employee, you pay personal tax and NICs through the company’s PAYE (i.e. pay as you earn) scheme. Your limited company must pay employer’s NICs at 13.8% on employees with wages more than £169 per week.

As a company shareholder, you can pay yourself dividends (providing enough cash is available). You don’t pay any tax on the first £2,000 of dividend payments, but you must pay tax if you pay yourself anymore. Determined by income tax band, the basic rate payable is 7.5%, the higher rate is 32.5%, while the additional rate is 38.1%. Dividends that fall within your Personal Allowance don’t count towards your £2,000 dividend allowance.

You must pay your company’s Corporation Tax bill within nine months and a day of the end of your accounting period (companies with profits of more than £1.5m can pay in instalments) – calculate your Corporation Tax deadline

You or your accountant must file your company’s Corporation Tax return within 12 months in accordance with HMRC requirements, as well as calculate how much corporation tax is payable.

What taxes do partnerships pay?

Members of an ordinary partnership are usually self-employed and taxed accordingly, with income tax payable on their share of any profits after deduction of their personal allowances and other forms of taxable income are taken into account.

The standard tax-free Personal Allowance is £12,500 (2020/2021) and no income tax is due until you earn more. Then:

  • the basic income tax rate of 20% is payable on profits and other taxable income between £12,501 and £50,000
  • the higher rate of 40% applies to profits and other taxable income between £50,001 and  £150,000
  • the additional rate of 45% income tax is payable on profits and other taxable income more than £150,000
  • income tax bands are different in Scotland than in the United Kingdom

As with sole traders providing turnover, thresholds are met, partners must also pay Class 2 and Class 4 NICs at the same time as they pay income tax after they’ve completed and filed a Self Assessment tax return.

Non-corporate limited liability partnership members are taxed in the same way as partners, with income tax payable on their share of any profits, plus other taxable income and after any personal allowances are taken into account. If turnover thresholds are met, LLP members must also pay Class 2 and Class 4 NICs at the same time as they pay income tax, after they have filed a Self Assessment tax return.

Tax doesn't need to be taxing

We'll email you expert tips to help you manage your business finances. You can unsubscribe at any time.

What business tax will my UK company have to pay?

You pay business rates for use of commercial properties such as shops, offices, warehouses, industrial units, factories, etc. 

You won’t pay business rates for using a small part of your home for business, for example, a spare room as an office. However, if you make significant alterations to your home for commercial reasons or sell products or services to visiting customers, business rates are payable to hm revenue from your bank account since you are operating as a UK company.

Local councils send business rates bills in February or March each year for the tax year to come.

  • GOV.UK to find your business rates valuation and more information on tax charges, your lower earnings limit, dividend taxes, capital allowances and rates thresholds.
  • To estimate your UK trading business rates you multiply the “rateable value” by the appropriate “multiplier” (which the government sets).

The Valuation Office Agency (VOA) decides the property’s rateable value and your local council works out your business rates bill from this valuation. If you qualify for business rates relief, it will reduce your bill, but this isn’t always applied automatically, you might need to apply. If you have any questions about your business rates bill, get in touch with your local council. If you think your rateable value is wrong, contact the VOA. 

  • As a result of the coronavirus (Covid-19) outbreak, businesses in the retail, hospitality and leisure sectors in England will not have to pay business rates for the 2020/2021 tax year. 
  • A £25,000 grant is available to those businesses operating from smaller premises, with a rateable value between £15,000 and £51,000. 
  • A £10,000 grant is available to those businesses who qualify for Small Business Rate Relief (SBBR) or Rural Rate Relief.

When do I need to register for VAT?

When your gross VATable year-to-date turnover reaches £85,000 (2020/21), you must register for VAT with HMRC (most businesses register online).

After registering, you’re sent a VAT registration certificate, showing your VAT number, the date you went over the threshold (i.e. your “effective date of registration”) and the date when you need to submit your first VAT return and make your first VAT payment.

From your effective date of registration, your business must charge the appropriate amount of VAT (in most cases this is the standard rate of 20% although some goods are subject to 5%, others are zero-rated or exempt).

You must hold and pay any VAT you charge to HMRC, after filing your VAT returns. You will need to keep detailed VAT records. Your business can reclaim VAT paid (possibly including VAT paid on purchases before you registered).

  • Due to Covid-19, VAT-registered businesses will be able to defer any VAT payments due between 20 March 2020 and 30 June 2020 until later on in the year. You will need to cancel direct debits and standing orders set up. 

From April 1 2019, if your profits rates are above the VAT threshold you will need to submit your VAT return digitally using accounting software. This is part of the government’s Making Tax Digital scheme. However, there are a small number of businesses to whom this will not apply:

“For a small minority of businesses that have more complex requirements, we have made the decision to defer mandation by 6 months to ensure there is sufficient time for testing the service with them in the pilot before they are mandated to join. These businesses have until 1 October 2019 to start keeping records digitally and using MTD-compatible software to send their VAT returns to HMRC.”

via GOV.UK

Focus on what matters most with ANNA Money

ANNA is the business account and tax app that helps you automate everyday admin. Their in-app assistant creates and sends invoices, sorts your expenses, and takes care of your company tax returns – plus there's 24/7 customer support. 

Free yourself by setting up an account in less than five minutes. 

Get started
End of Article
Share this content

Brought to you by:

Tide Business

Tide is a business account and app designed to save small businesses time and money. Manage your cards from within the app, set-and-forget your auto-categories, integrate with your accountancy software, then get back to doing what you love – growing your business.

Visit Tide's website

Register with Informi today:

  • Join over 20,000 like-minded business professionals
  • Create your own personalised account with curated reading lists and checklists
  • Access exclusive resources including business plans, templates, and tax calculators
  • Receive the latest business advice and insights from Informi
  • Join in the discussion through the comments section

or

I’ve been working through the how to start a business in 20 days ebook and so many of the things I’d done are now nicely tied together and some gaps now filled. I love the simplicity. Thank you.

Sarah Gosling – Gosling Charity Consulting

I love receiving my Informi emails. They’re always well written and engaging.

Jennifer Hobson – JEH Bookkeeping

Coronavirus (Covid-19)The latest business guidance and support