What tax does a business have to pay?

The type of tax you pay depends on structure of the business and it may be useful to consider the most beneficial business structure for you.

Whether you are a sole trader, self-employed or a new start-up, TaxAssist Accountants can help you to navigate small business taxes. 

What is the business tax rate in the UK?  

Business tax is paid depending on how you trade. In this article we look at the different rates of tax businesses pay. Here we specifically look at a key recent change to the corporation tax rate.

From April 2023, businesses will pay the higher 25% corporation tax rate if profits exceed £250,000. Smaller businesses with profits up to £50,000 will continue to pay the previous Small Profits Rate (SPR) of 19%.

Businesses with profits between £50,000 and £250,000 will receive marginal relief.

How much business tax do I pay?  

A business pays tax depending on business structure, level of turnover, number of employees and location of the business. As you would expect, the higher the level of profits, the higher the tax liability. However, it is not as simple as that, other factors will play part in what sort of tax businesses pay.

Employers must budget for National Insurance Contributions, and VAT-registered businesses must account for VAT (Value Added Tax) liabilities.

It is important to have tax planning discussions with your accountant to ensure you understand the tax implications of your business structure and size changing.

What are the different types of tax businesses will need to pay? 

It is important to know what tax your business will pay and ensure you meet all your obligations. The chart below shows you the type of tax your business may need to pay.

 

Sole-trader 
Self-employed
Partner
LLP member

 Partnership Limited Liability Partnership
(LLP)		 Limited Company
Corporation Tax No No No Yes
VAT Yes Yes Yes Yes
Income Tax Yes No No No
National Insurance Contributions Yes Yes Yes Yes
Dividend Tax Yes No No No
Business Rates Yes Yes Yes Yes
Capital Gains Tax Yes Yes Yes No
Pay As You Earn (PAYE) Yes Yes Yes Yes

Corporation tax 

A UK company must pay corporation tax on income earned after deduction of salaries and allowable expenses and tax reliefs.

Businesses self-assess and pay corporation tax annually. A company pays corporation tax 9 months and 1 day after its accounting period ends. Larger companies may pay corporation tax over four regular instalments.

You complete self-assessment using a CT600 form. Businesses that file their corporation tax late or provide inaccurate information could receive a penalty from HM Revenue and Customs (HMRC).

VAT 

Value Added Tax (VAT) is the tax added to most products and services.

Companies must register for VAT:

VAT can be payable monthly, quarterly, or annually. Submit VAT returns within 37 days of the period's end, regardless of whether there is VAT to pay or reclaim.

Income tax 

Income tax is the amount an individual with taxable income (usually property income and/or income from partnership or sole-trade activities) must pay. Income tax is self-assessed using a tax return and needs to be paid by 31st January each year.

Individuals must pay income tax if their taxable income is more than £12,570, the personal allowance for the 2024-25 tax year. Some individuals are not entitled to the personal allowance.

Where company directors are receiving a salary and benefits, this income may need to be reported on their tax return as part of their taxable income. This will depend on whether the director is required to complete a tax return.

The rate of income tax payable depends on the level of taxable income earned.

England, Wales and Northern Ireland

Band Taxable Income Tax Rate
Personal Allowance Up to £12,570 0%
Basic Rate £12,571 to £50,270 20%
Higher Rate £50,271 to £125,140 40%
Additional Rate over £125,140 45%

Scotland

Band Taxable Income Tax Rate
Personal Allowance Up to £12,570 0%
Starter Rate £12,571 to £14,876  19%
Basic Rate £14,877 to £26,561  20%
Intermediate Rate £26,562 to £43,662 21%
Higher Rate £43,663 to £75,000 42%
Advanced Rate £75,001 to £125,140 45%
Top Rate over £125,140 48%

Dividend income is taxed at different rates, which are noted later in this article.

Individuals are also entitled to a tax-free trading and property allowance of £1,000 each, which can boost tax-free income where there are no other associated costs to attribute to that income.

National Insurance 

Businesses that have employees will need to pay National Insurance Contributions through the employers’ PAYE scheme. 

Employer National Insurance contributions 

Employer National Insurance Contributions (NICs) are also known as secondary Class 1 NICs. These are different to primary Class 1 NICs which are made by employees. 

Employer NICs are paid at 13.8% of an employee’s gross salary above £9,100 (secondary threshold).

Some businesses can reduce their NIC liability by up to £5,000 using the employment allowance.

Sole traders and self-employed National Insurance Contributions 

Sole-traders and self-employed individuals may be required to pay Class 4 NICs. In the 2024/25 tax year, an individual will pay Class 4 NICs at 6% on profits between £12,570 and £50,270, and at 2% on earnings above £50,270.

If your profits are £6,725 or more Class 2 NIC does not need to be paid but individuals are treated as having paid contributions to protect their National Insurance record.

If your profits are £6,725 or under you can choose to pay voluntary Class 2 NIC.

Dividend tax 

Dividends are the distribution of company profits to shareholders. It is a tax-efficient way for shareholders to take income from a company. For 2024/25, the first £500 of dividends an individual receives are tax-free. Thereafter tax is payable based on the follow bands. 

Tax Band Total Income Tax Rate
Basic Rate £12,571 – £50,270 8.75%
Higher Rate £50,271-£125,140 33.75%
Additional rate £125,141 upwards 39.35%

Business rates 

A business, including sole traders and limited companies, may be subject to business rates if it:

Local authorities will calculate business rates annually, based on the premise’s ‘rateable value’. Businesses should receive notice from their local council between February and March showing the charges applicable for the year from April.

Small business rates relief 

There are relief schemes which may enable you to reduce your business rates, including the small business rates relief. More information can be found here for businesses in England, Wales, Northern Ireland and Scotland.

Capital Gains Tax 

Capital Gains Tax is payable on the disposal of some assets, where a gain in made. A disposal can be a sale, swap, or gift, and can include the sale of a company, property, assets and shares.

All individuals have a tax free allowance (Annual Exempt Amount ‘AEA’). In 2024/25, the AEA is £3,000 or £1,500 for trusts. These allowances were previously much higher.

FAQs 

How long should you keep tax records for a UK limited company? 

A company should keep tax records for at least six years from the end of the accounting period. E.g. Records for the year ended 31st March 2023 should be kept until 31st March 2029.

Can you close a limited company without paying tax? 

There are two main methods to close a limited company:

There are advantages and disadvantages of both, and advice should be sought.

If a company is not trading, and you have told HMRC, the company will not need to pay corporation tax. The last period of trade should be accounted for and included on the final corporation tax return. All liabilities should be paid as part of closing the company.

Who pays corporation tax? 

Incorporated companies, co-operatives, members’ clubs, housing associations and trade associations may be required to pay corporation tax.

Arrange a free TaxAssist initial consultation 

At TaxAssist Accountants we can help your business determine how much tax it needs to pay, file a return and ensure you are aware of and meet your obligations. Call today on 01942 938 212 or contact us using the online enquiries form.

Last updated: 10th April 2024