When Does A Small Business Have To Pay Tax In The UK?

Do you need clarification about when to pay taxes? Starting a business is exciting in the early stages, but only some things are as obvious as they should be.

You’ll need to ensure you’re registered, understand your tax obligations, and have the right legal structure before you know what taxes you should be paying and when.

If you don’t pay any tax or miss the deadline, you’ll get fined and find yourself under the glare of HMRC – a place no business owner wants to be.

This article will discuss the various scenarios you’ll likely encounter as a business owner and the tax implications therein. We’ll focus mainly on the tax rates and thresholds that apply in the 2022/23 tax year.


As a sole trader

You must pay taxes on its profits if you operate as a sole trader. This will be calculated each year when you file your Self Assessment tax return.

Your company’s net profit, or profit after paying all expenses, determines how much tax you owe:

  • If your net profit is between £12,571 and £50,270, you pay 20% tax.
  • If your net profit is between £50,271 and £150,000, you pay 40% tax.
  • If your net profit is over £150,000, you pay 45% tax.

This will change in 2023 as follows:

  • The personal allowance and basic rates of taxes are frozen until 2028.
  • If your net profit is between £50,271 and £125,140, you pay 40% tax.
  • If your net profit is over £125,140, you pay 45% tax.

Sole traders are technically self-employed, so you won’t pay tax on the first £12,570 you make.

You’re expected to pay National Insurance if you make a profit of £6,724 or more over the year. This gives you a state pension and maternity allowance, with the amount of NI you pay depending on the profit you make throughout the year.

You may also have to register for VAT and complete a VAT return if your business’s sales turnover is £85,000.


As a limited company

Registering as a private company also means paying corporation tax on your business’s taxable profits.

All companies must pay corporation tax. Taxable profits include the money you make daily, selling assets, or investments.

The current corporation tax rate is 19%. This will change to 25% from April 2023, although the 19% rate will continue to apply to companies with profits of £50,000 or less, and a tapered rate will apply for profits between £50,000 and £250,000.

To pay corporation tax, you’re advised to:

  • Register for corporation tax when you set up your business.
  • Keep accounting records and complete company tax returns to calculate your corporation tax more easily.
  • Pay your corporation tax (or report if no payment is due to HMRC) by your deadline – typically nine months and one day after the end of your accounting period.
  • File your company tax return by the deadline – usually 12 months after the end of your accounting period.

You will also likely have to pay business rates on any commercial properties your business uses.

You won’t be notified of how much corporation tax you owe – that’s your responsibility to calculate, report and pay it.

And just like a sole trader, you must register for VAT and complete VAT returns if your business’s turnover exceeds £85,000.

VAT must be added to the goods and services that registered businesses offer their customers and clients.

You should still consider registering for VAT even if your annual revenue is less than £85,000. This is because you can charge VAT to clients or customers and recoup any VAT you may have paid.


Paying your team

When managing a team, you’ll need to register your employees for pay as you earn (PAYE) if they earn more than £123 in a week, are employed elsewhere, have a pension plan, or claim any kind of benefit.

PAYE is the system used by HMRC to collect income tax and National Insurance and will ensure your staff get paid each month.

You must make sure to deduct PAYE when using your payroll system to pay your employees. If your business has one to nine directors, you can register online to become an employer for PAYE.


Need to chat?

All businesses usually have to pay tax. It’s unavoidable and best kept on top of from day one.

If you have any questions about your tax bill, contact us today.

Ready to go? We’re excited to hear from you.

Let’s get started, as soon as you’re ready. We’re always up for a chat about how we can support you and your business.

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