Business Tax Explained

Understand all of the types of tax that you'll need to pay as a business owner operating in the UK.

Updated: June 14, 2024
Matt Crabtree

Written By

Matt Crabtree

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From corporation tax to income tax, you'll find that there's quite the range when it comes to all your various tax obligations when you're running a business in the UK — each of them serving a relatively unique purpose and generally coming with its own set of rules that you'll need to follow.

Naturally, it's not exactly the easiest thing in the world to come to terms with all the different taxes that you need to pay, especially if you're only a sole trader and don't have the resources to hire an accountant like some of the larger limited companies out there.

So, for a bit more clarity, we'll be breaking down some of the essentials of all the various kinds of business tax in this article for you — covering things like the different terminologies and generally just helping you understand how you can manage your tax obligations in an efficient way.

Understanding Business Tax

As we mentioned, business taxation in the UK is fairly complicated as you need to pay tax on a bunch of different things, with each of them pertaining to specific aspects of your business and the way you operate.

Obviously, some of these taxes might seem less important than others, but a few of them definitely can have a direct impact on your overall financial well-being and how compliant you're being with the law, so let's explore a few of the main ones in a bit more detail:

Corporation Tax

Kicking things off, let's take a look at corporation tax, which is often misconstrued as only being applicable to some of the larger corporations out there. In reality, this is something that applies to literally every size of business; it's just the specific rates that you have to pay that are different since they're based on your company's annual profits.

Generally speaking, though, every business owner has to pay corporation tax on the profits that their company's raking in, but this kind of thing is typically easy to manage as you just need to submit a company tax return.

Still, corporation tax tends to play a pretty substantial role in your overall financial planning, so it's generally wise if you want to keep an eye on the corporation tax rate, as this usually changes depending on what the government policies are.

Ultimately, you'll always need to ensure you're reporting your business's financials accurately so you can stay compliant with all the relevant rules and not pick up any unwanted audits or even penalties.

Income Tax

Unlike the previously mentioned corporation tax that's more strictly to do with businesses, income tax is way more focused on individuals instead — even including people like sole traders or just any people who work in partnerships.

So, if you're running either of those two kinds of businesses, you're going to need to pay income tax to some degree on any of the profits that you derive from it.

It goes without saying that you need to have a pretty firm grasp on income tax rates and allowances when you're running a business, as the specific thresholds and rates are going to have an impact on the specific amount that you're paying.

As such, it always pays to have some form of a plan for how you're going to be compliant with your taxes so you're actually able to manage it properly, whether that's just by reading up on it more or even just hiring a personal accountant.

National Insurance Contributions

Moving forward, you're also going to need to pay national insurance contributions (NICs) so you're doing your part — whether you're an individual or an employer — in funding things like the National Health Service (NHS) and various other state benefits we sometimes take for granted in the UK.

Now, the exact amount of money you're legally obliged to contribute is actually distinct from income tax since they're to do with how much you're earning above a specific threshold that the government outlines — and, as mentioned, it's not just employers and business owners that need to pay this; employees do, too, and they're on employees' income.

So, your role as the business owner/employer here is to ensure that you're always calculating and deducting NICs from their employees' pay accurately. Your employees, on the other hand, should generally just keep track of all of their contributions so they're able to guarantee that they're actually receiving the benefits that they're entitled to.

Of course, similar to the previous two examples that we've already covered, it's paramount to stay informed when it comes to NIC rates and rules so you avoid running into any issues down the line.

Capital Gains Tax

One type of taxation that's associated a lot less with individuals is capital gains tax, and this is basically a kind of tax that applies to any of the profits you make from either selling or simply just disposing various kinds of assets — whether they're property, investments like stocks or cryptocurrency, or any other kinds of business assets.

We'd definitely say this is one of the kinds of business tax that has more to do with companies since they're far more likely to be involved in things like property investing than your average person.

So, for any businesses out there that resonate with this, you'll want to understand the various implications of capital gains tax whenever you're selling a business asset.

If for no other reason, you'd definitely want to get familiar with some of the tax relief benefits that you might be eligible for — think of things like business asset disposal relief or any other kinds of tax relief options, for instance.

It goes without saying that some of these exemptions or reliefs that are available to you can have a major impact on the overall profit that you're taking home whenever you're selling an asset, so properly planning before you end up disposing assets can definitely help you make the most out of after-tax returns (while also minimising any of the other capital gains tax liabilities that you might need to pay).

Business Rates

Moving forward, you'll also need to pay business rates, which are more of a local kind of taxation that applies more towards your business premises.

Put simply, this tax is basically something you'll be charged based on your property's ‘rateable value', which gets determined by the Valuation Office Agency (VOA), so pay close attention to this one since it's going to make up part of your overall overhead expenses.

Generally speaking, though, the best ways to manage these expenses, in particular, are simply budgeting for them and communicating with all your local authorities so you can stay compliant.

Added Tax (VAT)

Lastly, it's worth taking a look at value-added tax (VAT), too, as this is also something that the majority of the UK should already be applied for unless they're literally just starting out and don't even make enough money for the threshold yet.

In essence, this is a consumption tax that applies to the sale of any goods and services you might provide, and any businesses out there that are registered for it need to collect VAT from their customers and send it back to HM Revenue and Customs (HMRC).

Having said all of this, you've also got the opportunity to reclaim a lot of the VAT on what's known as ‘allowable business expenses', so it's definitely worth brushing up on this to get a nice reimbursement at some point further down the line.

Now, the standard rate for VAT in the UK is currently sitting at 20%, but it's worth mentioning that a few kinds of goods and services are at a reduced rate of 5% (while others are even totally exempt), so depending on what kind of business you're operating, you might find even more savings here.

Efficiently Managing Your Business Taxes

Right, so now that we've walked you through a few of the main components of business tax, finish things off with a couple of ways you can manage your tax liabilities.

Comprehend Tax Deductible Expenses

Some of the most common business expenses you can deduct from your taxable income are things such as office rent, employee salaries, and even some of the other costs associated with running your business.

Self-Assessment Tax Return

Basically anyone who has income from various sources needs to complete a self-assessment tax return to work out how much income tax they owe, so ensure you're filing this on time to avoid any penalties and potentially even interest if you end up with outstanding payments.

Related Guides:

FAQs

What Can I Do If I'm Struggling to Manage My Taxes on My Own?

Are There Any Specific Tax Relief Options for Businesses in the UK?

How Can I Stay up to Date With Changes in Tax Rates and Regulations?

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