Tax 101 for small businesses
Autumn Statement 2023
Here’s a quick summary of the key points affecting tax for businesses and the self-employed. For much more detail, see our full roundup.
For the 2024/25 tax year, while the standard multiplier will rise in line with inflation, the small business multiplier will remain frozen for another year.
The existing 75% reduction in business rates for retail, hospitality, and leisure businesses on business rates of up to £110,000 will be extended for another year.
Changes to R&D system
The R&D Expenditure Credit and small or medium enterprises (SME) R&D relief schemes will be merged. Within the merged scheme, the rate at which loss-making companies are taxed will be reduced from 25% to 19%.
Further, the threshold for additional support for R&D intensive loss-making SMEs will be reduced to 30%.
See our full R&D guide for further information.
Changes to Self Assessment filing threshold
Starting from the 2024/25 tax year, individuals with income over £150,000 which is taxed via PAYE will not be required to submit an Income Tax Self Assessment return (ITSA), unless there is another reason for them to do so (for example, they received more than £10,000 from dividends or savings and investments).
You can check whether you need to submit a Self Assessment return using the government's checker tool.
Cuts to National Insurance rates
From 6 January 2024, employees will pay 10% on their earnings over £12,570, up to the £50,270 limit – a 2% cut from the current 12% rate.
For the self-employed:
From April 2024, Class 2 NI contributions will be abolished entirely (though those paying voluntarily will still be able to do so at the same rate). And Class 4 NI rates on profits between £12,570 and £50,270 will be reduced from 9% to 8%.
EIS/SEIS and VCT extensions
The EIS, SEIS, and VCT schemes have been extended until 2035.
Full expensing has been made available permanently.
Making Tax Digital
Making Tax Digital for Income Tax Self Assessment (MTD ITSA) will require Self-Assessment users to keep digital records and share quarterly updates with HMRC via software.
When you need to make the changes will depend on your income:
- Self-employed individuals and landlords with an income of more than £50,000: from April 2026.
- Self-employed individuals and landlords with an income between £30,000 and £50,000: from April 2027.
- Measures for those with an income under £30,000 are still under review.
We'll be keeping an eye on developments, so make sure to check the platform for updates.
If you can’t pay your tax bill
If you can’t pay your tax bill in full, you may be able to set up a ‘Time to Pay’ arrangement with HMRC. Time to Pay is a payment plan which allows you to pay what you owe in instalments.
Time to Pay plans are available for tax owed from Self Assessment, employers’ PAYE contributions, and VAT. You must meet certain eligibility requirements, including HMRC believing that you can keep up with the repayments.
If you're in an industry with unpredictable cash flow (e.g hospitality), make sure you consider your predicted future revenue carefully when agreeing Time to Pay arrangements. You don't want meeting repayments to become a financial strain.
You can set up a Time to Pay plan online here.
New tax year basis for Income Tax Self Assessment
HMRC is changing the way it assesses your profits if you’re a self-employed trader (including sole traders, partners in trading partnerships, and other unincorporated bodies, e.g. trading trusts and estates) that uses an accounting date between 6 April and 30 March. You will not be affected by this change if your accounting date is between 31 March and 5 April.
Your accounting date is the last day of the period for which you prepare your accounts. You choose your accounting date. You’ll usually make your annual accounts up to that date.
The new measure changes how tax is calculated. Previously, taxation was done on a ‘current year basis’. Your profit or loss for the tax year was normally taken as that of the year up to your accounting date.
From 6 April 2024, your profits will be assessed on a ‘tax year basis’. So, your profit or loss for the tax year will be that which arises in the tax year itself (running 6 April to 5 April), whatever your accounting date is.
So, if your accounting date is between 6 April and 30 March, you’ll need to fill in your tax return differently. There is transition year from 6 April 2023 to 5 April 2024. You’ll be taxed on profits for both:
- the 12 months up to your current accounting date; and
- the rest of the 23/24 tax year (spread over the next five tax years, if assessable profits are higher than they would have been under the old rules. You can choose to spread them over fewer than five years, if you prefer).
You may be entitled to overlap relief. You can check the details of your overlap relief entitlement here. Make sure to find out the details of your overlap relief before submitting your 23/24 tax return. Businesses with overlap relief that they should have previously used but did not can set this against their profits in the 23/24 tax year.
You should consider:
- How the new tax rules will affect your cashflow. You might need additional funding to make up any difference, especially in relation to tax payable in January 2025 (when larger 'catch up' payments may be due).
- Whether changing your accounting date to line up with the tax year may be worthwhile. Keep in mind that the timing of the change will be important. You should take into your account your profit forecasts when deciding.
For more information on the change, see here.
Spring budget 2023
The current 19% tax rate will be maintained for businesses with profits of £50,000 or less, and businesses with profits between £50,000 and £250,000 will pay a marginal rate of tax between 19% and 25%. The rate of corporation tax paid on taxable business profits over £250,000 will rise from 19% to 25% in April 2023.
If you’re looking to invest in new machinery and technology, you may be able to deduct said investments from your taxable profits. Be sure to keep up with our legal updates blog to stay on top of your dates for filing in the new tax year!
R&D tax credits
The government is continuing with their cuts to the R&D Tax Credit scheme. However, today’s announcement of an enhanced credit for those firms who spend over 40% on R&D will be welcome news.
To find out more about the changes to the UK’s tax system announced in the Spring Budget, the government have published their own factsheet here on .gov.uk.
Support for creative industries
The government announced its intention to continue supporting the UK’s creative industries by:
- Changing audio-visual tax reliefs (for the film, TV, and video game industries) into expenditure credits.
- Extending temporary higher rates of tax relief for theatres, orchestras, and museums/galleries for two further years, until April 2025.
The new expenditure credits will be offered at a higher rate than current tax relief:
- 34% for film/high end TV
- 39% for animation/children’s TV; and
- 34% for eligible video game projects.
The government plans to bring in these changes via legislation at a later date. It should be possible to claim expenditure credits from 1 January 2024, but there will be a transition period so that companies can adjust to the change.
Read more about eligibility requirements, the transition period, and how to claim credits here.
Our full roundup of the key points from the budget businesses should be aware of can be found here
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 general partnership agreement 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.
HMRC warns of dividend diversion scheme
HMRC has warned owner-managed companies about a tax avoidance scheme that is currently being marketed as a tax planning option.
The scheme claims to allow owner-managers and directors to fund their minor children’s education by redirecting dividend income from themselves to their children. While the children do pay tax on these dividends, they pay much less than if their parents had received the dividends as the company owners.
HMRC advises anyone using this scheme (or any other similar arrangements) to leave it and settle their taxes with HMRC urgently. There is more information about the scheme and how to exit it here.
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 £242)
- You're self-employed and making a profit above a defined level each year (currently £6,725)
Check the current thresholds here.
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 £6,725 or more a year, you'll usually pay Class 2 contributions.
- Class 4 - if your profits are £12,750 in 2023/24, you'll also pay Class 4 contributions.
The Class 2 and Class 4 NI rates for 2023/24 are as follows:
- Class 2: £3.45 a week
- Class 4: 9% on profits between £12,570 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 £6,725 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 2023 to 2024 tax year are:
- On pay of £242 to £967 a week (£1048 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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