Tax 101 for small businesses
Changes to reporting income from self-employment and trading partnerships
HM Revenue and Customs (HMRC) is changing the way it assesses profits from self-employment and trading partnerships. This change is called the Basis period reform. You may be affected by the new ‘tax year basis’ if:
- you are self-employed or in a trading partnership; and
- your business accounting end year does not match the tax year, i.e. it does not end on or between 31 March or 5 April. (Your accounting date is the last day of the period for which you prepare your accounts.)
If either of the above points do not apply to you, or you are an employee or company director, you will not need to do anything differently.
Previously, taxes were worked out 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’. The tax year runs from 6 April to 5 April the following year.
So, if your accounting date does not end on or between 31 March and 5 April, you’ll need to fill in your 2023/24 tax return differently. You will need to report your profits up to the tax year end, even if your accounting year ends at a different time.
This government guidance explains how to report profit on your Self Assessment tax return from 2023/24 if your accounting year doesn’t end on or between 31 March and 5 April.
You should also consider:
- how the new tax rules will affect your cash flow. (You might need additional funding to make up any difference, especially for tax payable in January 2025, when larger 'catch-up' payments may be due); and
- whether changing your accounting date to line up with the tax year may be a good idea. (Keep in mind that the timing of the change will be important. You should take into account your profit forecasts when deciding. Speak to an expert for help.)
When you start your own business, you'll have to start thinking about tax at an early stage.
Understanding tax can be complicated, but it’s important for avoiding penalties.
Meeting your tax responsibilities is called tax compliance. It shows that you manage your business well and honestly. This is vital to making sales, impressing investors, and attracting good employees.
Plus, being tax-compliant will help you take advantage of any exemptions and reliefs (tax breaks) you’re eligible for.
In this guide we’ll first look at some different business models. The business model you choose can have a big effect on the amount of tax you pay and the reliefs you can claim.
Then we’ll look at some of the most common taxes you're likely to encounter as a small business owner. We’ll cover:
- business rates;
- Corporation Tax;
- Income Tax;
- the IR35 rules;
- National Insurance;
- tax relief;
- Making Tax Digital; and
- what to do if you can’t pay your tax bill.
Different business models are taxed differently, so it’s important to think about this when you’re setting up your business.
Below is a quick summary of each model. You can learn more in the resources we have linked to throughout and also in our guide Which business model is right for you?.
A sole trader business model is a simple way of running a business where just one person owns and manages everything. It's like being the captain of your own small boat. The sole trader makes all the decisions and gets all the profits from the business, but also has to handle any losses or debts the business might have.
Sole traders can work alone or hire employees. This model is straightforward to set up and run, and it's a popular choice for people starting small businesses.
Learn how to set up as a sole trader in our full guide.
A limited company business model is a way of setting up a business so that it's its own legal entity, separate from the people who own or run it. This means the company itself is responsible for things like debts and legal matters, not the people who own it.
The owners, often called shareholders, have their risk limited to the amount of money they put into the company. If the company makes money, they can get a share of the profits. If it goes into debt, they usually don’t have to pay out of their own pocket – they only risk losing the money they initially invested.
This model is more complex to set up compared to being a sole trader, but it offers more protection for the owners' personal assets. Find out more in our superguide to setting up a limited company.
Partnerships established in the UK can be divided into:
- general partnerships;
- limited partnerships;
- limited liability partnerships; and
- Scottish partnerships.
The rules regarding the different types of partnership are detailed. Each model has pros and cons.
We’ve briefly outlined each of them below. However, we recommend taking tax and legal advice to consider your options and the risks involved, and to help you draw up any of these types of 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 about how to set up a general partnership in our guide to setting up a partnership. And, when you’re ready to put a partnership in place, you can use our template general partnership agreement.
Limited partnerships have one or more general partners and one or more limited partners.
Limited partners restrict their legal responsibility for how the business is run and its long-term success to the amount of money they put into the business. They aren’t held personally responsible for the business's debts or decisions beyond that investment. This is called ‘limited liability’.
You won't come across limited partnerships often. They are mainly used in certain specialised areas, such as venture capital investments.
It's important not to confuse limited partnerships with limited liability partnerships (see below).
Limited liability partnerships
LLPs combine the flexibility of partnerships with the benefit of limited liability for their members. The responsibility of an LLP member for the LLP's debts is limited to how much they have contributed to the business (unless that member is negligent concerning the work carried out for a client).
LLPs are regarded as 'bodies corporate' in commercial law. This means that an LLP is treated like its own individual 'person' in the eyes of the law. Just like a person can own things and be responsible for their actions, an LLP can own property, make deals, and be held accountable for its actions, independently of the people who are its members.
Each LLP must be registered at Companies House and file audited accounts.
For more information, see our guide How to set up a limited liability partnership (LLP). Our template limited liability partnership agreement will also be useful.
A Scottish partnership is like a general partnership, but it's treated as having a legal personality in the same way as an LLP. This means that the partnership can enter into contracts and hold property in its own name.
If your business operates from office or retail premises, you may have to pay business rates. These rates are like council tax for business properties.
They are charged on most non-domestic properties, including:
- warehouses; and
- holiday rental homes or guest houses.
Some properties are exempt from business rates, such as farm buildings.
Some businesses may be entitled to business rates relief, including small business rate relief and empty property relief. You can learn more about the various types of business rates relief here.
Retail, hospitality, and leisure relief
For the 2023/24 tax year, you may qualify for a 75% reduction in your business rates bill if your business property is mostly used as a:
- cinema or music venue;
- hospitality or leisure business (e.g. a hotel, gym, or spa);
- shop; or
- café, bar, pub, or restaurant.
The most you can claim in relief is £110,000 per business. See here for more information.
How are business rates calculated?
Business rates are calculated by taking your property’s ‘rateable value’ and applying a certain multiplier to that value.
If the rateable value of your business property is above a certain amount, you’ll use the ‘standard multiplier’ for the current tax year. If it’s below this threshold, you’ll use the ‘small business multiplier’.
Business rates thresholds and multipliers for 2023/24
Rateable value threshold: £51,000
Standard multiplier: 51.2 pence
Small business multiplier: 49.9 pence
You can check past and current rates here.
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.
If you want to challenge your property’s rateable value or report any changes that might affect it, you can use your government business rates valuation account.
What about businesses that are run from home?
If you run your business from home, you’ll usually just pay Council Tax without paying business rates on top, unless any of the following apply:
- You employ staff who come and work at your home.
- You sell goods or services from your home to visiting customers.
- You have adapted your home to work there (such as converting your garage or shed to a dog-grooming parlour).
- Your property is part business and part domestic, for example you run a pub and live above it.
Limited companies pay Corporation Tax on their profits. As soon as a company makes any profit, it will start paying Corporation Tax.
The only exception to this is if your company has previously made losses. These losses can be offset against your profits. If your losses are greater than your profits, your company will not usually need to pay Corporation Tax for that financial year.
Sometimes there may even be losses left over after you’ve offset your profit for the year against them. You may be able to carry forward those losses into your next year of trading and reduce the tax you owe on the same business activity for that next tax year.
Offsetting losses is often very useful for startups and businesses that have been struggling or are heavily investing in expansion and innovation opportunities.
The rate at which a company pays Corporation Tax depends on how much profit it has made in that tax year:
- Businesses that have made above a certain amount (the upper limit) will pay the main rate of Corporation Tax.
- Businesses that have made below a certain amount (the lower limit) will pay Corporation Tax at a lower rate (known as the ‘small profits rate’).
Corporation Tax thresholds and rates for 2023/24
- The upper limit is £250,000.
- The lower limit is £50,000.
- The main rate is 25%.
- The small profits rate is 19%.
You can check current thresholds and rates here.
What is ‘Marginal Relief’?
Businesses making between the small profits rate and main rate thresholds for Corporation Tax may be entitled to something called ‘Marginal Relief'.
Marginal Relief allows you to reduce the rate at which you pay Corporation Tax proportionately to your profits. It provides a gradual increase in the Corporation Tax rate between the small profits rate and the main rate.
You can check whether you are eligible for Marginal Relief and how much relief you could be entitled to here.
The associated company rules
If your company has one or more ‘associated companies’, the limits for the main and small profits rate are divided by the total number of companies, including your own.
For example, if your company has three other associated companies, the limits are divided by four. This means each company will pay the main rate of Corporation Tax on their profits much sooner than they would otherwise have done.
How associated company rules work
What is an associated company?
A company is an associated company of another company if one of them has control of the other, or both are under the control of the same person or people.
Control can take different forms, like control over the company’s income or dealings, or control through voting power.
A company can be an associated company even if it’s not based in the UK. Dormant companies aren’t included.
See HMRC’s guidance for help deciding whether someone has control over a company.
When should Corporation Tax be paid?
Corporation Tax is usually payable nine months and one day after the end of your company's accounting year. For example, a company with a year end of 31 March will have to pay its corporation tax by 1 January the following year.
Large companies with profits between £1.5 million and £20 million usually must pay Corporation Tax in instalments. There are separate rules for companies with profits over £20 million. The associated company rules also apply to these thresholds.
Read the full guide
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