How Much Can a Small Business Earn Before Paying Tax - UK
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When starting a business, business owners should familiarise themselves with taxes that they are bound to come across.
The type of taxes businesses are obligated to pay depends on the company’s business structure. The tax bill of a sole trader will differ from that of a limited company, or a partnership.
When do small businesses start paying taxes? And how much do they earn before paying taxes? In this article, we will outline taxes that every business owner is expected to pay and when not forgetting how they can pay them to Her Majesty Revenue and Customs (HMRC).
What is a company structure?
A company structure refers to how a business is organised and structured to achieve its overall mission. It outlines how employees, managers, and leaders are organised, allowing the company to effectively manage its human resources.
In essence, it’s like a map that explains how your company works and how roles are organised.
The common structures are as follows:
Sole Trader
Limited Liability Partnership ( LLP )
Private Limited Company ( Limited by Shares & Limited by Guarantee )
Public Limited Company
Tax obligation for sole traders and partnership business
A sole trader is a self-employed person who owns and runs their business independently. They have no company set up and are completely in charge of running their business, incur losses, and profits after tax.
A partnership business is made up of 2 or more individuals or entities who distribute income or losses between themselves.
Both sole traders and partnerships are obligated to pay income tax and National Insurance. They need to submit self-assessment tax returns each year and they pay tax on their profits.
Income tax
If you are self-employed or you have a source of income that isn’t from your salary, savings, or pension you’ll need to file an annual Self Assessment return with your annual earnings.
If during the last tax year, you were a sole trader and you earned over £1,000 or you were a partner in a partnership business, you’ll need to send a Self Assessment tax return.
Furthermore, you may need to file a Self Assessment tax return if you want to claim Income Tax relief, prove that you’re self-employed (this may be necessary to claim Maternity Allowance and so forth), or receive Child Benefit.
Each individual has a £12,570 personal allowance, which reduces the taxable profits. The basic rate, 20%, applies to profits from £12,571 to £50,270.
Higher rate: £50,271 – £125,140 (Tax rate: 40%)
Additional rate: £125,140 and above (Tax rate: 45%)
Once you register for Self Assessment tax, you can send your return to Her Majesty Revenue & Customs (HMRC) online. You can do this online, using commercial software, or on paper forms. It’s worth noting that you must use commercial software or paper forms to send returns for a partnership, trust, or estate if you lived abroad (as a non-resident)
National Insurance
If as a self-employed individual, you make a profit of more than £12,570 per year, you will be required to pay for National Insurance.
Employees will be required to pay for National Insurance if they are over 16 years old and earn more than £242 per week from one job.
The National Insurance contributions contribute to your eligibility for benefits and the State Pension.
There are different types of National Insurance known as classes, and the type individuals pay depends on their employment status and how much they earn.
If you’re employed, you stop paying Class 1 National Insurance when you reach the State Pension age, while self-employed, they stop paying Class 4 National Insurance from 6 April (start of the tax year) after they reach the State Pension age.
Tax obligation for Limited Companies
A limited company (LTD) is a business structure that is separate from its owner and shareholders. It offers protection to its directors, owners, and shareholders, allowing them to separate personal assets from business debts.
Taxes that limited companies need to pay may include;
Corporation Tax:
Corporation tax is applied to profits earned by limited companies.The main rate for company profits in 2023-24 is 25% rising from 19% last year.
However, not all businesses need to pay at this level. If profit exceeds £250,000, the main rate applies; if less than £50,000, the ‘small profits’ rate of 19% applies.
Marginal relief may apply for profits between these thresholds.
Dividends:
A dividend is payments given to shareholders from profits made by a limited company. Dividends are withdrawn after salaries and business expenses are deducted. This means that dividends can only be paid if the company has profits.
The first £1,000 of dividends is tax-free and beyond that, dividend tax rates apply.
PAYE
UK-limited companies that have employees are required to adhere to PAYE regulations. It is the responsibility of the employer to deduct the appropriate tax and National Insurance amounts from employees’ paychecks and submit them to HMRC.
The tax deducted from employees’ wages depends on how much they earn and the kind of work they do.
Employees who earn between up to £13,991 annually will be charged at the basic rate of tax, which is 20%. Anything from £31,093 to £62,430 is charged at the higher rate of 42%.
An additional rate of 45% is taxed for income over £62,431.
Taxes that all UK businesses are obligated to
VAT
All businesses operating in the UK are obligated to register for Value Added Tax (VAT) if they meet a £90,000 threshold.
If your business’ VAT taxable turnover for the last 12 months is more than £90,000 (the VAT threshold), you are legally required to register for VAT.
Additionally, you will need a VAT number if you expect your turnover to go over £90,000 in the next 30 days.
You will also need a VAT number if you only sell goods or services that are exempt from VAT but you buy goods for more than £90,000 from EU VAT-registered suppliers to use in your business.
You can also apply for a VAT number even if your turnover is less than £90,000 through voluntary registration.
Another common reason why a business may be forced to register for VAT is if it takes over an existing business that is VAT-registered.
Standard rate: 20%. This rate applies to most goods and services.
Reduced rate: 5%. It applies to specific items such as children’s car seats and home energy.
Zero rate: 0%. Certain goods and services fall under this category, including most food and children’s clothes.
In conclusion, the time frame of small businesses to start paying taxes varies with the company structure. Sole traders start paying taxes once their profits go above their personal tax allowance which is £12,570 in 2023. UK limited companies with profits up to £1.5 million pay corporation tax nine months after the accounting period.
Need help with your business tax obligation? Icon Offices has company services integrated to help businesses with corporation tax filing and VAT registration. We have provided our services to every type of businesses around the world.
UK VAT registration differs based on the nature of your business, your business activities, where the business is located, where the company directors or business owners are located, to where or from the goods are being shipped, where they are being stored, how they are being delivered to your customers, etc. Icon Offices will help you understand what type of application you need to make and what information you need to provide to support your application.
For more information, contact us at info@iconoffices.co.uk.