When Do SMBs Have To Pay Tax?
All businesses in the UK are liable to pay various forms of taxes. As an SMB owner it is important to be aware of what types of taxes you could owe, and when.
Many taxes and tax brackets will depend on the size of your business and your annual turnover. The tax year runs from April to the following April, although the exact dates will vary from year to year. Any tax owed in the following April will be calculated from any trading that occurred in the previous 12 months. Missing tax deadlines, whether for VAT, corporation tax or any other, can lead to serious fines from HMRC.
To keep all SMBs in the loop with the different types of tax they might owe here is our quick reference guide for business owners and managers.
Taxes For Small Businesses Owners
SMB owners in the UK are liable to pay several different types of small business taxes. The structure of your organisation will affect the type of taxes that you owe and the amount of tax that you owe. For example a partnership will be liable for different taxes compared to a sole trader.
To make sure that you are aware of the specific taxes your business structure makes you liable for, consult with a professional accountant.
Corporation tax applies only to limited companies, not partnerships or sole traders.
Limited companies are taxed on profits after all general business expenses have been accounted for, but before dividends. Corporation tax is charged at a fixed rate of 17% of profit for all limited companies as of April 2020.
This type of tax is due for payment nine months after the end of the business’s accounting period, or year end, depending on your structure. It is down to the SMB to determine how much tax they owe, HMRC will not calculate it for you.
Value Added Tax (VAT)
Value Added Tax is due by all VAT-registered companies, which includes almost all goods and services sold in the UK. VAT is charged at 20% for most items, but some items such as children’s wear, publications and household bills have a lower rate of around 5%.
Only SMBs whose annual taxable turnover is greater than £85,000 must register for VAT. Businesses with a lower turnover can also register for VAT if they wish to do so. This is often done in order for these businesses to claim VAT back on business purchases, which can save small businesses money.
VAT returns must be submitted on a quarterly basis, regardless of whether you have VAT to pay or claim.
National Insurance is designed to help fund public services and build up state pensions for all individuals. This type of tax is payable by both employers and employees directly to HMRC. For SMBs the contribution for National Insurance is 13.8% per year for each employee earning over £9,569 per year (2021-2022).
For sole traders, National Insurance is paid as part of your self-assessment tax return which is due by January 31st each year. Limited companies can automatically pay National Insurance contributions through their payroll.
If your business is eligible for the Employment Allowance incentive to recruit more staff, you could have your National Insurance Contributions reduced by up to £3,000 per year.
Income tax is payable only by individuals, not businesses. Income tax does therefore apply to sole traders and is calculated from profits, and it can also be payable by business owners if they receive a salary from their company.
Income tax is split into bands to ensure that those on lower wages are not taxed too highly and visa versa. Income tax is paid via payroll to HMRC on a monthly basis.
The basic income tax rate is set at 20%, the higher rate is at 40% and the additional rate is set at 45%.
If you run your business out of an office, factory, warehouse or shop, you may be liable to pay business rates on the property. If you run your small business from home you will not have to pay business rates.
Local authorities set business rates, much like councils do for council taxes and will also vary depending on the size of your business premises. You can expect to receive a bill for business rates due in February or March for the financial year ahead.
Some small businesses can also be exempt from paying business rates relief if they have a premises value determined by local authorities to be less than £12,000. The amount due in business rates will increase for properties the higher their determined rateable value. For example, a business rated at £15,000 will have to pay 100% of their business rates with no opportunity for tax relief, whereas a business with a rateable value of £14,000 will get a discount of 33% on their business rates.
Business rates are payable in monthly installments over the course of 12 months.
All businesses are liable to pay some form of tax. Size, structure, turnover and location can all play a factor in determining how much tax each SMB is required to pay each year.
While there is no definitive time that can be claimed as the threshold for when SMBs have to pay tax, each type of tax outlines its requirements. Filing a small business tax return for the first time can be daunting, and it is always recommended that you speak with a professional accountant if you have any questions or are unclear about what tax your business owes.
For more information and guides to setting up and running your small business, view our helpful blog posts or get in touch with our UK based support team.