Chapter seven: Tax explained

There are various taxes you need to be aware of as a business owner and you should consider seeking independent, professional tax advice to ensure you pay the right amount.

Income tax

Income tax is personal tax paid on income, including the profits made by self-employed people.

Most people in the UK have a personal tax allowance of £12,570.

Beyond that, the percentage of tax you pay is dependent on how much you earn.

The income tax bands for England, Wales, Northern Ireland, and Scotland can be found on the Gov.uk website.

Business owners can reduce the income tax they pay in various ways, including making pension contributions and being paid in dividends as a limited company director. 

National Insurance

National Insurance Contributions (NICs) are payments towards an individual’s entitlement to a basic state pension and other benefits.

Self-employed business owners with annual profits of £12,570 or more pay Class 4 National Insurance contributions.

If you have staff, you need to pay employer’s National Insurance

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Some businesses can reduce these payments through their employment allowance

Corporation Tax

Corporation Tax is a tax paid by limited companies on profits that they make.

A Corporation Tax return needs to be filed with HM Revenue & Customs (HMRC) within 12 months of the accounting period it covers, with payment due within nine months of the end of the accounting period covered in the return.

The main rate of Corporation Tax, for companies with over £250,000 profit, is 25%.

Companies with a profit of £50,000 or less pay the 19% ‘small profits rate’.

If your profit is between £50,000 and £250,000, you might qualify for ‘Marginal Relief’. 

Value Added Tax (VAT)

VAT is a tax applied to the sale of most goods and services. 

The standard rate is currently 20%.

The current VAT threshold is £90,000 which means you must register for VAT if your VAT taxable turnover in the last 12 months was over £90,000 or you expect it to exceed £90,000 within the next 30 days.

You can choose to register if your turnover is under £90,000.

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Further reading

Read our guide to VAT.

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Whilst we make reasonable efforts to keep the information in this guide up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.