An introduction to business tax

Sole traders are individuals who run their businesses on a self-employed basis. The main tax sole trader’s pay is income tax.  

How much income tax you pay in each tax year depends on how much of your income is above your personal allowance and how much of your income falls within each tax band.  

Your personal allowance is the amount of income you can earn without paying any tax. It is worked out on your total income and you only get one personal allowance.    

The current tax year runs from 6 April 2023 to 5 April 2024. 

The first £1,000 of income you earn from self-employment is your trading allowance. If your total turnover for the year is less than this figure, you don’t have to pay tax or fill in a self-assessment tax return.  

If you earn anything over your trading allowance, you must complete a tax return, even if you earn the majority of your income from PAYE employment.  

More information about self-assessment tax returns can be found here: https://www.gov.uk/self-assessment-tax-returns.  

Some companies are structured as a partnership where you and at least one other partner share responsibility for your business.  

Each partner must be registered for self-assessment and is individually responsible for completing their tax return but the partnership itself must also be registered with HMRC.  

Tax is then paid on an individual basis and the amount and rates will depend on the individual person’s circumstances.    

Self-employed tax calculator - https://www.gov.uk/self-assessment-ready-reckoner
National insurance calculator - http://nicecalculator.hmrc.gov.uk/Class1NICs1.aspx  

Many small businesses owners choose to be structured as a limited company. This is quite different to a sole trader or a partnership in that corporation tax is the main tax liability.  

Corporation tax is a tax on the profits a business makes from doing business (trading profits), making investments and selling assets for more than they cost (chargeable gains).  

UK based companies pay corporation tax on all their profits from the UK and abroad. The main rate of corporation tax for the financial year 2023/24 is 25%.

Companies with profits of between £50,000 and £250,000 will be taxed under a new taper relief system and means you may be entitled to marginal relief. Companies with profits of £50,000 or less will still pay the current rate of 19%.

You don’t receive a bill for your Corporation Tax so it’s your responsibility as a business owner to calculate, pay and report the Corporation Tax you owe.   

You can use this corporation tax calculator to get an estimate of your liability: https://www.itcontracting.com/calculators/corporation-tax-calculator/

If your business is set up as a limited company, then your personal tax liability will be calculated depending on how much salary you pay yourself as an employee of the business and how many dividends you distribute as a director.  

Your salary will be taxed in the usual way, with a £12,570 personal allowance for 2023/24, while dividends will be taxed at either 7.5% (basic rate), 32.5% (higher rate) and 38.1% (additional rate) depending on your other earnings for the year.  

There is a £2,000 dividend allowance that sits within your existing tax bands.  

Value added tax (VAT) is a tax added to the sale price of goods and services and other revenue-generating activities.  

It is charged on things like:    

• business sales 
• hiring or loaning goods to someone  
• selling business assets  
• making commission  
• items sold to staff - for example canteen meals  
• business goods used for personal reasons  
• ‘non-sales’ like bartering, part-exchange and gifts  

If your business is VAT registered, you must charge VAT on all your goods and services. You may be able to reclaim VAT you’ve paid on business-related goods and services.   

The current standard VAT rate is 20%. It was increased from 17.5% in 2011.  

More information about the different VAT rates can be found here: https://www.gov.uk/vat-rates   

• Standard rate – 20% - applies to most goods and services 
• Reduced rate – 5% - applies to some goods and services e.g., children’s car seats and home energy 
• Zero rate – 0% applies to zero-rated good and services e.g., most foods and children’s clothes 

You can register for VAT here: https://www.gov.uk/vat-registration