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Tax made simple for small businesses

Income tax, corporation tax, national insurance contributions and VAT - we take a look at what you need to do.

In this article

Income Tax

If you’re a sole trader or trade as a partnership, you need to complete a self-assessment tax return by 31 January each year, to cover the preceding tax year.

Tax returns need to include all the supplementary pages for employment so you can work out how much income tax to pay on the money your business has earned.

Self-employed people pay tax in the same way as people in employment, except they are entitled to set a range of costs against their income which will reduce what they owe. Having an accountant will help you ensure you claim everything you are entitled to. 

Which? also has a series of guides that can help:

Corporation Tax

When you set up as a limited company, you need to register for corporation tax within three months after you start trading. You can register for corporation tax online, using your unique taxpayer reference, allocated by HMRC.

Limited companies must all pay corporation tax at 20% on their taxable profits. Similarly to income tax, you don’t get a bill – you must keep records and submit a tax return each year.

The tax return needs to include form CT600, a full set of your company’s accounts, plus any necessary supplementary pages and additional tax computations. It is a good idea to get an accountant or tax expert to prepare this to ensure it is completed correctly.

You normally have 9 months and one day from the company’s year-end to calculate and pay your corporation tax.

National Insurance

There are different classes of National Insurance Contributions (NICs) depending on your employment status.

Class 1

What is this?

Tax on employee wage or salary, paid by employees under state pension age who earn more than £162 a week. If you are a director of a limited company you may also be your own employee and pay Class 1 NICs through your PAYE payroll.

How do I pay?

You, as the employer, have to deduct employee’s class 1 NICs from their salary or wage. Your payroll software should be able to help with this. You need to send your payment to HMRC by the 22nd of the following month, if you pay monthly, or the 22nd after the end of the quarter if you pay quarterly.

Class 1A or 1B

What is this?

Tax on employee in-work benefits and expenses.

How do I pay?

Once again, it is your responsibility as the employer to deduct the correct amount from your employee and submit it to HMRC. Class 1B NICs are reported and go to HMRC along with the class 1 NICs on a weekly or quarterly basis.

Class 1A NICs on in work benefits, such as a company mobile phone, have to be submitted separately to HMRC on an annual basis.

Class 2

What is this?

This is the class of contributions that is most relevant to anyone who is self-employed – trading as a sole trader or in a partnership. If your earnings fall under the threshold you do not have to pay contributions, but you can choose to pay voluntary contributions.

In 2018/19 you must pay class 2 NICs if your profits are over £6,205 a year. If you earn less than this, you can still pay voluntary contributions (Class 3), to maintain your National Insurance record.

How do I pay?

When you start trading as a sole trader or a partnership you inform HMRC. Most people then pay their class 2 NICs through their annual self-assessment tax return.

Class 4

What is this?

This is an additional tax to Class 2 NICs if your business’ profits are over £8,424.

The 2018/19 rate is 9% on profits between £8,424 and £46,350, then 2% on any profits above the £46,350 threshold.

How do I pay?

This Class 4 NIC is assessed in your tax return with the payment due included in your final bill.

Value added tax

Value added tax (VAT) is an indirect tax payable on the purchases of  most goods and services. For most goods and services the current VAT rate is 20%. In the current tax year you must register with HMRC for VAT - and charge your customers the tax - if your business turnover is above £85,000. If your turnover is below this level you can voluntarily register for VAT. It might suit your business to do so because:

  • your business needs a lot of VAT-registered supplies, and VAT can be reclaimed
  • you want to allow your customers to reclaim the VAT element of your invoice
  • you want to give your operation the credibility that VAT rating gives in the eyes of other businesses.

Standard VAT accounting involves completing four VAT returns a year and paying VAT on invoices issued each quarter, which can lead to cashflow problems if some of your customers don’t pay promptly.

To help small businesses reduce VAT administration, there are three different schemes available:

  • The Flat Rate VAT Scheme allows you to calculate your VAT due as a percentage of your sales rather than constantly keeping track of VAT paid and VAT charged. To qualify for the Flat Rate Scheme, your turnover must be under £150,000. Different sectors pay a different flat rate. Visit the Gov.uk site for more details.
  • The Annual Accounting Scheme allows you to make a set of VAT payments each month or every quarter. You only complete one VAT return at the end of the year, though you will need to be disciplined with your accounting.
  • The Cash Accounting Scheme may be useful if you invoice other businesses and are likely to face delays in payments. You account for VAT on the basis of payments you receive and make, rather than on the invoices you issue and receive.

Check our guide to whether you should register for VAT for more information.

Remember all Which? Trusted traders have unlimited, free access to the Which? Money helpline on 01992 822848 as part of their Which? membership. It’s open Monday to Friday 9am to 5pm, and staffed by financial experts who will give you one-to-one advice on your financial questions, including tax queries.

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