Business Tax: How much is business tax? 

With the start of the new tax year, small business owners will be looking to 2024 and beyond to think about how business tax may impact their finances. In this guide we’re going to help you clear up some of the questions you might have such as; what is business tax, and how much is business tax?

Small businesses have a lot of different things to consider when it comes to paying tax. From corporation and capital gains tax, to VAT and tax allowances, the tax world is often a tricky one to navigate. One key thing to remember is that the way your business is registered will determine the way you need to pay your taxes, for example a sole trader will owe tax differently to that of a limited company.

If you’re ever in doubt about your taxes you should seek help from a qualified accountant or contact HM Revenue & Customs (HMRC) directly. Ultimately getting your tax wrong, even if it’s accidentally, could lead to your business being liable to pay fines and large interest sums, or perhaps even undergoing criminal proceedings in extreme circumstances.

Corporation tax is charged on the profits made by limited companies and does not affect businesses registered as sole traders or partnerships. It’s charged on profits made before dividends are paid, but after salaries and other business expenses are paid. Corporation tax needs to be paid on all business profits which makes it similar to the income tax paid by sole traders and self-employed individuals.

The main rate of corporation tax for limited companies is 25% for the tax year 2024-2025, payable by businesses with a profit of more than £250,000.00. Businesses which earn less than £50,000.00 are eligible for the small profits rate which is reduced to 19%. For businesses that earn between these two thresholds, some relief may be available – it’s best to discuss this with your accountant or with HMRC.

Whilst businesses themselves don’t pay income tax, employees and those who take a salary from their work are liable to pay income tax, for example sole traders. There are currently three main income tax rates to consider:

• Basic rate income tax at 20% for earnings up to £50,270.00.
• Higher rate income tax at 40% for earnings from £50,271.00 to £125,140.00.
• Additional rate income tax at 45% for earnings over £125,141.00.

Tax rates are applied to all earnings above £12,570.00 which is the personal allowance threshold for the tax year 2024-2025. Self-employed individuals and those registered as sole traders will need to pay their income tax via a self-assessment tax return. During this return, HMRC will calculate how much tax is owed through the year and will generate a bill. Your accountant should be able to assist you with this.

For employees, this tax is taken automatically through the pay as you earn (PAYE) system.

Businesses should remember that income tax is also due for cash in hand payments which is why accurate records of cash income should be maintained to ensure you pay the correct tax for the corresponding tax year.

No matter how small your business is, if you have employees you will be liable for national insurance contributions. For the tax year 2024-2025, businesses are liable for national insurance at 13.8% of their employees earnings over £12,570.00. Sole traders must also pay national insurance on their earnings which is calculated by HMRC during the self-assessment tax return process.

National insurance rates can differ depending on earnings, some small businesses may also be eligible for the employment allowance which allows companies to reduce their national insurance contributions. It’s always best to discuss your options with your accountant, or with HMRC to ensure you make the correct payments and avoid potential penalties for wrong or late payments.

Company shareholders can receive payments in dividends, during the tax year 2024-2025, these payments can be made tax free up to £500, anything more than this will be liable for dividend tax. Dividend tax rates are calculated based on your income tax band:

• Basic rate income taxpayers are taxed 8.75% on dividend payments.
• Higher rate income taxpayers are taxed 33.75% on dividend payments.
• Additional rate income taxpayers are taxed 39.35% on dividend payments.

For shareholders that only receive income from dividends (and don’t take a salary elsewhere for example), the personal allowance still remains, and in this instance, tax on dividends is only charged on earnings over £12,570.00, plus the additional tax-free dividend allowance.

Any business which operates from a commercial premises such as a warehouse, office or shop is likely to be charged business rates. Business rates are similar to council tax and are managed and calculated by your local authority. Business rate charges are sent out to business owners prior to the new tax year and should detail how much your business owes for the coming 12 months.

In some instances, businesses which operate from a domestic property or business owners who work from home could also be charged business rates. This might happen if:

• You have employees who work from your home address.
• You have customers visit your home address to purchase a product or service.
• You have adapted part of the property for business use, such as a garage or outbuilding.
• Your property is part domestic and part commercial, for example a shop with a flat above it.

Some businesses are eligible for small business rates relief. You should contact your local council or authority to discuss this further if you think this could impact your business.

Capital gains tax is charged when a business sells or gives away an asset, which may include things like property, equipment, trademarks, shares and even whole businesses. Like dividend tax, capital gains tax is dependent on your income tax band and therefore it’s important to consider that with capital gains tax, a large sale could push you into a higher tax bracket, meaning the tax you pay on your income could change.

As always, if you have any questions or doubts about capital gains tax, you should contact your accountant or HMRC to discuss further.

Our business tax guide helps small businesses to navigate the tricky world of tax. It’s tough running a business, which is why at Premierline, we go the extra mile to look out for our customers.

Now your business tax is sorted, why not take a moment to review your business insurance needs? Our experts can advise business owners on the covers they need to protect their business. Get in touch today and book an appointment with an expert who can review your insurance needs, spot any gaps in cover and provide a no obligation quote.