NOTE: Due to the ongoing coronavirus outbreak, the government has made several announcements in relation to the filing and payment of taxes. These include:
- From 8 July 2020 to 30 June 2021 no stamp duty is payable on the first £500,000 of a residential property purchase. From 1 July 2021 to 30 September 2021, no stamp duty is payable on the first £250,000. This does not apply to commercial premises and does not include the 3% higher rate for additional property purchases.
- The Annual Investment Allowance for capital expenditure has been temporarily increased to £1 million between 1 January 2019 and 31 December 2021.
- Companies can claim increased capital allowances for capital expenditure between 1 April 2021 and 31 March 2023. Purchases that would normally qualify for an 18% writing down allowance qualify for a 130% first year allowance. Special rate purchases qualify for a 50% first year allowance.
It helps if you understand the taxes likely to affect your business. You also need to make sure that you have effective systems for keeping financial records and complying with your tax obligations.
For the details, you need to consult a qualified accountant or tax adviser. A genuine expert should be able to save you more in tax than you spend on fees, as well as sparing you effort, time and stress.
1. Different taxes
Both the self-employed and employees pay income tax
- Employees pay income tax on the amounts they are paid and on any taxable benefits they receive. Employers generally collect and pay this through PAYE.
- Tax for the self-employed is based on their profits.
A limited liability company pays corporation tax
- See Corporation tax.
National Insurance (NI) is a form of taxation paid by both employers and individuals
- NI contributions for employers, employees and the self-employed are collected in the same way as income tax.
Businesses collect VAT for the government
- VAT-registered businesses charge their customers VAT on most supplies of goods and services, but can also usually reclaim VAT on most purchases.
- Businesses that are not registered do not charge VAT but cannot reclaim the VAT they pay.
Capital gains tax (CGT) may be payable if assets are sold for more than they cost
- See Capital gains tax.
Stamp duties may be charged on transfers of land, property and shares
- Stamp duty land tax (SDLT) for commercial property is 0% for values up to £150,000, 2% on the portion of the purchase price between £150,000 and £250,000 and 5% over £250,000.
- First time buyers relief applies to residential property costing less than £500,000 purchased after 21 November 2017.
- An additional 2% surcharge applies to non-UK residents who buy a residential property in England or Northern Ireland from 1 April 2021.
- SDLT for residential purchases by 'natural persons' ranges from 0% for amounts under £125,000 to 12% on the portion of the price over £1.5 million. Second homes and buy-to-let properties costing more than £40,000 attract an extra 3% surcharge.
- Residential properties valued over £500,000 purchased by 'non-natural persons' attract SDLT at 15%. Properties valued in excess of £500,000 are also subject to an Annual Tax on Enveloped Dwellings (ATED) and CGT on disposal.
- Stamp duty at 0.5% is charged on share transfers above £1,000.
2. Are you self-employed?
People who are self-employed can benefit from significant short-term tax and NI advantages compared with employees.
You are usually self-employed if you are your own boss and trade as a sole trader or in partnership
HM Revenue & Customs (HMRC) may treat you as an employee unless you can show features such as:
- controlling what you do, and how and when you do it
- having more than one customer
- bearing an element of business risk
- having the right to get a subcontractor or employee to do the work instead of yourself
If you trade as a limited company, you will normally be an employee of the company
- Company directors are also taxed as employees.
- If the company contracts your services to a single client, who would otherwise employ you, it will probably be classed as a personal service company. Special rules apply.
3. Tax for the self-employed
The self-employed pay income tax on their profits - not on their drawings
- For example, if you make £30,000 profit, you pay income tax on the full £30,000 - even if you draw only £10,000 out of the business bank account for personal use.
- Profit is business turnover less allowable expenses and capital allowances.
You pay tax on the profits made over your accounting period (usually 12 months)
- You pay tax on the profit for the accounting period which ends in that tax year.
- Tax is currently due in two equal instalments, on 31 January (during the tax year), and on 31 July (after the end of the tax year).
- The interim amounts payable are based on the previous year's tax liability. Arrangements can be made to cut payments, if profits are falling.
- A balancing payment is due on the following 31 January to adjust for the difference between the amounts paid and the tax due as a result of the actual profits.
A new business can initially be taxed twice on some of the first year's profits
- This depends on the choice of accounting period.
- 'Overlap relief' may be available to correct the position, but the calculations are complex and there will always be a cash flow cost to the business. Consult your accountant or tax adviser.
Tax planning can ensure the self-employed pay tax due later than employees
- For example, if your accounting period ends on 30 June 2020, you pay tax on the profits for the period on 31 January 2021 and 31 July 2021.
- Both payments are based on the previous year's tax liability. The balancing payment (based on actual profits) will not be made until 31 January 2022.
Personal tax accounts with HMRC
- All small businesses and personal tax payers now have their own account.
- The accounts allow people to see their tax transactions across the range of business taxes including self-assessment, corporation tax, VAT and PAYE for employers and to make payments at any time.
- Eventually this will remove the need for an annual confirmation statement.
4. Income tax
There are currently three income tax bands for 2021/22.
Taxable income (£)
37,701 - 150,000
These tax bands apply to both employees and the self-employed, and are expected to remain unchanged through 2025/26.
Taxable income is reduced by a personal allowance
- For the tax years 2021/22, the basic personal allowance is £12,570.
- The basic personal allowance is reduced for those people earning more than £100,000. Where income is more than £100,000, the amount of the allowance is reduced by £1 for every £2 above the limit.
- If you run your own business, and your spouse has no other income, it makes sense for tax purposes to employ him or her on a salary of at least £12,570.
If you are a company employee, you pay income tax every time you are paid
- Your employer deducts your income tax and NI contributions through PAYE (Pay as You Earn).
- Any overpayment or underpayment of tax is corrected after you complete your tax return at the end of the tax year. The tax year runs from 6 April to 5 April.
The employer sends tax and NI contributions to HMRC monthly or quarterly
- Employers can make quarterly payments if their average net monthly payments fall below £1,500.
5. Corporation tax
Corporation tax is payable on the profits - business turnover less allowable expenses and capital allowances, plus investment income and chargeable gains - of limited companies.
Corporation tax is charged at a single rate of 19%
- A reduced 10% rate of corporation tax - known as the Patent Box - is available for profits which can be attributed to patents and other intellectual property. The scheme is optional and businesses must 'opt in' to benefit.
- A higher 25% rate of corporation tax is being introduced from April 2023. Profits below £50,000 will continue to be taxed at 19%, with tapered rates from £50,000 to £250,000.
Companies have to calculate their own corporation tax liability
- If profits are likely to be in excess of £1.5 million, companies pay corporation tax by quarterly instalments.
- All other companies pay corporation tax nine months after the end of the company's accounting period.
- Interest is charged on underpayments (and paid on overpayments).
- The tax return has to be filed within 12 months of the end of the accounting period and must be accompanied by accounts. Late returns incur automatic penalties.
You need to be clear about what expenses are allowable when working out your profit figure. Personal costs are not allowable but most business costs are.
Goods and materials
- Allowable expenses include anything your business buys in and then resells.
- Be careful about the value you put on your stock at the year end. A common mistake is to value it at selling price, rather than cost. This inflates your profit figure and increases your tax bill.
Premises costs, such as rent, rates and heating
- If you work from home, you can usually count a fair proportion of your domestic bills such as electricity and telephone charges and fixed costs such as mortgage interest as business expenses.
Finance costs, such as bank charges and interest
- This includes leasing and hire purchase interest charges.
General running expenses
- For example, telephone, travel and subsistence (eg hotel costs on a business trip), insurance, postage, accounting and other services.
- Selling costs, including marketing and advertising expenses, are allowable.
Directors' and employees' wages and benefits
- Employer's NI contributions are allowable.
- Drawings taken by self-employed sole traders and partners are not.
Spending on research and development (R&D)
- Small and medium-sized companies can claim R&D tax credits on qualifying spending at 230%. This means you can set £230 off against your profits, for every £100 you spend.
- R&D tax credits apply to the costs of staff and consumable stores used in your R&D efforts, plus expenditure on software, power, fuel and water.
- Companies not yet in profit (or not yet trading) can claim a cash payment of 14.5% of R&D expenditure instead. There is a cap on the maximum that can be paid.
- A separate scheme applies for larger businesses.
- You can claim an allowable expense where specific invoices are unlikely to be paid.
- If you are not registered for VAT, you treat the VAT element of any allowable costs as part of your expenses.
- If you are registered, VAT is reclaimed separately.
- Provided you have formally notified HMRC that you have started up a business, most pre-trading costs are usually allowable as business expenses in the first year.
- Some costs are not allowable. For example, training courses are only an allowable expense once you have officially commenced trading. Formation costs for a limited company are not allowable.
- Keep records of all your business expenditure, with receipts, invoices and bank statements, from the moment you decide to go into business. Set up a separate bank account to make this easier.
Handle with care
Some expenses cannot be deducted when calculating your profit figure
- personal expenses, including living expenses, ordinary clothes, and travel to and from your regular place of work
- entertaining, including any food or drink bought for clients
- certain professional fees, such as the costs associated with forming a company and obtaining a lease
- depreciation (you claim capital allowances instead)
- fines, including parking tickets
There are special rules for car (and van) expenses
- If you are self-employed and use your own car for business, you can claim a mileage allowance.
- Alternatively, you can claim a percentage of total costs as a business expense (and an equivalent percentage of the normal capital allowance) based on how much the car is used for business.
- Employees can be paid a mileage allowance for using their own cars.
- There are complex rules covering the tax treatment of company cars. These include tax on the benefit provided to an employee who can use a company car for private use.
7. Capital allowances
You cannot generally claim the cost of purchasing or improving premises. Most other business assets are tax deductible through “capital allowances” rather than as an expense.
You can claim a 100% capital allowance for most purchases of plant and machinery, up to an Annual Investment Allowance (AIA)
- The AIA is normally £200,000, but temporarily increased to £1 million between 1 January 2019 and 31 December 2021.
You can usually claim a writing down allowance for capital expenditure not covered by the AIA
- The rate is 18% for most purchases, but 6% for long-life and special rate assets, such as integral features of buildings.
- Companies benefit from increased capital allowances between 1 April 2021 and 31 March 2023. There is a 130% first year allowance instead of 18% writing down, and a 50% first year allowance for special rate and long-life assets.
- You apply the percentage to the original cost in year one, and write the value of the asset down by that amount.
- In subsequent years, you apply the percentage to the written-down value, so that the allowance gradually declines.
Buildings and cars do not generally qualify for capital allowances
- There is a 100% first year allowance for zero emissions cars.
- Integral features of buildings and thermal insulation usually go in the 'special rate' pool.
- Each time you buy something, the cost is added to the value of the pool.
- You may be able to claim the Structures and Buildings Allowance on building construction or renovation costs since 29 October 2018. This allows a deduction from profits at an annual rate of 3% calculated on the original construction expenditure on new, non-residential structures and buildings.
Assets expected to have a short life in the business get a separate pool
- This includes most assets that you expect to sell or scrap within eight years, apart from cars and special rate items.
- The pool ends when you sell the asset, which can accelerate tax relief.
Repairs to machinery and equipment are fully tax-deductible
- Only improvements count as capital expenditure.
You can choose to defer claiming any capital allowances
- The whole process of writing down the assets is delayed by a year, leaving their value unchanged.
- You might choose to do this in a year when you make a trading loss and have no tax to pay.
8. Offsetting losses
Losses are treated differently depending on whether you are self-employed or a limited company.
- You can offset trading losses against other income received in that tax year or the preceding year, such as earnings from a job or income from investments, plus any capital gains arising in that year.
- Alternatively, losses can be carried forward to offset against future profits from the same trade. Losses in the first four years, or in the last year, may also be carried back up to three years.
- You can offset trading losses against other income in the accounting period.
- Alternatively, the loss can be 'carried forward' against profits from the same trade, to reduce future tax bills, or 'carried back' and offset against profits from the previous year. The company can be reimbursed for tax already paid.
- The amount of profit that can be offset by losses carried forward is limited to 50% for profits above £5m.
9. Capital gains tax
Capital gains tax (CGT) is a tax on successful investments, such as those in property or shares. If you sell something for more than you paid for it, you may have to pay CGT.
Individuals pay CGT on any capital gains over the annual tax-free allowance
- The tax-free allowance is £12,300 (2021/22) and is expected to remain unchanged through 2025/26. Each individual, including a husband and wife or civil partners, can claim this allowance.
- Higher rate income tax payers generally pay CGT at 20%.
- For those paying the lower income tax rate, any taxable gain is added to their other taxable income. CGT is charged at 10% on any amounts within the basic income tax band, and 20% thereafter.
- There is usually no CGT when you sell your home. But sales of other residential property attract an extra 8% CGT (so CGT is charged at 18% or 28%).
- CGT is payable on 31 January following the end of the tax year in which the gain is made.
- From 6 April 2020, gains on the sale of a residential property that has not been your main home (eg a holiday home or buy-to-let property) must be reported to HMRC and any CGT paid within 30 days.
- Capital gains made by the self-employed are treated in the same way.
Limited companies pay corporation tax on any capital gain
- Capital gains are treated as part of the company's taxable profit.
Some items are exempt from CGT
- These generally include increases in the value of your private car and your principal private residence.
- If you work from home and have not claimed any part of your mortgage payments as a business expense, there is usually no CGT on the profits made from the sale of your house.
- Gains made in ISAs are also exempt. Under certain conditions, some investment vehicles, life assurance policies and charitable gifts may also be exempt.
Individuals may be able to claim business asset disposal relief (entrepreneurs' relief) on the sale of a business
- The relief reduces the rate of CGT to 10% on gains up to £1 million when you sell a business or its assets (down from £10 million prior to 11 March 2020).
- The minimum qualifying period for relief is two years for disposals made on or after 6 April 2019.
- Claims can be made on more than one occasion up to the £1 million lifetime limit.
- Gains over £1 million are charged at the usual CGT rate.
Capital losses can be set off against capital gains from the same year
- Any excess loss can be carried forward to be set off against future gains.
Payment of some CGT can be deferred
- You can get 'rollover relief' if you sell a building from which you trade (or certain other types of asset), and use the money to buy another such building (or asset).
- You can get 'reinvestment relief' if you reinvest the gain in qualifying shares in certain types of companies under the Enterprise Investment Scheme and the SEED Enterprise Investment Scheme.
10. Investments and tax
Investment made through various schemes offer tax advantages
- Both the enterprise investment and venture capital schemes are aimed at boosting investment in small, unquoted businesses.
- 30% income tax relief can be claimed on investment in shares up to £1 million (or £2 million for knowledge-intensive companies) under the Enterprise Investment Scheme.
- For investors in venture capital trusts income tax relief on qualifying investments is 30% up to £200,000 investment.
- There is 50% income tax relief on an annual maximum of £100,000 invested in new small companies under the SEED Enterprise Investment Scheme.
- There are CGT exemptions for qualifying gains when you sell investments made through these schemes or if you hold them in an ISA.
The first £2,000 of dividend income is free of income tax.
- Dividend income over this limit is subject to income tax at 7.5%, 32.5% or 38.1% depending on the tax band applicable.
- This tax free allowance has reduced significantly from £5,000 prior to 6 April 2018.
Shares in small businesses may be exempt from inheritance tax
- They must meet qualifying criteria.
Employees adopting 'employee shareholder' status get a CGT exemption
- Employee shareholders give up some of their statutory employment rights in exchange for shares in the company.
- The first £2,000 of free shares received by the employee are generally exempt from NI and income tax.
- Before March 2016 shares worth up to £50,000 when the employee receives them will usually be exempt from CGT.
- From March 2016 CGT is only payable on profits over £100,000 from selling shares during the employee's lifetime.
11. Paying less tax
There are widely-used ways of paying less tax.
New businesses expecting to make a first-year loss can delay incorporation
- This may be advantageous because the self-employed can offset the tax loss against previous years' employment income and receive a tax rebate.
It may be worth trying to reduce profit at the year end in order to cut your tax bill
- If you are making profits and your cash flow is sound, you can bring forward the purchase of assets that you will have to buy later anyway.
- If you make a purchase the day before your year end, you still receive the full capital allowance for the whole of that accounting period.
- Make full provision for any bad debts.
Payments into a pension scheme are an efficient way of saving tax
- Bear in mind that such payments will then be locked in. Weigh up the possibility that the cash will be needed in the business.
Some employee benefits are not taxed
- low-interest loans of up to £10,000
- workplace childcare and welfare counselling
- provision of some equipment, office services and consumables such as a mobile phone or computer
- annual staff parties costing no more than £150 per head a year
- some less commonly-used benefits such as free or subsidised meals, free medical treatment whilst working abroad, health screening and check-ups
Limited companies can introduce tax-favoured share schemes for employees
- Approved schemes include Share Incentive Plans, Save as You Earn and the Enterprise Management Incentive.
12. Next steps
Discuss your specific situation and business with a tax specialist
- Check that the specialist is properly qualified. Look for a suitably experienced qualified accountant, or a member of the Chartered Institute of Taxation or the Association of Taxation Technicians.
Make sure your accounting system shows how much tax is payable each month
- Check that you are keeping all your receipts and invoices and the other evidence that is required by law.
Make realistic provisions for future tax bills
- Plan cash flow so that when a tax demand arrives, you have the cash to pay it.
- Find guidance on business tax on GOV.UK.
- Find an ICAEW chartered accountant, an ACCA accountancy firm, an ICAS chartered accountant or a CIMA management accountant.
- Find a chartered tax adviser belonging to the Chartered Institute of Taxation (020 7340 0550) or a member of the Association of Taxation Technicians.