Company formations

Business Tax Rates in the UK

Taxes are never anyone’s favourite subject, but if you are running or setting up a business in the UK it is vital that you have an understanding of business tax rates. The main taxes are Corporation Tax, Value Added Tax (VAT) and Business Rates, as well as PAYE, National Insurance, Stamp Duty and Capital Gains Tax.

Corporation Tax

Limited companies pay taxes on their profits or taxable income. They are responsible for calculating their own liability (which in practice will be your accountant’s responsibility) to the Inland Revenue and pay any tax nine months and one day after the company’s ‘due date’. The due date is normally the last day of the company’s accounting period, which is usually once per year.

The tax rate for small companies is currently 21% (2009/2010.) Small companies are defined as companies that make profits of up to £300,000. Companies that make between £300,000 and £1.5 million are subject to a scheme called ‘marginal relief’ and companies that make over £1.5m currently have to pay 28% tax on their profits.

Value Added Tax

In the UK most goods and services are subject to Value Added Tax, which is known as a tax on ‘final consumption.’ There are several different rates of VAT in the UK. At present, the standard rate is 15%, although this will return to the usual rate of 17.5% in January 2010.

Not everyone who is running a business in the UK has to register for, and charge VAT. If your turnover does not exceed £68,000 (threshold for 2009/2010), then you are not obliged to register for VAT. In a nutshell, people who are VAT registered charge your customers VAT on their invoices, and pay this amount to Customs at intervals during the year, deducting any VAT that they have paid in connection with their business.

Business Rates

Business rates are a tax that people often overlook when they are first considering moving their business into commercial premises (as opposed to working from home.) In essence, rates are like council tax for businesses and are linked to the market rental of the property. Rates are payable on the majority of business premises, such as factories, offices, pubs, warehouses and shops. It is worth checking whether you might be eligible for small business rate relief if your ratable value is less than £15k (or 21k in London). For more details contact your local authority.

PAYE

'Pay As You Earn' is a means of deducting tax from employee’s earnings at source, from their salary or wages. PAYE does not apply to sole traders, who are liable for assessing their own income, but is applicable to employees of limited companies (including directors.)  Employees are entitled to a tax free amount of money each year, but must also be taxed on their benefits. Depending on the individual’s salary, earnings are either taxed at 20% (lower rate) or 40% (higher rate.)

National Insurance

National Insurance was originally established to pay for the NHS, state pensions and other forms of benefits. If your business is a company, and you are a director, you are employed by your company. This means that you pay Class 1 NICs on your earnings. Sole traders, who are self-employed, pay income tax on earnings but are also liable for National Insurance contributions (Class 2 and Class 4).  

Stamp Duty

Stamp duty is a business tax relating to land transactions. It is payable in two distinct scenarios. Businesses pay stamp duty if they rent or buy premises. The other type of stamp duty is called stamp duty reserve tax, which becomes payable when you buy shares or other forms of security.

Capital Gains Tax

There is a flat rate of 18% for capital gains tax for any disposals made by businesses. However, there is also a relief scheme for entrepreneurs that reduces the rate to 10% on disposals up to the value of £1m (which is a lifetime allowance.)

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