Business tax rules and deadlines for SMEs

Setting up your business

Most businesses are liable to pay tax. The tax year runs from April 6 to April 5, the following year. In the current tax year, 2023-24, everyone can earn £12,570 tax free before being liable for income tax.

Initially, your startup may be a side hustle, alongside a paid job as an employee. Even so, if you earn more than £1,000 a year from the side hustle, you must register with HMRC, complete a self-assessment tax return and you may be liable to pay tax and national insurance on profits. Register when you start trading, though the deadline is October 5 after the end of the tax year when you began trading. 

If you do not use all of your personal allowance as an employee, use the remainder to reduce your startup’s profit figure, so you pay tax on the reduced amount.

With all businesses, good record keeping makes complying with tax rules easier and allows you to deduct allowable costs to reduce taxable income. Keep records of income and outgoings, receipts, invoices and sales orders to maintain accurate financial records for completing tax returns.

Self-assessment, income tax and national insurance

Register for self-assessment on or before you start trading. The deadline for submitting paper tax returns to HMRC is October 31 after the end of the tax year you are filing a return for. For online returns it’s January 31.

You pay income tax and national insurance on taxable profits, calculated after deductions for allowable expenses such as equipment and office rent. Payment is required by January 31, the same deadline for filing online returns.

Income tax is currently charged at 20% for income above 12,570, up to £50,270. Between this figure and £125,140, the higher rate is charged at 40% and income above £125,140 is charged at 45%.

Self-employed traders pay a flat weekly ‘Class 2’ National Insurance contribution, currently £3.45 a week and also ‘Class 4’ NI on profits between £12,570 and £50,270, at 9% for the 2023-24 tax year and 2% extra on profits over £50,270.

If your self-assessment tax bill for the previous year was above £1,000, you make payments on account on January 31 and July 31, each payment equivalent to half your previous year’s self-assessment bill.

Limited company rules

If you decide your startup should be a limited company, tax rules are different. You are still liable for Income Tax and National Insurance as an owner of a limited company. Corporation Tax also applies. You must file a company tax return and may be liable for employers’ tax if you employ staff.

Limited companies require directors and a company secretary. They have shareholders, often  including the directors, who may be paid via dividends, which are treated differently for tax purposes than salaries.

Annual accounts are filed with Companies House and tax returns to HMRC. They are due 12 months from the end of the month your company was incorporated.

Company directors have to complete a self-assessment tax return and may be liable for tax, depending on how they are paid. If it’s through a salary taxed via PAYE, there is no self-assessment tax liability. However, if they receive a small basic salary and top it up with dividends and/or benefits in kind, any tax due is collected via self-assessment.

Corporation tax (CT) is paid by limited companies on profits. You do not receive a bill, instead you must work out, pay and report your tax liability.

The main rate of CT increased from April 2023 to 25%. This applies to profits above £250,000. If your company makes profits below £50,000 in 2023-24, they will pay the previous rate of 19%. Companies making profits between £50,001 and £250,000, may qualify for marginal relief whereby profit thresholds are proportionally reduced.

Some business running costs are deductible from profits before tax when preparing your company tax return.

Employers tax

Initially, you may not require employees, but as your business grows, you may need to recruit. When you first employ staff, inform HMRC to register as an employer.

PAYE is HMRC’s system for collecting income tax and NI from employment. If you employ staff, you are liable unless no employees earn more than £123 a week, get expenses and benefits, have another job or receive a pension.

When you run payroll, you must report employees’ payments and deductions to HMRC. Use payroll software to calculate liabilities. This will include employers’ Class 1 NI contribution of 13.8% on most employees’ earnings above £175 a week. 

Employers can claim an employment allowance available that reduces eligible employers NI bill by up to £5,000 a year. 

VAT

If your turnover as a sole trader or limited company is above the £85,000 threshold, you need to register for value added tax (VAT). 

The current VAT rate is 20%. This means VAT-registered companies add 20% to an invoice for all goods and services charged to a customer. For tax reporting purposes, keep records of the VAT you charge and the VAT you pay for goods and services you buy, including for imports into the UK.

You then report both figures every three months via a VAT return. If you have charged more VAT to customers than you have paid to other businesses, you pay the difference. 

Tax-free allowances

Some costs, loans and charges to your business qualify for allowances. This means the income is not taxable or you can deduct the cost from your business’s taxable income.

These come from capital allowances, R&D tax credits, Seed Enterprise Investment Scheme (SEIS) or the depreciation of business assets.

The Seed Enterprise Investment Scheme is for early-stage companies who have been trading for less than three years, have fewer than 25 employees and total assets below £350,000. Its aim is to attract investment because investors can invest up to £200,000 each tax year and qualify for a 50% tax break. They also get Capital Gains Tax exemption on profits relating to the sale of shares after three years. The funds invested must be spent within three years.

Research and development (R&D) tax relief is available to encourage businesses to invest in science and technology. Check if an area you plan to invest in qualifies.

From April 2023, you need to tell HMRC if you plan to claim R&D tax relief and from August 2023, you must submit detailed information to support all R&D tax relief claims.

R&D tax relief allows SMEs to deduct an extra 86% of their qualifying costs, in addition to the normal 100% deduction from profit. You can claim SME R&D tax relief if your business has fewer than 500 staff and a turnover below €100M.

Start-up loans is a subsidiary of the British Business Bank. It oversees government-backed loans to qualifying British startups. Loans range from £500 to £25,000 and are charged at 6% interest. Startups repay loans over 1-5 years and receive 12 months of free mentoring. 

Depreciation applies when companies invest in fixed assets like equipment, premises and vehicles. Assets are depreciated in value over the course of their useful working life. 

It is an accounting method to measure an asset’s fall in value through wear and tear etc. The most common method is ‘straight line’ depreciation, which evenly distributes the drop in value over the assets expected life. 

Depreciation is reported to tax authorities through capital allowances on a company’s balance sheet. 

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Benjamin Salisbury - Business Journalist

Benjamin Salisbury is an experienced writer, editor and journalist who has worked for national newspapers, leading consumer websites like This Is Money and MoneySavingExpert.com, business analysts including Environment Analyst, AIM Group and written articles for professional bodies and financial companies. He covers news, personal finance, business, startups and property.

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