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As a business owner, paying taxes may slip your mind when you are preoccupied with the company’s short and long-term objectives. Nevertheless, you need to be aware of what taxes you must pay and when the taxes are due. You should note that with most taxes, you will not receive any form of bill. Therefore, the onus is on you to find out what the law requires you to pay, otherwise, you risk facing penalties for not paying business taxes. This article will explain four types of taxes that you will pay when running an SME.
1. Corporation Tax
All companies that work and operate in the UK must pay corporation tax. You pay corporation tax as a percentage of all profits your business makes, including the income generated through investments or the sale of assets.
Notably, you will not receive a bill for this tax. Instead, you must:
- register to pay corporation tax;
- ensure that you keep thorough accounting records;
- prepare a Company Tax Return and calculate how much corporation tax you need to pay;
- pay the tax, or report to HMRC if you do not need to pay Corporation Tax within nine months and one day after the end of the accounting period; and
- submit your Company Tax Return within 12 months after the end of your accounting period.
2. Income Tax
As a business owner, the personal income you pay yourself from your business is subject to income tax. The amount of income tax you owe is based on how much you earn. Notably, you will only receive a bill after you have filed your tax return.
The income tax you pay will differ depending on your company structure.
| Company Structure | Tax Implications |
| Limited Companies | If you have structured your business as a limited company, you will pay income tax through your business’s PAYE (Pay As You Earn) scheme as an employee of the business. Otherwise, any contractors will be liable to pay their own income tax. |
| Sole Traders | If you run the business as a sole trader, you must complete a self-assessment tax return to pay your income tax. You will have a personal income tax-free allowance of £12,570. You must complete a self-assessment tax return even if your earnings fall under this threshold. |
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3. National Insurance
In addition to paying income tax, you must contribute to national insurance. The state uses national insurance payments to fund public services and state pensions. If you use a PAYE system, you pay national insurance at the same time as your income tax. However, if you do not use a PAYE system, you must pay national insurance tax through your self-assessment tax return.
Nevertheless, some SMEs do not have to pay national insurance through their self-assessment such as people with businesses that involve land or property. If you fall into one of these categories, you will receive a payment request for your national insurance contribution.
Notably, SME workers must pay national insurance individually if applicable. Additionally, employers must pay national insurance contributions on behalf of their employees.
4. Value Added Tax (VAT)
Currently, businesses with an annual turnover of over £85,000 must register to pay VAT. If your business earns less than this threshold, you do not need to pay this tax, although you can still register to pay it.
Once registered, you must charge VAT on all VAT-able goods and services that your business offers. Additionally, you must ensure that your SME charges VAT at the correct rate.
Ultimately, your business does not automatically pay VAT. Instead, you must:
- find out if you need to pay VAT;
- calculate how much your business owes; and
- pay VAT when it is due, usually quarterly.
Additionally, if you have a VAT-registered business, you need to:
- charge VAT on VAT-able products and services;
- ensure you charge VAT at the correct rate;
- keep track of the amount of VAT you pay for any business-related purchases;
- calculate and report to HMRC how much VAT you have charged customers using a VAT return; and
- pay HMRC all outstanding VAT your business owes.
This checklist will help you identify areas in your business that may need further protection or assistance to ensure you are legally compliant.
Key Takeaways
SMEs must generally pay corporation tax, income tax, national insurance and VAT. The type of taxes you owe and the amount due depend on various factors. These factors include:
- your business structure;
- your business profits;
- your income;
- whether your business owns premises;
- if your business has employees; and
- if your business holds assets.
If you need legal advice for matters relating to your SME, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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