What business taxes do I have to pay as a tradesperson?

If you’ve recently set up your own business as a tradesperson, you’d be wise to ask, “what taxes does my business need to pay?”. If you submit your tax return late or miss the deadline to pay your tax bill, you’ll be faced with a penalty fee and interest on late payments; it’s one thing you can’t afford to let slide.

What taxes do small businesses have to pay?

All small businesses have to pay tax, payable to HMRC, based on their business profits, losses, and the type of company they own.

What taxes do limited companies pay?

As a limited company, the main tax you’ll have to pay is Corporation Tax. For the financial year starting 1st April 2023:

• The main rate of corporation tax will be 25% for profits above £250,000
• A 19% small profits rate of corporation tax will be introduced for companies with profits under £50,000
• Companies with profits between £50,000 and £250,000 will pay tax at the main rate, reduced by marginal relief.

Some limited companies will also be required to pay VAT and Employer National Insurance Contributions, not forgetting the personal tax liabilities of company directors. If you’re unsure, we recommend finding an accountant to help.

How to find an accountant that’s right for your business

What taxes does a self-employed person have to pay?

If you’re a sole trader, you’ll need to pay income tax and National Insurance Contributions.

The tax you pay as a self-employed person depends on the taxable income you’ve earned in that particular tax year.

Your gross income minus your business expenses will give you a taxable income figure. The tax bracket you fall into is based on your taxable income.

Once you’ve deducted expenses from your gross income, you’ll pay:

• 20% tax on earnings between £12,571 to £50,270
• 40% tax on earnings between £50,271 to £150,000
• 45% tax on earnings over £150,000

To budget for your self-assessment tax bill as a self-employed tradesperson, enter your estimated weekly or monthly profit into HMRC’s ready reckoner tool.

If you fail to submit your tax return on time, you’ll receive a penalty fine. If you fail to pay your tax bill on time, you’ll receive a further fine, plus you’ll be charged interest on the amount owed. For a number of reasons, it’s well worth being organised when it comes to tax.

How much can you earn self-employed before paying tax (UK)?

The Personal Allowance means that if you earn under £12,570 (for the tax year 2022/23), you don’t pay any income tax. This amount is exactly the same as the previous year (2022/21).

Guide to self-employed tax returns

When do small businesses pay taxes (UK)?

Limited companies

Limited company owners must submit an online CT600 form to HMRC every year in order to find out how much corporation tax is owed. This is calculated by deducting tax allowances and expenses from the company’s income.

The corporation tax owed must be settled no later than nine months and one day after the end of your company’s accounting period ends. You set your own accounting period as a limited company, but it must remain the same every year.

Sole traders

You’ll pay two tax payments each year as a business owner – by 31st January and 31st July. This differs from employees, who pay tax from their pay slip every month under PAYE.

The tax year starts on 6th April and ends on the 5th April the following year.

You have from the end of the tax year in April until the folllowing January to submit your tax return, but it’s recommended to do it as soon as possible. This way, you’ll know how much you’ll owe in good time, giving you more time to cover the cost.

Payments on account

The first tax payment you make as a small business can often be significant. When you make your initial January payment toward your first tax return, you will pay what you owe, plus half again as a ‘payment on account’.

It’s wise to work out what you’ll owe and set this money aside, so you’re prepared when the bill is due.

What are ‘payments on account’?

Payments on account are advance payments toward your tax bill. You make two payments on account each year – in January and July.

Each payment is half your previous year’s tax bill. These payments are intended to help self-employed people stay on top of their tax payments.

You will make two payments on account every year unless:

• Your last self assessment tax bill was less than £1,000
• You paid more than 80% of the previous year’s tax you owed, for example through your tax code or because your bank already deducted interest on your savings.

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FAQs

What taxes do businesses pay?

Sole traders pay income tax and national insurance contributions. The main tax that limited companies pay is corporation tax, although some limited companies will also need to pay VAT, Employer National Insurance Contributions, and personal tax liabilities for company directors.

Do you pay tax in the first year of business?

If you’re self-employed, you must complete a self-assessment tax return and pay tax by 31st January following the year that you started your business. For example, if you started your business in May 2021, you will pay your tax in January 2023. This bill is likely to be large as there’ll be a long time between starting your business and making your first tax payment.

How much can my small business make before paying taxes?

The personal allowance for the tax year 2022/23 is £12,570. This means you don’t pay any income tax on earnings up to this amount.

Do you pay tax on revenue or profit UK?

Revenue is the gross income you generate. Profit is the net income you’re left with after deducting expenses from your gross income. You pay tax on profits (also referred to as your net income).