The amount of tax paid by profitable companies is determined by the type of business and their level of profit. There are distinct differences between Limited Companies and non-incorporated bodies like Sole Traders and Partnerships.
Sole Traders and Partnerships
Sole Traders and Partnerships are liable for Income Tax (just like someone employed by a company). This is calculated through a self-assessment on their earnings minus any allowable business expenses and tax allowances.
The tax is usually paid in two instalments, no later than January 31 and July 31 of the following tax year.
|Income Tax Rates & Thresholds (England, Wales and Northern Ireland)|
|Rate||2021 – 2026|
|Personal Allowance||0%||First £12,570|
|Base Rate||20%||£12,571 – £50,270|
|Higher Rate||40%||£50,271 – £125,140|
|Additional Rate||45%||Over £125,140|
|Income Tax Rates & Thresholds (Scotland)|
|Personal Allowance||0%||£0 – £12,570|
|Starter Rate||19%||£12,571 – £14,732|
|Scottish Basic Rate||20%||£14,733 – £25,688|
|Intermediate Rate||21%||£25,689 – £43,662|
|Higher Rate||42%||£43,663 – £125,140|
|Top Rate||47%||Above £125,140|
These figures apply to non-dividend income, including income from savings, employment, property or pensions.
Individuals, Sole Traders and Partners have a Personal Allowance – the amount they can earn each year that is not taxable.
Earnings over £100,000 will see a reduction to their Personal Allowance by £1 for every £2 of income above the £100,000 limit.
Corporation Tax Rates
Limited companies are responsible for calculating their own tax liability and must pay their tax without prior assessment by HMRC.
Limited Companies pay Corporation Tax, based upon their accounting profits for a particular financial year. For most private limited companies, the payment of Corporation Tax is due nine calendar months and one day after the end of the accounting period (for PLC`s the timescale is six months and one day).
Tax is calculated on the net profit made by the company during the taxable period.
|Corporation Tax Rates|
|Profits under £50,000 (Small Profits Rate)||19%|
|Profits between £50,000 and £250,000 (Lower / Upper Threshold)||Tapered|
|Profits over £250,000||25%|
The main rate of corporation tax will increase to 25% with effect from 1st April 2023. The previous rate of 19% lives on as the ‘standard small profits rate’.
The small profits rate applies only to companies with profits at or below the lower limit (£50,000).
Other companies will calculate tax at the main rate (25%) but, if their profits are below the upper limit (£250,000), will deduct marginal relief calculated by applying the ‘standard marginal relief fraction’ of 3/200 to the difference between their profits and the upper limit.
Dividends are the distribution of a company’s earnings to its shareholders. The amounts are determined by the board of directors and agreed upon by the shareholders.
Shareholders have a dividend allowance which is tax-free. Any payments above this allowance are taxable.
|Tax Free Allowance||£2,000||£1,000||£500|
National Insurance (NI)
Class 1 National Insurance contributions
This is paid by employed taxpayers and is a combination of employee salary deductions through PAYE and employer payments.
|Thresholds (Monthly – rounded to the nearest £)|
|Lower Earnings Level (LEL)||£533|
|Primary Threshold (PT) – Employees start paying NI||£1,049|
|Secondary Threshold (ST) – Employers start paying NI||£758|
|Upper Earnings Level (UEL) – Employees pay a lower rate over this||£4,190|
Class 1 National Insurance – Employee Rates
The Employee Rate is the amount employers deduct from an employee’s pay.
|Class 1 National Insurance Employee Rates|
|Below Lower Earnings Level (LEL)||N/A||N/A|
|LEL – PT||0||0|
|PT – UEL||12%||10%*|
|Above Upper Earnings Level (UEL)||2%||2%|
Class 1 National Insurance – Employer Rates
The amount an employer pays towards their employees.
|Class 1 National Insurance Employer Rates|
|Below Secondary Threshold (ST)||0||0|
|Rate above ST||13.8%||13.8%|
|Class 1A on expenses & benefits||13.8%||13.8%|
National Insurance Rates for the Self-Employed
Class 2 and Class 4 National Insurance contributions are paid by the self-employed and based on their profits.
|Class 2 National Insurance – Self-Employed (Annually – rounded to the nearest £1)|
|Small Profits Threshold (SPT) per year||£6,725||£6,725|
|Lower Profits Limit – start paying Class 2 NI||£12,570||£12,570|
|Rate per week||£3.45||N/A|
If a business’ profits are below the Small Profits Threshold, Class 2 NI payments are voluntary to maintain an individual’s contribution records.
The amount of Class 2 NIC due is based on the number of weeks in which someone is self-employed in that week. A week runs from a Sunday to Saturday – if the week straddles two tax years, it’s counted in the earlier tax year.
Between the Small Profits Threshold and Lower Profits Limit, there is no Class 2 NI to pay.
From April 2024, Class 2 NICs will be abolished – unless an individual falls under the Small Profits Threshold and wants to make voluntary payments to maintain their contribution record for benefits purposes.
|Class 4 National Insurance – Self-Employed (Annually – rounded to the nearest £1)|
|Lower Profit Limit (LPL) – start paying Class 4 NI||£12,570||£12,570|
|Upper Profit Limit (UPL) – pay lower NI over this||£50,270||£50,270|
|Rate between LPL and UPL||9%||8%|
|Rate above UPL||2%||2%|
VALUE ADDED TAX (VAT)
VAT is a tax that is charged on most business transactions in the UK. Businesses add VAT to the price they charge when they provide goods and services. A business must register for VAT once the turnover for the previous 12 months has gone over a specific limit – called the ‘VAT threshold’. Under this threshold a business can voluntarily register for VAT.
The taxable turnover threshold, which determines whether a business must be registered for VAT remains at £85,000 until 2026. The taxable turnover threshold for VAT de-registration remains at £83,000.
When is VAT charged?
For VAT-registered businesses, VAT is charged on any goods and services provided in the UK that are VAT taxable. VAT is charged on the full sale price, even if the goods are accepted in part exchange or through barter instead of money.
The VAT charged on the sale price of goods or services is called ‘output tax’.
The VAT paid when a business purchases goods or services is called ‘input tax’.
VAT-registered businesses submit a VAT Return at regular intervals – usually quarterly – and send it to HM Revenue & Customs (HMRC). If the amount of output tax is more than the input tax, then the difference is paid to HMRC with the return. If the input tax is more than your output tax, the difference is claimed back from HMRC.
Non-VAT-registered businesses cannot reclaim VAT paid on purchased goods or services.