When Does a Business Need to Start Paying Tax?

Starting a business can be stressful as you push to ensure your products or services are at their best in time for launch. Attracting clients, perfecting your digital presence and ensuring you have the right team in place will all be high on the priority list. Taxes, however, may be less front of mind in those early days. But, with the possibility of substantial penalties if you overlook your tax obligations, it's essential to understand what you'll have to pay and when before you get stuck into the day-to-day running of your business.

What taxes do small businesses pay?

There are potentially a whole host of taxes you'll have to pay, depending on your business structure and assets, how much you earn and whether you have employees. Key taxes include corporation tax, income tax, VAT, business rates, employers' national insurance contributions and capital gains tax.

Corporation tax

Corporation tax must be paid on the profits of limited companies – not by sole traders or those in a partnership. It's calculated after salaries and other business expenses are paid before dividends are withdrawn.

Following recent changes, the primary rate of Corporation Tax is now 25%, although small companies with profits up to £50,000 will pay the small profits rate of 19%. These companies that fall between those two figures will pay tax at the primary rate, reduced by a marginal relief. You must register for Corporation Tax within three months of starting to trade as a limited company. You must submit a company tax return to HMRC each year detailing your income and any deductions. This is due 12 months from the end of your company's accounting date. Any corporation tax due must be paid nine months and one day after your business's accounting period ends, so it's best to submit this information in good time so you know how much you owe. 

You can make payments via your online HMRC account or over the phone.

Value Added Tax (VAT) 

As a consumption tax, VAT is added to the cost of most goods and services at 20%. So, if your company is VAT registered, you must add VAT to the price you charge your customers. However, you'll also be able to reclaim the VAT that you pay in business expenses.

Limited companies can choose to register for VAT at any time. Still, they must register if their total VAT taxable turnover for the last 12 months exceeded the VAT threshold of £85,000 or if turnover is expected to go over £85,000 in the next 30 days.

If you do register, you'll need to submit VAT returns to HMRC, usually every three months. This will include information such as the amount of VAT you owe and how much you can reclaim. The deadline for submitting your return online is usually one calendar month and seven days after the end of an accounting period. This is also the deadline for paying HMRC. 

VAT returns must be submitted using accounting software compatible with Making Tax Digital, such as AccountsPortal.

There are other VAT accounting schemes such as Flat Rate learn more in our guide: Guide to VAT Accounting Schemes

Business rates 

If your business is run from a non-domestic property, such as an office, shop, factory or warehouse, then you'll likely be charged business rates on this property. Rates are based on your property's 'rateable value' - its estimated rental value on the open market - with bills calculated and sent out by your local authority. Rates were last updated in April 2023, based on rateable values from April 2021. You can estimate your business rates using the government's online tool.

Some properties are eligible for business rates relief – check with your local council for details and how to apply. This includes small business rates relief, whereby if your property's rateable value is less than £15,000 and your business only uses one site, you may get a discounted rate. So, you'll pay no business rates for properties with a rateable value of less than £12,000. For properties with a rateable value between £12,001 and £15,000, the relief rate will gradually reduce from 100% to 0%. Business rates should be paid to your local authority. Most councils split the bill into 10 payments, to be paid over 12 months, and payment can be made via direct debit, phone, online or at your bank.

Employers' National Insurance contributions 

If your business has employees, you must pay the employer's National Insurance contributions directly to HMRC. Businesses pay 13.8% for employees with earnings above £12,570 in 2023-24. 

You may be able to reduce your liability if you're eligible for the Employment Allowance. With this, if your employers' Class 1 National Insurance liabilities were less than £100,000 in the previous tax year, you can reduce your annual National Insurance liability by up to £5,000. You pay less employers' Class 1 National Insurance each time you run your payroll until the £5,000 has gone or the tax year ends (whichever is sooner).

National insurance and income tax

If your limited company employs you, you'll also have to pay National Insurance – this will be taken automatically through payroll. If you're a sole trader, your self-assessment will pay national insurance. If you earn less than £6,725, you won't have to pay anything. Those earning between £6,725 and £12,570 won't be required to pay Class 2 contributions but will still accrue National Insurance credits.

If you earn more than £12,570, you'll pay Class 2 contributions of £3.45 per week and Class 4 contributions of 9% on earnings up to £50,270. Above £50,270, you'll pay Class 4 contributions of 2%.

Also, be aware of income tax. As it's only payable by individuals, business owners won't have to pay any income tax for the business itself. Still, they will be personally liable if their wage is above the personal allowance of £12,750. Limited company directors will pay income tax through the business's PAYE scheme. Sole traders will pay income tax on profit. How much you owe will be calculated through your self-assessment. 

Whichever category you fall into, income tax will be paid at the same rate once you've exceeded your allowance. So, earnings between £12,571 and £50,270 will be taxed at the basic rate of 20%; between £50,271 and £125,140 is liable to the higher rate of 40%; and over this, you'll pay 45%. Be aware that other earnings such as dividends, savings interest or capital gains may also count towards your income and push you into a higher tax band.

When do sole traders start paying tax?

The key date to be aware of when operating as a sole trader is 31 January. Your tax bill will need to be submitted by this date each year. So, your first self-assessment tax return and payment will be due by 31 January, following the year you started running your business. You must register for self-assessment by 5 October. Also, be aware that you may have to make payments on account – payments towards your next tax bill. This payment will be due on 31 July.

When do limited companies start paying tax?

Limited companies will also need to submit an annual financial year-end tax return to determine how much corporation tax is due. VAT will be paid quarterly from your company's registration date, while national insurance contributions will be deducted automatically through PAYE each month. Directors of limited companies will also need to settle their tax obligations via self-assessment and will be subject to the same deadlines as sole trader.