Each year businesses are responsible for submitting a tax return and paying tax to HMRC. Which taxes you have to pay and when depends on how your business is structured, for example, whether you’re registered as a sole trader, limited company director or via a partnership.

Keep reading to learn more about:

  • Types of company formations
  • When you need to start paying tax (sole traders, limited companies and partnerships)
  • When do you need to pay tax?

When do you need to start paying tax?

When you set up your business, you’ll need to decide whether you want to be a sole trader, limited company or partnership. Your accountant can advise you on the best option, but generally:

  • Sole trader. Sole traders are self-employed individuals who own and run their own business, and as such, the company doesn’t have a separate legal identity from its owner. Freelancers and contractors will often register as sole traders.
  • Limited company. A limited company has a separate legal identity from its directors and shareholders and must be incorporated on Companies House. While limited companies have separate legal identities to their owners, they can still be considered a ‘one-person band’.
  • Partnerships. Partnerships are businesses set up by two or more individuals, who are responsible for managing the business’ income and expenditure.

When do sole traders start paying tax?

Sole traders have a tax-free allowance of £12,570, which means they have to pay income tax on any profits earned over this amount. How much tax they are liable to pay depends on which tax bracket they fall into:

  • Basic Rate: £12,571-£50,270. Sole traders who earn between £12,571 and £50,270 have to pay the basic income tax rate of 20%. So, for example, if you earned £15,000, you’d pay 20% of (£15,000 – £12,571) £2,429 in income tax. 
  • Higher Rate: £50,271-£150,000. Sole traders who earn between £50,271 and £150,000 must pay 40% on this portion of their profits. So, for example, if you earned £60,000, you’d pay 20% on the profits earned in the basic rate bracket (£12,571 to £50,270) and then 40% on the profits earned in the higher rate (£60,000 -£50,271).
  • Additional Rate: +£150,001. Sole traders earning above £150,000 must pay 45% income tax on this portion of the profits. So, for example, if you earned £160,000, you’d pay 20% on the profits earned in the basic rate bracket (£12,571 to £50,270), 40% on the profits earned in the higher rate (£50,271 to £150,000) and then 45% on any additional profits beyond this.

In addition to paying income tax, sole traders need to pay 2 classes of National Insurance and may also need to register for VAT if their annual income is above the threshold of £85,000.

Sole traders, however, are not liable to and do not need to pay corporation tax.

When do limited companies start paying tax?

Limited companies need to submit a corporation tax return and pay any liability over to HMRC each year. Corporation Tax is payable at 19% on the company’s trading profits for the taxable period in question. The VAT qualifying criteria also applies, meaning the company will need to register for VAT services if their annual VAT-able income exceeds the threshold of £85,000.

Remember, trading profit is the amount of money your business makes after expenses have been deducted from its income. So, if your business ran at a loss, you may not need to pay any corporation tax.

Directors of a limited company will also need to submit a self-assessment tax return each year and may need to pay income tax/National Insurance through PAYE if they received a salary from the company. Some one-person businesses still pay themselves on payroll as this allows Directors to take advantage of the tax-free allowance of £12,570, as well as qualify for State Pension credits

When do partnerships start paying tax?

Partnerships need to submit a self-assessment tax return and pay income tax on their share of their profits. They’ll also need to pay National Insurance and register for VAT if the company’s revenue is above the annual threshold of £85,000.

The nominated partner will also need to submit a partnership self-assessment tax return every year.

When do you have to pay tax?

Different types of tax have different deadlines and payment schedules, so when you’ll need to pay tax depends on the type of tax you need to pay.

Income tax

Sole traders and company directors will need to pay income tax. Income tax is the tax paid on income you receive personally, for example, your company salary or dividends.

Limited companies may decide to pay Directors via payroll, which means you may pay any income tax liability through regular payroll deductions (PAYE) . However, for sole traders, income tax will be the tax paid on profits made through the businesses as determined by your self-assessment tax return.

If you’re liable to submitting a self-assessment tax return, for any given tax year (ending 5th April), you have until the end of the following January to file away the return The tax liability for the year is also due by the following 31st January, with any ‘Payments on Account’ due by July of the same year too.

National Insurance

Sole traders and company directors may also need to pay National Insurance, depending on the level of income earned. National Insurance feeds into your pension and helps pay for public services like the NHS.

Limited company directors will most likely pay any National Insurance through the PAYE method, with deductions being made directly frequently from their payslips. For sole traders, however, they will pay any National Insurance alongside their income tax via the self-assessment return. Therefore, the deadlines for paying National Insurance as sole traders are also January 31st and July 31st.

VAT

VAT (Value Added Tax) is a consumption tax added to the cost of goods and services. VAT is typically paid quarterly, and VAT returns need to be submitted within one month and one week of the end of the quarter.

Corporation tax

Limited companies will need to pay corporation tax. Corporation tax is tax paid on the trading profits your business made during the last financial year. 

Typically it’s due nine months and one day after your business’ financial year ends. Companies often operate with different financial years, which typically falls in line with the month of the business’ incorporation. Say, for example, your financial year ends March 31st, you’ll need to pay your corporation tax by January 1st.

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