An Introduction to Tax and National Insurance for Business

From sole traders to large companies, get the lowdown on your obligations here

An Introduction to Tax and National Insurance for Business

What tax does a self-employed person pay?

  • Income tax on profits. Your ‘profits’ as a self-employed person count as income minus allowable business expenses (see expenses). We deal with business expenses in more detail below. You pay income tax on profits over the current £10,000 personal allowance threshold. You pay tax for the 12-month accounting period which ends with the current tax year – so for the 2014/15 tax year, you will be taxed on your earnings across the 2013/14 tax year. This means you pay tax later than employees – whilst this requires careful financial planning, it can also help your cashflow in the short term.
  • National Insurance contributions. NI contributions are divided into two ‘bands’ – a weekly flat rate and a further tax on profit. For more on this, see national insurance.

How much income tax do I have to pay?

Whether you are an employee or self-employed, the income tax rules are the same. There are three ‘bands’ of income tax (figures valid for the 2014/15 tax year):

  • £0-£31,865: 20%
  • £31,866-£150,000: 40%
  • £150,000+: 45%

You pay the above rates of tax only on earnings above the threshold – so if you earned £40,000 in a year, you would only pay the 40% rate on your earnings above £31,865.

The income tax you pay is also reduced by a ‘personal allowance’, which is £10,000 for the 2014/15 tax year. You get to keep this amount tax-free, unless you exceed the income limit of £100,000 for the personal allowance – in which case, your allowance is reduced by £1 for every £2 you are over the limit. In effect, this means your personal allowance disappears altogether once you make more than £120,000.

How much corporation tax does my business have to pay?

If you operate a limited company, it will have to pay corporation tax on its earnings. Again, this is divided into three ‘bands’, based on profit:

  • £0-£300,000: 20%
  • £300,000+: 21%

If your company earns between £300,000 and £1.5m, you qualify for ‘marginal relief’ which will give you a slight discount on your corporation tax – work out your own corporation tax using HMRC’s marginal relief calculator. From the start of the next tax year on 1 April 2015, marginal relief is being abolished, and there will be a flat rate of 20% on all company profits.

If you can attribute some of your profits to income generated from patented inventions and certain other innovations, you should sign up to the Patent Box scheme. This applies a reduced corporation tax rate of 10% to company profits directly resulting from such innovations. Find out more here.

If you expect to make profits of more than £1.5m, you pay tax by quarterly instalments – otherwise, you pay nine months after the end of your accounting period. More information can be found here.

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