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Tax and the Small Business

By: Dave Howell - Updated: 11 Sep 2012 | comments*Discuss
Small Business Tax Hmrc Hm Revenue &

Tax is a fact of life that all small business owners have to contend with. Handling your tax affairs however, doesn't have to be a stressful exercise if you take steps to understand your tax liabilities.

The type of tax your business will have to pay will depend on the structure you have chosen for your enterprise. Tax is slightly different for sole traders and limited companies. It's important that you understand the differences so you always pay the right amount of tax.

If you are unsure of what structure would be right for your business, contact the HMRC as it is important that you choose carefully as there are cost as well as tax implications that depend on the business structure you have chosen. Contact the HMRC on: 08459 15 4655. You can also download a useful guide that covers all of the issues relating to working for yourself from the HMRC website: www.hmrc.gov.uk/startingup/working-for-yourself.pdf.

The types of tax that you should be aware of include:

Income Tax

Not matter what structure your business takes you will pay income tax. For small business owners this means handling the self-assessment tax system. It's import to file your income tax (self-assessment form) on time or you will receive a penalty of £100. An accountant can come in very handy when it comes to calculating the right amount of tax you owe in any given year. More information about self-assessment is on the HMRC website: www.hmrc.gov.uk/sa. If you have any questions you can call the self-assessment helpline on: 0845 9000 444.

National Insurance

As an employee you will have been used to paying national insurance each month. As a small business owner you still have to pay this tax. You can find out more about national insurance on the HMRC website: www.hmrc.gov.uk/nic. There are 4 types of national insurance:
  • Class 1
    This type of national insurance is paid by everyone that is employed, so is not relevant and is not paid by small business owners unless they also have a paid job as well as running their business.
  • Class 2
    This type of national insurance is paid by everyone that is self-employed. The amount is a fixed weekly rate that is collected via direct debit.
  • Class 3
    This type of national insurance is voluntary if you want to pay into a fund to give you an income in the event of you falling ill. These contributions can also help you pay toward your state old age pension if you think you won't have enough credits saved up.
  • Class 4
    This type of national insurance is paid by most self-employed people that earn over a set limit that is linked to the profit your business is making. Note that if you are in a partnership or your spouse is also self-employed, you all have to pay separate Class 4 contributions.


As a consumer you are used to paying VAT on some of the products that you buy. As a business owner you may also have to charge VAT to your customers. If the goods or services you sell are eligible for VAT, and your business is turning over more than £64,000 you must register for VAT and start to collect this from your customers. VAT legislation is very strict so use the skills of your accountant to ensure your VAT accounts are always bang up-to-date. You can get more information about VAT on the HMRC website: http://customs.hmrc.gov.uk.

Corporation tax

This type of tax is paid by limited companies, trade associations, cooperatives, members' clubs and housing associations. As with self-assessment you have to work out your own corporation tax based on your businesses profit. You can see detailed information about this tax on the HMRC website: www.hmrc.gov.uk/ctsa.

As a small business owner it is now your responsibility to ensure your tax affairs are in order each year. The more organised you are, the easier you will find navigating the types of tax you need to pay. Always remember that you are not alone. Business advice teams that you can contact via the HMRC website [www.hmrc.gov.uk/bst] are there to help you. And always take professional advice if you are not sure of any tax legislation. Don't forget, your accountant's fee is a legitimate deductible expense.

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