Business taxes explained

As its name suggests, income tax is the tax you pay on the money you make – your income. But you don’t need to pay tax on all of your income.  

Gov.uk states that income tax needs to be paid on:  

• Money you earn from employment 
• Profits you make if you’re self-employed - including from services you sell through websites or apps 
• Some state benefits 
• Most pensions, including state pensions, company and personal pensions and retirement annuities 
• Rental income (unless you’re a live-in landlord and get less than the rent a room limit) 
• Benefits you get from your job 
• Income from a trust 
• Interest on savings over your savings allowance 

You don’t need to pay income tax on:  

• The first £1,000 of income from self-employment - this is your ‘trading allowance’  
• The first £1,000 of income from property you rent (unless you’re using the Rent a Room Scheme)  
  
• Income from tax-exempt accounts, like individual Savings Accounts (ISAs) and National Savings Certificates  
  
• Dividends from company shares under your dividends allowance  
  
• Some state benefits  
• Premium bond or National Lottery wins
• Rent you get from a lodger in your house that’s below the rent a room limit  

In the UK, most people are given a Personal Allowance of tax-free income. This is the amount of money you can make before you start paying tax.  

Below are the different tax rates for tax year 2023/4:

Personal allowance (up to £12,570) = 0% tax rate

Basic rate (£12,571 to £50,270) = 20% tax rate 

Higher rate (£50,271 to £125,140) = 40% tax rate

Additional rate (over £125,140) = 45% tax rate

National Insurance is a tax that allows you to be eligible for a variety of state benefits, like state pension, maternity leave, jobseekers allowance and statutory sick pay.  

National Insurance is paid by employers, employees (earning above £242 per week) and self-employed individuals (making a profit of £12,570 or more a year).  

There are different classes of National Insurance and the amount you pay depends on how much you earn as well as your employment status.  

Gov.uk defines the National Insurance classes as follows:  

Class 1: Employees earning more than £242 a week and under State Pension age - they’re automatically deducted by your employer. 

Class 1A or 1B: Employers pay these directly on their employee’s expenses or benefits.  

Class 2: Self-employed people earning profits of £12,570 or more a year. If your profit is less than this, you can choose to pay voluntary contributions to fill or avoid gaps in your National Insurance record. Note this class will be abolished from 6 April, 2024 as announced in the Government's Autumn Statement.

Class 3: Voluntary contributions - you can pay them to fill or avoid gaps in your National Insurance record.  

Class 4: Self-employed people earning profits of £12,570 or more a year.  

To work out how much National Insurance you will need to pay, use the HMRC calculator.  

Any business with a turnover of £85,000 must register to pay VAT and charge it on the products and services they sell. Businesses with a turnover of less than £85,000 can voluntarily register for VAT, unless everything they sell is VAT exempt.  

Businesses charge their customers VAT then pay the money to HMRC through their VAT return.  

Gov.uk states current UK VAT rates as:  

Standard rate: 20% - applies to most goods and services  

Reduced rate: 5% - applies to some goods and services  

Zero rate: 0% - applies to zero rated goods and services  

VAT registered businesses can reclaim the VAT they have paid on goods and services for their businesses, find out how here.  

If you are a limited company, a foreign company with a UK branch or office, or a club or co-operative association, you must pay corporation tax on the profits you make from doing business. 

You don’t receive a bill for your corporation tax, so it’s your responsibility as a business owner to calculate, pay and report the corporation tax you owe.  

You can find more information about corporation tax here.