Complete guide to UK taxes and rates
When you run your own business or work as a sole trader, you become responsible for taking care of your taxes. In the UK there are several different types of taxes which could affect you or your business. The current tax year falls between 6 April 2020 to 5 April 2021.
In this guide, we will explain the differences between taxes, when you are required to pay them, and what the different rates are.
If you run your own business and work as self employed or as a sole trader, you will be required to pay income tax if you earn over £1,000 during the tax year. If you aren’t a PAYE employee, you will be required to submit a Self Assessment tax return each year. To find out more, read our guide to Self Assessment tax returns here.
Income tax rates
The rates for income tax are as follows:
|Band and income||Tax rate|
|Basic rate (£12,501 to £50,000)||20%|
|Higher rate (£50,001 to £150,000||40%|
|Additional rate over £150,000||45%|
For more information on income tax rates visit the HMRC website.
Tax free allowance
When you pay income tax, you have a Personal Allowance. This is the amount you can earn before you start paying tax on your income.
- The standard Personal Allowance is £12,500.
- Your personal allowance is reduced if you have income over £100,000. It goes down £1 for every £2 that your adjusted net income goes over this amount.
- You have no personal allowance if you earn over £125,000.
National Insurance contributions
National Insurance contributions are paid by sole traders based on how much profit they make. Sole traders have different NIC rates than PAYE employees, and these rates are reviewed each year and change from 6 April.
There are 2 different National Insurance classes that could apply to you if you are a sole trader:
- Class 2 National Insurance: You will pay this if your profits are higher than £6,365 (the Small Profits Threshold). The rate is £3 a week, paid each year when you do your Self Assessment tax return.
- Class 4 National Insurance: You will pay this if your profit is higher than £8,632 (the Lower Profits Limit). The rate is 9% on profits from £8,632 and £50,000, and 2% on profits over £50,000. These profits will be calculated during your Self Assessment tax return.
If your business is a limited company, then you will need to pay corporation tax. You will need to register for corporation tax separately. As the owner of a limited company, you will have certain responsibilities, which you can read more about in our guide to setting up a limited company.
The corporation tax rate is fixed at 19% for non ring fence profits. A ring fence company is a company that make profits from oil extraction or oil rights.
You can find out more about corporation tax on the HMRC website.
Capital Gains Tax
Capital Gains Tax is when you dispose of an asset that has increased in value. Disposing of an asset could include selling it, gifting it, swapping it or getting compensation for it. The increase in value (‘gain’) is taxed, not the total value of the item.
You only need to pay Capital Gains Tax on gains above your annual tax allowance. The Capital Gains tax free allowance is £12,000, or £6,000 for trusts.
Find out more about how to calculate your Capital Gains Tax on the HMRC website.
A dividend payment is made to shareholders of a company out of its profits. You will only pay tax on dividends that exceed your dividend allowance in the tax year.
The current dividend allowance is £2,000. The tax you pay depends on your income tax band (which should be calculated including the amount of dividends you receive):
|Band and income||Tax rate|
Businesses that earn over £85,000 will need to pay VAT on goods and services. You can also voluntarily register to pay VAT if your turnover is under this amount. Here are the rates:
|Standard (most goods and services)||20%|
|Reduced (some goods and services, such as home energy)||5%|
|Zero (such as most food and drink)||0%|
To calculate your VAT amount, you can use our online calculator.
If your business has a turnover of over £85,000 then you are required to submit your VAT return in compliance with Making Tax Digital. This means you will need an MTD compatible accounting software, such as Bokio, to file your return. Read our guide to Making Tax Digital to find out everything you need to know.
Flat Rate VAT return
When you submit your VAT Return, there are different methods you can use. The Flat Rate VAT Return is a popular method with small businesses.
The Flat Rate scheme allows you to pay a fixed rate of VAT to HMRC. This is a reduced fixed rate percentage on your Gross Turnover (Net turnover plus VAT). But, using the Flat Rate scheme means you can’t reclaim VAT on your purchases except for some capital assets that were bought for over £2,000. You can read more about the Flat Rate scheme here.
With cash VAT, you record transactions when you get cash or pay an expense. VAT is paid or reclaimed to or from HMRC based on the date invoices were paid. You need to report these figures and pay money to HMRC even if the invoices haven’t been paid yet. There are other eligibility criteria to meet which you can read more about here.
Keep track of your finances
Keeping a close eye on your finances is really important to understand which taxes you need to pay. Using an accounting software like Bokio is a great way to see how much profit you are making in your business. With Bokio, you can do your accounting, invoicing, and manage your expenses all in the same place, totally free. Plus, you can submit an MTD compliant VAT Return in just a few clicks. There’s no hidden costs, and no credit card required. Interested?