Chartered Certified Accountants, Auditors and Business Advisors
UNDERSTANDING BUSINESS TAXES
Income Tax
National Insurance Contributions (NICs)
Corporation Tax
Income Tax is the tax you pay on your earnings as an individual.
- Who does it apply to?
- Sole traders and partnerships (your business profits are treated as personal income).
- Employees of companies also pay Income Tax on their wages.
- How does it work? You only pay tax on income above your Personal Allowance, which is the amount you can earn tax-free.
- Thresholds for 2024/25:
- £12,570: Tax-free Personal Allowance.
- £12,571 to £50,270: 20% tax (Basic Rate).
- £50,271 to £125,140: 40% tax (Higher Rate).
- Over £125,140: 45% tax (Additional Rate).
Example: If your sole trader business earns £40,000, you won’t pay tax on the first £12,570, but you’ll pay 20% on the remaining £27,430.
Corporation Tax
National Insurance Contributions (NICs)
Corporation Tax
Corporation Tax is a tax on the profits made by limited companies.
- Who does it apply to?
- Limited companies.
- How does it work? Companies pay tax on their profits, which is the income left after deducting expenses like salaries, rent, and equipment.
- Rates for 2024/25:
- 19% for profits up to £50,000.
- 25% for profits over £250,000.
- Marginal relief applies for profits between £50,001 and £250,000, so the rate gradually increases.
Example: If your company earns £200,000 in profit, you’ll pay 19% on the first £50,000 and a higher rate on the remainder.
National Insurance Contributions (NICs)
National Insurance Contributions (NICs)
National Insurance Contributions (NICs)
NICs are payments that fund public benefits like the NHS and state pensions.
- Who does it apply to?
- Sole traders, employees, and employers.
- How does it work? There are different types of NICs depending on your situation:
- Sole traders:
- Class 2 NICs: Pay £3.45 per week if your profits are above £12,570.
- Class 4 NICs: Pay 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.
- Employees: Pay NICs on earnings above £12,570 per year, starting at 12%.
- Employers: Pay 13.8% on employee wages above £9,100 per year.
- Sole traders:
Value Added Tax (VAT)
Capital Gains Tax (CGT)
National Insurance Contributions (NICs)
VAT is a tax on most goods and services sold.
- Who does it apply to?
- Businesses with a taxable turnover above £90,000 in a rolling 12-month period.
- How does it work? VAT is added to the price of your goods or services. If you're VAT-registered, you must charge VAT on sales but can reclaim VAT on your business purchases.
- Rates for 2024/25:
- Standard rate: 20% (most goods and services).
- Reduced rate: 5% (e.g., energy-saving materials).
- Zero rate: 0% (e.g., most food, children’s clothes).
Dividend Tax
Capital Gains Tax (CGT)
Capital Gains Tax (CGT)
Dividend tax applies to company directors and shareholders who take profits from the company as dividends.
- Who does it apply to?
- Shareholders of limited companies.
- How does it work? Dividends are profits distributed to shareholders. You pay dividend tax only on amounts above the annual allowance.
- Thresholds for 2024/25:
- The first £500 of dividends is tax-free.
- Rates above this:
- 8.75% (Basic Rate taxpayers).
- 33.75% (Higher Rate taxpayers).
- 39.35% (Additional Rate taxpayers).
Example: If you take £5,000 in dividends, the first £500 is tax-free, and you pay tax on the remaining £4,500.
Capital Gains Tax (CGT)
Capital Gains Tax (CGT)
Capital Gains Tax (CGT)
CGT is a tax on the profit made when you sell a business asset.
- Who does it apply to?
- Anyone selling assets like property or shares.
- How does it work? CGT is only payable on profits above your tax-free allowance.
- Thresholds for 2024/25:
- The first £3,000 of gains is tax-free.
- Tax rates:
- 10% (Basic Rate taxpayers).
- 20% (Higher/Additional Rate taxpayers).