Small business tax tips: Income Tax, Corporation Tax, VAT and more

Running a small business comes with lots of responsibilities, and understanding your tax obligations is one of the most important.

Knowing how taxes work helps you stay compliant, avoid penalties, and save money which can then be re-invested back into your enterprise so you can implement business growth strategies. 

This guide outlines the key taxes you should know about, along with practical tax saving tips for small business owners.

We also highlight key differences for sole traders, partners, and limited companies, ensuring you get the right advice for your enterprise. By the end, you’ll understand your tax obligations better and know how to handle taxes efficiently, so you can keep more of your hard-earned money.

Small business tax tips

Depending on factors like your business structure, location, and whether you have staff, you might have to handle:

• Income Tax

• Corporation Tax

• Business Rates

• VAT

• Capital Gains Tax

• PAYE and National Insurance

Let’s check out some small business tax tips to see how your business could pay less in each of these categories.

Income Tax

Income Tax is a big one for sole traders and partners but also applies to directors taking a salary or dividends from a limited company. It’s paid through your Self Assessment return.

You pay Income Tax on your income after deducting allowable expenses. Most people have a personal allowance of £12,570, meaning you don’t pay tax on that amount. This allowance can increase or decrease in certain situations.

For the tax year 2024 to 2025, Income Tax rates are:

• Personal allowance – Up to £12,570 – 0%

• Basic rate – Up to £12,571 to £50,270 – 20%

• Higher rate - £50,271 to £125,140 – 40%

• Additional rate – Over £125,140 – 45%

Tax tips for small business owners

Here are some tips that could help you pay less Income Tax.

Deduct all allowable expenses

For sole traders and partners, claiming allowable expenses is key to cutting your Income Tax bill – so make sure you claim what you can. Examples include:

• Startup costs for up to seven years before your business started.

• Rent and utility bills for your business premises.

• Raw materials and inventory.

• Essential equipment like computers, card machines, and tools.

• Advertising and marketing expenses.

• Business insurance, software, and professional services.

• Transport, accommodation, and meal costs for business travel.

• Depreciation of physical assets over time.

• Interest payments or finance costs for business assets.

• Unpaid invoices as bad debts.

• Staff costs, including salaries, wages, health insurance, and certain benefits.

• Everyday small business expenses like stationery and office supplies.

Explore allowances and schemes

There are various allowances and reliefs that offer legal ways to cut your Income Tax bill.

For instance, the annual trading allowance lets you earn up to £1,000 from self employment without even having to notify HMRC. This is ideal if you’re exploring how to make extra money on the side of your main career. You can use this relief even if you earn over £1,000, though if you do, you can’t deduct expenses or use capital allowances. 

The tax-free childcare scheme could be useful if you’re working out how to run a business around young kids. And if you’re married or in a civil partnership, the marriage allowance allows you to distribute income to maximise personal allowances.

You don’t have to work with your other half to use this allowance but it’s something to factor into your business plan if you’re thinking about how to start a business together.

Corporation Tax

If you’re setting up a limited company, you’ll pay Corporation Tax on the profits it earns from daily operations, from the sale of business assets, and from investments.

The main rate is 25% but this only kicks in if your taxable profits are over £250,000. If your small business makes less than that, you’ll pay a lower tax rate.

If profits are:

• Under £50,000 – Small profits rate of 19% applies.

• Between £50,001 and £250,000 – Marginal relief reduces the rate on a sliding scale.

Tax tips for small business owners

To lower corporation tax, you need to reduce your taxable profits. Here are some tips:

Claim legal tax deductions

Limited companies can deduct running costs from their profits. These deductions work similarly to business expenses for sole traders and partners.

For example, you can deduct rent, stock, and insurances like small business cyber security protection from taxable profits. Be sure you claim everything you can, but keep in mind that anything bought for personal use by directors or employees is treated as a benefit. 

The £6 weekly tax relief for directors working from home we highlighted earlier is also tax deductible for your business.

Claim capital allowances

Just like sole traders and partners, if you buy assets for your business, such as a van or a smart point of sale solution, you can benefit from capital allowances to reduce the tax you owe. Here are two relief categories to consider:

• Annual investment allowance (AIA) – Claim up to £1 million on eligible plant and machinery.

• 100% first year allowances – Claim the full cost for certain plant and machinery in the year of purchase.

Explore tax reliefs

Other relief schemes are also available for reducing Corporation Tax bills. Here are some options you could qualify for:

• Research and development (R&D) relief – For businesses involved in innovative projects.

• Patent box – For companies making a profit from patented inventions.

• Creative industries tax relief (CITR) – For businesses in theatre, film, TV, animation, or video games.

Business Rates

Business Rates are a tax on commercial properties. If your business has a physical location, you can usually expect a Business Rates bill. The specifics and amount you owe depend on your location in the UK. Here’s a quick rundown:

England

In England, the Valuation Office Agency (VOA) sets the rateable value of properties. To calculate your Business Rates bill, this value is multiplied by a government-set multiplier: 

• Standard multiplier – 54.6p for properties over £51,000.

• Small business multiplier – 49.9p for properties under £51,000.

• For example, a property valued at £17,000 would have a bill of £8,483 (17,000 x 0.499).

Wales

The VOA also sets the rateable value of properties in Wales. However, a uniform multiplier of 56.2p is used.

Scotland

In Scotland, the Scottish Assessors Association set the rateable value of properties. There are three multipliers:

• Basic – 49.8p for values up to £51,000.

• Intermediate – 54.5p between £51,001 and £100,000.

• Higher – 55.9p above £100,000.

Northern Ireland

In Northern Ireland, Business Rates are determined by your property’s net annual value (NAV), set by Land and Property Services (LPS), and multiplied by non-domestic regional and district rates for your area.

Tax tips for small business owners

Here are some tips that could help reduce your business rates bill:

Check eligibility for small business rate relief

You might qualify for small business rates relief based on your property’s rateable value. It’s important to research these schemes thoroughly, especially if you have multiple properties, but here are the basics:

• England – If the value is under £12,000, and it’s the only property you use, you get 100% relief. Relief tapers for values between £12,001 and £15,000.

• Wales – Eligible premises valued under £6,000 get 100% small business rates relief, and those between £6,001 and £12,000 get tapered relief.

• Scotland – The small business bonus scheme offers 100% relief for single properties valued up to £12,000, with tapering relief up to £20,000.

• Northern Ireland – 100% Business Rates relief isn’t available, but you can get 50% off for properties valued under £2,000, and tapered relief up to £15,000.

Sometimes, small business rate relief is applied automatically, but not always.  For example, in Scotland, you’ll usually need to complete an application form. Make sure to check your area’s requirements to ensure you don’t miss out.

Explore alternative reliefs

Besides small business rates relief, there are other tax breaks available. For example, England’s supporting small business relief scheme runs until March 2026, capping increases to a maximum of £600 per year if you lost some or all small business rate relief after the 2023 VOA revaluation. Wales offers similar transitional rates relief.

Plus, if you run a shop, restaurant, café, bar, pub, cinema, music venue, or hospitality and leisure business (like a gym, spa, or hotel) in England or Wales, you could qualify for retail, hospitality, and leisure relief.

If eligible, you get 75% off your business rates for 2024 to 2025 in England and 40% off in Wales – up to £110,000 per business per year.

Double check your business rates bill

Since Business Rates are one of the few taxes you receive a bill for, always double check your bill for errors. Mistakes can happen and catching them early can save you money.

In particular, pay attention to your property’s rateable value. If it seems off, it’s worth challenging it. A lower rateable value could mean you qualify for relief.

Here’s a reminder of who to contact:

• England and Wales – Valuation Office Agency (VOA).

• Scotland – Scottish Assessors Association. 

• Northern Ireland – Land & Property Services (LPS).

VAT

You can’t really avoid VAT. Even if you’re running a modest business, perhaps working on side hustle ideas at home, you’ll likely deal with VAT-registered suppliers. This means you’ll pay VAT on the products and services you buy and need to work this into your pricing strategies, even if you don’t charge VAT yourself.

You must register for VAT if either of these are true:

• Your business makes £90,000 in taxable profits in a 12-month rolling period.

• You expect it to cross that threshold within the next 30 days.

Once registered, you’ll need to charge VAT on your goods, typically at 20% or 5%, and pay the VAT you collect from clients and customers, minus the VAT you pay to suppliers, to HMRC.

Tax tips for small business owners

Want to simplify VAT for small business and perhaps pay less? Here are some tips:

Consider voluntary registration

You can sign up voluntarily for VAT before your business hits the £90,000 VAT threshold. Registering early means you can reclaim the VAT you pay. Plus, it can also help boost your credibility with potential clients, prepare for growth, and unlock new business opportunities. 

However, there are drawbacks too. Registration can mean increased admin and costs, tricky decisions about how to price a product or how to price a service to account for VAT, and even cash flow problems if you don’t manage things carefully.

Voluntary registration can be smart, but make sure it’s the right choice for your business.

Explore VAT schemes

Optional VAT schemes don’t change how much VAT you charge. However, they can make it simpler to work out what you owe, cutting the time and costs involved – and in some cases, your bill too.

Here are a few schemes to consider:

Flat rate scheme

The flat rate scheme simplifies VAT returns by letting you pay a fixed rate. Your taxable turnover excluding VAT must be £150,000 or less, and the rate will dependon your business type and whether you have a limited cost business.

While you typically can’t reclaim VAT under this scheme, you keep the difference between what you charge customers and what you pay to HMRC. This can be great if you charge more VAT than you pay. For example, charging 20% but only paying 12%. You get a 1% discount in your first year as a VAT-registered business.

Annual accounting scheme

Normally, VAT returns are submitted quarterly. With annual accounting, you make advance payments and submit just one return a year. When you file, you pay any shortfall or get a refund.

Available to businesses with a turnover under £1.35 million, this scheme simplifies accounting and could boost working capital if sales increase. However, it’s less suitable if you need regular VAT refunds.

Cash accounting scheme

Also available to businesses turning over under £1.35 million, this scheme lets you reclaim VAT on purchases when you pay suppliers and pay VAT on sales when you receive payment, not when you send invoices.

It can smooth out operating cash flow, especially when you’re dealing with late-paying customers. However, it can’t be combined with the flat rate scheme.

Margin scheme

The margin scheme might be a good fit if your business deals in art, antiques, collectibles, or second-hand goods. It lets you pay VAT on the profit margin instead of the full sale price.

This can be simpler, but if some of the goods you buy and sell don’t qualify for a margin scheme, you’ll still need to handle these in the normal way.

Retail schemes

These schemes make tracking VAT more straightforward for busy retail companies. Instead of calculating VAT for individual sales, you do it all at once for each return.

There are three main schemes:

• Point of sale scheme – Record VAT at the time of sale.

• Apportionment scheme – Ideal if you buy goods to resell.

• Direct calculation scheme – Useful if most of your sales are at one VAT rate, but a small portion is at another.

These schemes can be combined with the annual or cash accounting schemes but not with the flat rate scheme.

Compare software options

If your business is VAT registered, the Making Tax Digital initiative means you must use approved software to keep VAT records and submit returns. There are different options available, so make sure you shop around and find the program that best suits your needs.

Capital Gains Tax

Capital Gains Tax (CGT) kicks in when you sell or dispose of business assets like property, shares, or equipment for a profit. Limited companies pay Corporation Tax on profits from selling these assets, so when it comes to small business owners, CGT mainly affects sole traders and partners.

Every tax year, you get a tax-free allowance. For 2024 to 2025, it’s £3,000. You only pay CGT on gains over this amount.

Tax tips for small business owners

Managing CGT effectively can save your small business a lot of money. Here are some tips:

Deduct costs

When working out CGT, don’t forget that you can reduce your chargeable gains by deducting certain expenses relating to buying, selling, or improving your asset.

For example, you can deduct fees for valuing or advertising the asset and costs for significant improvements. You can also deduct stamp duty land tax and VAT (if you can’t reclaim VAT).

You can’t deduct interest on loans to buy the asset or any costs that can be claimed as a business expense.

Claim reliefs

Relief is often available, so make sure you understand what’s out there to maximise your potential savings. One major scheme is business asset disposal relief, commonly known by its former name, Entrepreneurs’ Relief. 

This can cut CGT on qualifying profits when you sell all or part of your business to 10%, up to a lifetime cap of £1 million, and can be an important factor when you’re considering how to improve cash flow.

PAYE and National Insurance

If you’re self-employed and making a profit of more than £12,570 a year, you’ll need to pay National Insurance contributions. Additionally, if you have employees or pay yourself as a director, you’ll have to manage both NICs and PAYE.

This system collects Income Tax and NICs direct from your employees’ wages, so it’s important to stay on top of it if you’re thinking about how to hire employees. 

Tax tips for small business owners

Let’s look at some of the ways you could cut the costs of having a team to support your small business.

Use payroll software

Specialist software can support you with how to do a payroll, making it simpler to calculate and pay PAYE and NICs. Plus, it can often generate payslips and submit real-time data to HMRC, freeing up time for other tasks like working on employee retention schemes or looking into the benefits of training employees. 

Claim allowances and reliefs

Allowances can help reduce your National Insurance liability. Here are a few to consider:

• Employment allowance – If you qualify, this allowance cuts your national insurance liability by up to £5,000 a year. You might also be able to claim National Insurance relief if you offer non-cash benefits to employees.

• Small employers’ relief – This allows small employers to reclaim 103% of statutory payments like statutory maternity or statutory paternity pay, instead of the usual 92%.

More tax tips for small business owners

By now, you should have a good understanding of the different taxes you might encounter as a small business owner, but we’re not done yet. Here are five more tips to keep in mind:

1. Keep your books in order

Keeping track of financial transactions is a must. Diligent bookkeeping for small businesses makes handling taxes less stressful and helps you catch issues early.

The right accounting tools for small business can really make a difference. Even if you don’t need VAT or payroll software, digital tools can streamline your accounting, assist with cash flow management, and ensure you have enough reserves in your small business budget to pay your taxes.

If you need specialist software for specific financial tasks, consider a comprehensive solution that includes extra features, like generating cash flow statements or doing break even analysis. 

2. Know the rules and meet deadlines

Understanding the legal requirements for starting a small business and staying compliant can save you from headaches, penalties, and interest charges.

Stay up to date on the latest tax rules for your business and mark your calendar with tax return and payment deadlines.

3. Get expert help

An accountant or financial adviser can ensure your taxes are done correctly and help you benefit from all possible deductions and credits.

They can also help with other financial analysis, such as giving advice on the most tax-efficient structure for your business or helping plan your future tax strategy. This could mean timing purchases, sales, or investments to maximise deductions.

4. Avoid mixing business and personal finances

Why is it important to separate business and personal finances? It keeps things clear, ensures business-related expenses are properly documented and claimed, and is a smart part of any small business risk management strategy.