National Insurance
National Insurance contributions are used to pay for benefits and your State Pension. In the UK, everyone over 16 pays National Insurance. There are four different ‘classes’ of National Insurance. Self-employed people pay Class 2 rates, as well as Class 4 if their profits are over £11,909 a year.
Paying National Insurance
While employees of a company pay National Insurance through their employer (they’ll see this on their payslip), it’s different if you’re self-employed. You’ll pay this through your Self Assessment tax return.
If you’re both employed and self-employed, you’ll still pay Class 1 National Insurance through your employer, but you’ll also have to complete a Self Assessment tax return to cover your self-employed income. When you file this return, HMRC will let you know if you have to pay any other contributions for your self-employed work.
Director of a limited company? You’ll be classed as an employee and will pay National Insurance contributions through payroll.
Value Added Tax (VAT)
VAT is a tax added on to the prices of most goods and services in the UK. Most of the time when you’re buying something, you won’t notice the VAT that’s already added.
If you provide goods or services, you must charge VAT on what you sell. You’ll add the relevant VAT rate to the cost of what you’re selling. You can only charge VAT on invoices if you’re VAT registered.
As a small business, you’ll need to keep a record of the VAT you pay on goods and services for your business, and also make sure you charge the right amount of VAT on what you sell. All of this needs to be reported to HMRC.
Small businesses and limited companies will need to register for VAT if your VAT taxable turnover was more than £85,000 in the last 12 months, or you’re expecting it to go over this threshold in the next 30 days.
Paying and claiming VAT
If you’re registered for VAT, you’ll need to complete a VAT Return at the end of your accounting period – this is usually every three months. This will include any VAT you’ve charged to your customers, as well as any VAT you’ve paid on goods and services for your business.
Your VAT online account will tell you when your VAT Return is due and how to pay. You’ll need to complete a return even if you have no VAT to pay or claim.
If you’re VAT registered, you’ll need to sign up to ‘Making Tax Digital’ and complete your business’s VAT returns using compatible software, like FreeAgent, which you get included with a Mettle account.**
The standard rate for VAT has been 20% since 2011. This covers most goods and services. There is a ‘reduced rate’ of VAT on some goods and services like children’s car seats and home energy. And a ‘zero rate’ on things like children’s clothes. Some things are exempt from VAT like postage stamps and subscriptions.
Income Tax
This is the tax you pay on your income. If you’re self-employed, this means the profit you make on everything you sell. But, the first £1,000 of income from self-employment is exempt from Income Tax. Most people will also get a Personal Allowance of tax-free income which is currently £12,570*.
If you’re employed, you’ll pay tax through your employer based on your tax code. For the self-employed, you’ll need to complete a Self Assessment tax return each year if you make more than £1,000 in that tax year.
Check out our tax hub for everything from self-employed tax advice to nailing your tax return every time.
Corporation Tax
This is a tax that limited companies pay on profits. If you own a limited company, you’ll need to register for Corporation Tax when you start doing business (or restart a dormant business). Once you’re registered, you’ll need to file a company tax return.
Read our guide to Corporation Tax, which includes everything you need to file a company tax return, how to register your business, and the rate change being introduced in April 2023.
Business rates
Business rates are charged on most properties that you don’t live in, and are generally used for business purposes. This includes shops, offices and pubs and even covers properties used as holiday accommodation.
If you own a property as part of your business, you’ll need to pay business rates on it. Some local councils offer relief schemes for some properties. What’s available will differ depending on your local council, and whether the property is in England or Wales.
Business rates are different if your property is in Scotland or Northern Ireland.
Paying business rates
Your local council will send you a bill each February or March. This bill will cover the following tax year. HMRC has a guide on estimating your business rates, so you roughly know what to expect to pay.
*Updated 24 November 2023.
**This is based on the lowest FreeAgent tariff, saving you up to £150 a year.
Disclaimer: The content of this blog is based on our understanding of the topic at the time of publication and should not be taken as professional advice. Any of the information may be subject to change. You are responsible for complying with tax law and if in doubt, should seek independent advice.
