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Exploring Tax Breaks for Small Businesses in the UK

April 24, 2024

Paying tax is an obligation that all businesses in the UK have to fulfil. However, it’s important to remember that small and medium-sized businesses now receive many incentives to develop. You don’t have to overpay, and your business can be very tax-efficient. Using UK tax incentives for entrepreneurs will help you optimise your cash flows, improve the monitoring and control of your finances, save on tax, and potentially increase your market position. To get all these benefits, you need to know about UK small business tax breaks.

In this article, we will look at tax break eligibility criteria, VAT relief measures, capital allowances, employment allowances, and research and development tax credits. You will also learn how to simplify tax management with Payrow’s services.

Small Business Taxation Basics for the UK

Small businesses are subject to a variety of taxes, including corporation tax, value-added tax (VAT), income tax, and business rates. They also have to make National Insurance contributions. In this section, we’ve gathered the fundamentals of SME taxation.

1. VAT

A common problem faced by start-ups is not knowing when they need to officially register. If you earn more than £90,000 of taxable income per year, you have to register for VAT, regardless of your business type: limited company, sole trader, partnership, or LLP. Currently, the standard rate of VAT in the UK is 20%. However, some goods and services have a reduced rate of 5%, a zero rate, or are exempt. Use the article below for navigating business tax exemptions.

2. Corporation Tax

Corporate income tax is a tax on a limited liability company that it pays on its profits. It also applies to non-corporate and membership associations and clubs if they have income. Partnerships, sole traders, and LLPs pay tax through self-assessment and qualify as self-employed. The main rate of corporation tax in the UK is 25%, increased from 19% in 2023. The small profits rate (SPR) for companies with profits of £50,000 or below is 19%.

3. Business Rates

Business rates are a tax on the right to occupy commercial real estate. If a company runs its business from the office or retail space or has factories and warehouses, it will have to pay business rates. The average amount of this tax is 50% of the annual rent. It’s also possible to get business rate relief if you qualify for exemptions. Some properties, such as farm buildings, are automatically exempt.

4. Income Tax

For the self-employed in the UK, it’s important to know that profits made by a self-employed person will be taxable if they exceed the Personal Allowance of £12,570. Different rules apply to those who run limited companies. They have to pay income tax on the salary and dividends they receive from the business. The amount of tax depends on how much they receive. Here, Personal Allowance rules apply as well.

5. National Insurance

National Insurance Contributions (NICs) are a form of taxation that increases entitlement to certain benefits and the state pension. A sole trader is subject to two types of NICs: Class 2 and Class 4. For limited companies, there are standard Class 1 employee NICs and Class 1 employer NICs.

Eligibility Criteria for Tax Breaks

The eligibility criteria for tax breaks are specific conditions that individuals and businesses must meet to qualify for these benefits. Criteria for tax deductions depend on the type of tax break. They can include having a property with a rateable value below a certain threshold, earning less than a certain amount of taxable income per year, investing in qualifying items, or carrying out R&D projects. Since tax breaks are used to reduce your tax burden, we’ll share eligibility criteria and tax break features below.

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VAT Relief for Small Businesses

The VAT reporting threshold has been raised from £85,000 to £90,000, taking 28,000 small businesses out of paying VAT. Businesses with an annual VAT turnover below the registration and reporting threshold do not have to charge or pay VAT, which also reduces the administrative burden for very small enterprises. In addition, SMEs can claim relief on VAT for bad debts owed to them, helping improve their cash flows. The UK government also provides simplified VAT accounting schemes for small businesses.

Broadly speaking, the whole policy now is to support SMEs, but these are not all VAT advantages for start-ups. There’s the Flat Rate Scheme, which allows eligible small businesses to pay a fixed percentage of their VAT-inclusive turnover as VAT rather than calculating the exact VAT on each sale. Applying for VAT Flat Rate Scheme is possible for businesses with a turnover of no more than £150,000 a year, excluding VAT. If you are wondering how to register for this VAT scheme, check out the Flat Rate VAT guide.

VAT Flat Rate Scheme benefits are as follows:

Simplified record keeping — no need to keep detailed records of sales and invoices
Fixed interest, which is lower than the standard rate
Simplified cash flow management

VAT exemptions and special rates, such as reduced and zero VAT, apply to specific goods and services deemed essential or socially beneficial, helping to make them more affordable for consumers and businesses. These are special VAT cases; for example, the reduced rate of 5% applies to children’s car seats and home energy, while most food and children’s clothes are zero-rated.

Capital Allowances for Small Businesses

Capital allowances allow businesses to reduce the amount of their taxable profit and save a lot of money while still complying with UK regulations. There are different types of capital allowances. For example, thanks to the annual investment allowance (AIA), small businesses can claim up to £1 million per year on the full cost of qualifying plant and machinery purchases, allowing them to deduct the entire amount from their profits before paying tax.

Furthermore, certain plant and machinery purchases, like energy-efficient and zero-emission vehicles, qualify for 100% first-year allowances. SMEs are allowed to deduct the full cost in the year of purchase.

For qualifying plant and machinery purchases, small businesses can claim a super-deduction of 130% or a 50% first-year allowance, which also provides enhanced tax relief. If an asset does not qualify for the AIA or other first-year allowances, SMEs can claim writing down allowances, which allow them to deduct a percentage of the asset’s value each year.

Calculating Writing Down Allowances

Claiming capital expenditures comes after calculating them. If you use writing down allowances, you will need to determine how much you can claim depending on which pool your property is in. The main rate pool (18% rate) is for most business assets like office equipment, commercial vehicles, machinery, and software. The special rate pool (6% rate) is for longer-term assets like building alterations and thermal insulation. The single asset pool (6% or 18% rate) is for assets used both for business and personal purposes, like cars.

To calculate the writing down allowance, you need to:

Take the opening balance of the pool from the previous accounting period
Add the value of any new qualifying assets purchased in the current period
Deduct the value of any assets sold or disposed of from the pool
Apply the relevant writing down allowance rate to the resulting balance
Subtract the amount you claim from the pool balance to get the closing balance
Use the amount left in each pool as the opening balance for the next period

Utilising Employment Allowances to Reduce Costs

The National Insurance Contributions employment allowance allows businesses to reduce their National Insurance liability by up to £5,000. If you qualify, employment tax reductions enable you to pay lower employers’ Class 1 NI each time you run your payroll until the £5,000 has gone or the tax year ends. This helps offset the costs of employer National Insurance contributions for small businesses.

To qualify for employment allowance, you must be registered as an employer with HMRC and have a PAYE reference number and your business must have Class 1 National Insurance liabilities of less than £100,000 in the previous tax year. You can also claim if you employ a care or support worker. The £5,000 employment allowance can only be claimed against one payroll, even if your business has many.

Here are the employment allowance benefits:

You will reduce the amount of NI Contributions you pay
You will improve the business’s cash flow and free up funds for other operational expenses
You will be financially able to hire more employees and expand your operations
You can claim the employment allowance for up to four previous tax years, potentially recouping significant sums

Overall, the employment allowance impact on payroll is significant, as you can reduce the Class 1 National Insurance costs when running the payroll, thereby reducing the administrative burden for your small business.

Research and Development Tax Credits for Innovation

There is a Research and Development (R&D) tax relief scheme for enterprises engaged in research and development projects, that is, any company developing innovation in the science and technology sector. R&D tax credits for small businesses are available to small and medium-sized enterprises with less than 500 staff, a turnover under €100 million, or a balance sheet total under €86 million.

Under the scheme, you may deduct a further 86% of your qualifying expenditure from trading profits for tax purposes, plus the normal 100% deduction, making a total of 186% deduction. You also may claim a tax credit if the company has claimed relief and made a loss. The tax credit payable is 10% of the loss to be recovered or 14.5% of the loss to be recovered if the company meets the intensity condition.

Business Rate Relief in the UK

Many businesses in the UK are eligible for a reduction in their business rates. The best-known relief is a Small Business Rate Relief (SBRR). Companies with a property with a rateable value of less than £12,000 can get 100% relief if it’s their only property. The relief gradually decreases from 100% to 0% for properties with a rateable value between £12,001 and £15,000.

The good news is that the commercial property tax relief works: over 1 million properties are protected from higher bills as a result of freezing the small business rates multiplier for a fourth consecutive year, as stated in the press release by HM Treasury and Gareth Davies MP.

Businesses in the retail, hospitality, and leisure sectors can get 75% off their business rates, up to a maximum of £110,000 per business. Companies that operate in rural areas with a population below 3,000 can get 100% relief if they are the only village shop, post office, pub, or petrol station below certain rateable value thresholds. Businesses may also be eligible for other small business rates relief schemes such as charitable relief, local newspaper relief, empty property relief, hardship relief, or improvement relief.

Payrow Automation Tools for Tax Accounting

We’ve been helping small businesses understand UK tax for many years because we know how important it is for SMEs to comply with legislation. That’s why we not only write articles on how to save money on relief and improve your understanding of VAT for small enterprises but also offer user-friendly software to manage your accounting needs.

Payrow’s tools generate detailed, automated statements about payments for any required period or statements the user requests. You can streamline compiling reports and statements, calculating income, and sorting payments.
Our users automate the calculation and processing of payroll taxes, ensuring the accuracy and timeliness of payments. Small businesses and freelancers stay compliant with tax regulations easily.
Payrow automation solutions provide users with real-time visibility of their financial data, including income, expenses, and tax obligations, so that they can better manage their cash flow.

Simplify tax management with the Payrow platform!

FAQ

How do UK small businesses qualify for tax breaks?

The tax break eligibility criteria are specific and depend on the type of tax break you are interested in. Criteria can include earning less than a certain amount of taxable income, selling qualifying items, or carrying out R&D projects.

What are the benefits of the VAT Flat Rate Scheme for UK small businesses?

The VAT Flat Rate Scheme offers simplified record-keeping processes, as you don’t have to keep detailed records of sales and a fixed interest, which is lower than the standard rate. Businesses using this scheme also significantly simplify cash flow management.

What types of capital allowances can UK small businesses claim for tax reductions?

To save money, you can check your eligibility for an annual investment allowance (AIA), a first-year allowance, a super-deduction and a 50% special rate allowance, or write down allowances. Capital allowances reduce a company’s taxable profits by deducting the cost of qualifying capital expenditures, including plant and machinery.

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