Business taxation covers the tax rules applying to different business structures and their stakeholders. Key taxes include Income Tax (for sole traders, partners, and individuals), Corporation Tax (for companies), Capital Gains Tax (on asset disposals), VAT (on goods and services), and Inheritance Tax (on business transfers). Different business structures attract different tax treatment.
Income Tax is paid by individuals on their taxable income. This includes sole traders on their business profits, partners on their share of partnership profits, employees on their salary, and individuals on investment income (dividends, savings, property). Companies pay Corporation Tax, not Income Tax.
The tax year runs from 6 April to 5 April. For 2024/25: Personal Allowance is £12,570 (reduces for income over £100,000), Dividend Allowance is £500, Personal Savings Allowance is £1,000 (basic rate) or £500 (higher rate), and Trading Income Allowance is £1,000 (£500 if property income exists).
| Band | Taxable Income | Rate |
|---|---|---|
| Personal Allowance | Up to £12,570 | 0% |
| Basic Rate | £12,571 - £50,270 | 20% |
| Higher Rate | £50,271 - £125,140 | 40% |
| Additional Rate | Over £125,140 | 45% |
The Personal Allowance reduces by £1 for every £2 of adjusted net income above £100,000, meaning it is zero at £125,140+. This creates an effective 60% tax rate on income between £100,000 and £125,140.
Dividends are taxed at different rates to other income. After the £500 Dividend Allowance: Dividend Ordinary Rate (basic rate taxpayers) is 8.75%, Dividend Upper Rate (higher rate taxpayers) is 33.75%, and Dividend Additional Rate (additional rate taxpayers) is 39.35%.
The Dividend Allowance was reduced from £1,000 (2023/24) to £500 (2024/25) and will reduce further to £0 from April 2024. Only the first £500 of dividends in a tax year is tax-free. Dividends above this are taxed at dividend rates, not the usual income tax rates.
Companies pay Corporation Tax on their profits. This is NOT a credit against the shareholder's Income Tax liability on dividends. Shareholders must pay dividend tax on dividends received, regardless that the company has already paid Corporation Tax. The dividend is paid out of post-tax profits.
Example: Salary £36,000 + Dividend £5,000. Personal allowance used against salary: £12,570. Remaining salary: £23,430 (all in basic rate band). Basic rate band remaining: £50,270 - £36,000 = £14,270. Dividend after £500 allowance: £4,500. Tax at 8.75% = £393.75. Total dividend tax = £393.75.
From 1 April 2023: Small Profits Rate is 19% for profits up to £50,000. Main Rate is 25% for profits over £250,000. Marginal Relief applies between £50,000 and £250,000, giving an effective rate of 26.5% on profits in this band (25% plus marginal rate relief adjustment).
For Corporation Tax purposes, companies are associated if one controls the other, or both are under common control. The £50,000 and £250,000 thresholds are divided by the number of associated companies + 1. Two associated companies each have thresholds of £25,000 and £125,000.
Corporation Tax is payable 9 months and 1 day after the end of the accounting period. Companies with profits over £1.5 million must pay in instalments. Returns must be filed within 12 months of the end of the accounting period. Late filing penalties apply.
Company trading losses can be: (1) Carried forward against future trading profits of the same trade; (2) Set against total profits of the same or previous accounting period (s.45 CTA 2010); (3) Claimed against total profits of the previous 12 months (s.45). Trading losses CANNOT be set off against capital gains of earlier years.
Individuals pay Capital Gains Tax on chargeable gains. Companies pay Corporation Tax on chargeable gains (not CGT). Partners in a partnership are individually liable for CGT on their share of partnership gains - the partnership itself is not a separate tax entity.
The Annual Exempt Amount is £3,000 for individuals (reduced from £6,000 in 2023/24). This means gains up to £3,000 in a tax year are tax-free. Trustees' allowance is £1,500. Unused allowance cannot be carried forward.
| Asset Type | Basic Rate | Higher/Additional Rate |
|---|---|---|
| Residential Property | 24% | 24% |
| Other chargeable assets | 10% | 20% |
| Business Asset Disposal Relief (BADR) | 10% | 10% |
Capital losses can be: (1) Set off against gains of the same tax year; (2) Carried forward indefinitely against future gains. Losses MUST be claimed within 4 years of the end of the tax year. Losses brought forward must be used against future gains before the annual exempt amount.
In a partnership, capital gains are allocated according to partners' capital-sharing ratios (NOT income-sharing ratios). Each partner is personally liable for CGT on their share of gains. The partnership itself does not pay CGT.
Formerly Entrepreneurs' Relief. Reduces CGT to 10% on qualifying business assets up to £1 million lifetime limit. Available on: sale of all or part of a business, sale of assets after business cessation, and shares in a personal company (5% holding, employee, trading company).
Businesses MUST register for VAT if taxable turnover exceeds £90,000 in any 12-month period (2024/25). Voluntary registration is allowed below this threshold. Deregistration is possible if taxable turnover falls below £88,000.
| Rate | Percentage | Examples |
|---|---|---|
| Standard | 20% | Most goods and services |
| Reduced | 5% | Home energy, children's car seats, some mobility aids |
| Zero | 0% | Food, books, children's clothes, most exports |
| Exempt | N/A | Education, health, insurance, some financial services |
OUTPUT VAT is VAT charged on sales to customers. INPUT VAT is VAT paid on business purchases. Businesses pay the difference to HMRC: Output VAT - Input VAT. If Input VAT exceeds Output VAT, HMRC refunds the difference. VAT-exempt supplies cannot recover input VAT.
Firm charges £10,000 output VAT on services (standard rate on £50,000 sales). Pays £20,000 input tax on business purchases. Input (£20,000) exceeds Output (£10,000). Firm can RECLAIM £10,000 VAT from HMRC. The firm does not pay any VAT for that period.
VAT returns are usually submitted quarterly. The "Making Tax Digital" system requires most businesses to keep digital records and submit returns using compatible software. Returns and payments are due 1 month and 7 days after the period end.
Inheritance Tax is charged on transfers of value (lifetime gifts and on death). Standard rate is 40% on death. Nil Rate Band is £325,000 (2024/25), frozen until 2028. Residence Nil Rate Band adds up to £175,000 for main residence passed to direct descendants.
Business Relief (formerly Business Property Relief) reduces IHT on business assets. 100% relief for: shares in unquoted trading companies, business assets used in a partnership or sole trader business. 50% relief for: shares controlling a quoted trading company, land/buildings used by a business you don't control, some shares.
For 100% Business Relief on a partnership interest: the business must be TRADING (not predominantly investment), the partner must have held the interest for at least 2 years before death/gift. Business property used by the partnership but owned personally may qualify for 50% or 100% relief depending on circumstances.
Partner dies owning 1/3 of partnership (value £300,000) and office used by partnership (value £700,000). Partnership business qualifies for 100% BR. Office owned personally but used by partnership: does NOT qualify for 100% BR (not used for business AND owned by partner). Only partnership interest gets 100% relief.
Partnerships are NOT separate tax entities. Each partner is taxed individually on their share of partnership profits. The partnership itself files a Partnership Tax Return but pays no tax. Income profits are taxed as Income Tax; capital gains are taxed as CGT.
Partners can set their share of partnership trading losses against: (1) Other income of the same tax year; (2) Capital gains of the same year; (3) Income of the previous tax year. Loss relief claims must be made within specific time limits. Early trade losses relief allows losses against total income of previous 3 years.
LLPs with corporate members are taxed as companies for the corporate members' share. LLPs with only individual members are tax-transparent like partnerships. Individual members pay Income Tax on profit share and Class 2/4 National Insurance contributions.
Partners are taxed on the profit arising in the tax year, regardless of the partnership's accounting date. The "basis period" rules allocate profits to tax years. For new partnerships, the opening year rules may overlap profits. For continuing partnerships, profits are generally apportioned to the tax year.
Employers must deduct Income Tax and National Insurance from employees' salaries through the PAYE system and pay it to HMRC. Employers also pay employer's National Insurance contributions. Real Time Information (RTI) requires reporting payments to HMRC on or before each payday.
Employees pay Class 1 NIC: 0% on earnings up to £12,570, 8% on £12,570-£50,270, 2% above £50,270. Employers pay Class 1 NIC: 13.8% on earnings above £9,100 per year. Self-employed pay Class 2 (£3.45/week if profits £12,570+) and Class 4 (6% on £12,570-£50,270, 2% above).
Benefits in kind are taxable if provided free or below market value. Common taxable benefits: company cars (based on CO2 emissions and list price), private medical insurance, accommodation, loans below market rates. Some benefits are exempt: trivial benefits (£50), pensions advice, workplace nursery.
Employers must provide form P60 to employees by 31 May each year. Form P11D reports expenses and benefits by 6 July. Form P45 is given when employee leaves. Real Time Information reporting required for each payroll payment.
Sole traders pay Income Tax on business profits. Class 2 NIC (flat rate) and Class 4 NIC (percentage of profits) also apply. Trading income allowance of £1,000 means no tax reporting if income below this. Accounts are prepared to 5 April each year for tax purposes.
Trading losses can be: (1) Set against other income of same or previous year; (2) Carried forward against future trading income; (3) Claimed as terminal loss relief in final year. Early years loss relief allows set-off against total income of previous 3 years.
From 2026, sole traders with turnover over £50,000 must keep digital records and use MTD-compatible software to file Income Tax returns. From 2027, this threshold drops to £30,000. This represents a significant change in tax reporting requirements.
Sole Trader: taxed on all profits at income tax rates, simpler administration, losses can offset other income. Company: profits taxed at Corporation Tax (19-25%), salary and dividends taxed individually, more complex administration but potential tax savings at higher profit levels, limited liability.
Sole Trader: £50,000 - £12,570 allowance = £37,430 taxable. Basic rate 20% = £7,486 + Class 2 (£169) + Class 4 (£2,085) = £9,740 total. Company: 19% CT on £50,000 = £9,500. If paid as £12,570 salary (no tax due for employee) + dividends, overall tax may be lower but requires considering NIC and administrative costs.
Tax AVOIDANCE is legal use of tax rules to minimise tax (ISA, pension contributions, claiming allowances). Tax EVASION is illegal non-payment or underpayment of tax (not declaring income, false deductions). HMRC can challenge tax avoidance schemes under the General Anti-Abuse Rule (GAAR).