Freelancers, sole traders and small business owners just starting out have enough on their plate to worry about without having to consider taxes on top. Yet taxes are an unavoidable fact of life (and business), and so must be carefully managed by filing annual small business tax returns.
The good news is that mastering tax returns for small businesses can help you save money and streamline your profit margins in the long-run. What’s more, with our handy guide to filing your tax return, the process needn’t be a headache!
Just remember, if at the end of the day everything still feels a bit too much to handle, you can always turn to your local accountant or tax professional for some trustworthy advice.
Understanding Small Business Tax Returns in the UK
So what is a small business tax return? The answer depends on the type of business you run and the way your company is structured. A sole trader (often known as a freelancer) will file a different type of tax return to a limited company, for example.
Nevertheless, the objective of the tax return remains the same: to report a business’s spending, losses and profits, before using this financial information to calculate the tax owed to the government—which in the UK is collected by His Majesty’s Revenue & Customs, or HMRC for short.
Who Needs to File a Tax Return?
Businesses, sole traders earning more than £1,000 per year, partners in business partnerships, and small businesses are all legally obliged to submit an annual tax return to HMRC.
Do You Need to File Tax Returns for Small Businesses by Yourself?
Whilst you absolutely can file and submit your own tax return, the process can be complex—increasingly so as your business grows—and can therefore begin to surpass what you have the resources, energy, time or expertise for.
In many cases, small business owners will either hire an accountant or outsource their accountancy and text return needs to a third-party accountancy firm.
What Are the Dates of the UK Tax Year?
The UK tax year runs from 6th April until 5th April year-on-year. This year’s tax year, for example, began on 6th April 2024 and will end on 5th April 2025. It is worth noting, however, that different taxes come with different payment deadlines. It’s important to take note of these in order to avoid late fees.
What Late Fees Apply to UK Small Business Tax Returns?
Failure to pay company tax returns on time can result in a number of fines, increasing in severity the later the tax is paid. If you feel you have legitimately mitigating circumstances explaining late payment, contact HMRC directly to discuss your case.
- Payment late by 1 day incurs a £100 fine.
- Payment late by 3 months incurs an additional £100 fine.
- Payment late by 6 months incurs an additional 10% penalty onto your Corp Tax bill.
- Payment late by 12 months incurs a further 10% Corp Tax penalty.
- If payment of your business tax return is made late thrice in a row, the £100 penalties mentioned above increase to £500 each.
When Are Tax Returns for Small Businesses Due?
Small businesses, as we’ll soon find out, must submit a Corporation Tax tax return to HMRC, and must submit their accounts to Companies House annually, as well. The due dates—or deadlines—for doing so depend on your ‘accounting period’. A small business’s accounting period is usually 12 months long, starting from the day your business began operating.
As we said before, different taxes and tax returns are due at different times. Here’s what your small business Corporation Tax return schedule will look like:
- You must file your Statutory Accounts with Companies House by 9 months after your accounting period ends.
- You must file your Corporation Tax return by 12 months after your accounting period ends.
- You must pay your previous year’s Corporation Tax bill by 9 months and 1 day after your accounting period ends.
Know Your Taxes! Exploring Tax Differences Between Sole Traders and Limited Companies
Let’s now take a look at the types of taxes you, as a sole trader, partner, or small business owner should expect to pay.
Sole Traders and Partnerships
Self-employed sole traders and partners in business partnerships tend to have to pay the same types of taxes, which are:
Income Tax
Only individuals have to pay income tax, which applies to the income (precisely, profit) they make from their business. Income tax rates include a tax-free allowance of £12,570, above which individuals pay scaling rates depending on how much they’ve earned that year.
- Basic tax rate: 20% of earnings from £12,571 – £50,270
- Higher tax rate: 40% of earnings from £50,271 – £125,140
- Additional tax rate: 45% of earnings over £125,141
National Insurance (NI)
Whilst not necessarily a “tax” per se, National Insurance contributions are collected alongside tax and go toward paying for national services like healthcare and welfare. Individuals earning over the tax-free threshold of £12,570 per year must pay Class 4 National Insurance at 6% on income up to £50,270, and 2% on income above that.
Dividend Tax
As a shareholder in a company, you may pay yourself “dividends”, which are shares of the company’s profit. If so, you’ll have to pay dividend tax. You get £2,000 of dividends tax-free, above which the tax rate scales according to your income tax band.
- Basic tax rate: 8.75
- Higher tax rate: 33.75%
- Additional tax rate: 39.35%
Limited Companies
As income tax is only payable by individuals, your small limited company won’t have to pay it. Instead, a different set of taxes apply.
Corporation Tax
Corporation tax is like income tax but for companies. It is applied to a company’s annual profits, no matter how much money the company makes. At present (in the 2024-25 tax year), Corporation Tax in the UK is set at a flat rate of 25%. Limited companies must register for Corporation Tax within their first three months of trading.
Corporation Tax Relief
Certain companies can claim a portion of relief on their corporation tax bill, including:
- Companies in Research and Development (R&D)
- Companies profiting from patented inventions
- Cultural companies in film, theatre, television, animation or video games
National Insurance (NI)
If your small limited company employs people, you’ll have to contribute toward their National Insurance (NI) payments, by paying Class 1 National Insurance through the PAYE payroll system. The system will calculate for you how much NI per employee you’ll have to pay.
Business Rates
Like council tax for residential homes, business rates are a sort of local tax for businesses, calculated according to the property or unit’s rental value. Business rates tax bills are sent out to all businesses in the UK typically around February or March, applied toward the following financial year.
What about VAT?
Value Added Tax is a tax imposed on most goods and services in the UK. Small businesses—whether sole trader or limited company—must register for and begin collecting VAT once they begin earning more than £90,000 a year.
It’s worth noting, however, that businesses and sole traders can also choose to voluntarily register for VAT before they hit this threshold, if they feel it’s in their best interests.
How to File Small Business Tax Returns?: A Step-by-Step Guide
We’ll close out this guide to tax returns for small businesses with a step-by-step tutorial to recording, calculating, filing and paying your tax return.
Step 1: Register with HMRC
First thing’s first, you must register your business with HMRC.
If you’re a sole trader or partner, that means registering for Self Assessment once you start earning over £2,000 a year.
If you’re a limited company, that means registering for Corporation Tax within your first three months of trading.
Step 2: Gather your records
Next up, you’ll have to set up a system for gathering and managing your accounts. There are different types of records you need to keep if you’re a sole trader versus a limited company.
What Records Do You Need to Keep?
Sole traders should keep clear, accurate and accessible records of:
- All business activity, including:
- Sales (i.e., earnings)
- Business-related expenses
- Customer/client invoices
- VAT receipts, if applicable
- Any charitable donations you make
- Anything earned through Capital Gains
- Any interest earned on savings (outside of an ISA)
Limited companies should keep records of:
- All business activity, including:
- Sales (i.e., earnings)
- Business-related expenses
- Customer/client invoices
- VAT receipts, if applicable
- Employee wages or payroll (PAYE)
- Any charitable donations made
- Any capital allowances claimed
- Any losses claimed
What Allowable Business Expenses Can You Claim?
Both sole traders and limited companies can claim certain expenses as ‘allowable,’ meaning that they are deducted from your Gross Profit before tax is calculated.
There are lots of different types of allowable expenses, so to make the most out of them, and reduce your tax bill as much as possible, we would advise seeking the help of a professional.
Below are some examples of Allowable Expenses for small businesses:
- Office supplies
- Business-related travel expenses (including accommodation and food if applicable)
- Rent and utilities of your business property
- Phone and internet bills of the business
- Legal and professional costs
- Raw materials to make products for your business
- Relevant industry-related subscriptions
- Clothing for staff uniforms
- Marketing materials and expenses
If you run your business from your own residential property (your home), you can also include applicable expenses listed above—like utilities, rent, phone and Wi-Fi bills—but you must first legitimately calculate which portion of each is being used exclusively for business purposes.
For example, if you live in a home with four rooms (other than kitchen(s) an bathroom(s)), and you use one of these as your work office, then you could ‘expense’ 1 out of 4 rooms. In other words, you could expense up to 25% of your rent/mortgage and utilities.
Step 3: Fill in a Self-Assessment or CT600 form online
Once you’ve your records in order and the tax year or your accounting period is over, it’s time to fill in and file your small business tax returns! For sole traders, this means filling in a Self Assessment Tax Return online. Whereas for limited company businesses, it means filling in a CT600 (2024) Version 3.
Step 4: Pay what you’re due by the deadline
Once you’ve submitted the tax returns for your small business, HMRC will calculate for you how much tax (Corporation, Income, NI or otherwise) you’re due, and will tell you how long you have to pay it, too. All that’s left to do is pay the government what you owe!
Conclusion: Final Thoughts on Tax Returns for Small Business
Small business tax returns can be complicated to calculate, and records hard to keep—especially for those of us flying solo!—but they are a necessary evil and one you’d do well to keep constantly on top of.
By mastering your business’s tax returns, you can ensure you’re making the most out of your profits and staying compliant with the law—thus avoiding unnecessary and often hefty fines!
Of course, not every freelancer nor small business owner has the time and energy required to stay on top of their taxes all year round. If this sounds like you, then it could be time to seek the advice of a professional tax accountant.
