Self-employment and corporation tax in the UK
Find out which corporation tax or self-employment tax is relevant to your UK business, plus what business expenses can be claimed as a tax exemption.
If you live in the United Kingdom as a self-employed worker or business owner, you will be liable to pay UK corporation taxes, although what you are taxed on depends on whether you are classified as a resident or non-resident taxpayer in the UK.
Generally, the same UK corporation tax rates and rules apply to residents and non-residents alike. While there are some minor rule variations between the two groups, the primary difference is that residents pay taxes on their world-wide income whereas non-residents are only taxed on their UK-based income. There are a number of factors that determine your tax-residence status; if you stay in the UK for at least 183 days, own UK real estate or work in the UK, you may be considered a resident for tax purposes. Read more details in our guide to UK taxes.
Income taxes are the responsibility of each individual – the UK does not recognise joint tax filings. In addition to personal income tax and reporting requirement covered in this guide to UK income taxes, there are also special reporting requirements and UK corporation taxes for self-employed workers or individuals acting as the responsible party for business tax. This guide outlines some of the conditions for UK self-employment tax and UK corporations taxes.
Your UK corporation taxes depend on business structure
The type of business structure you select determines your corporate tax rates and reporting obligations. In addition, your business structure will determine how you personally take profits and any personal responsibilities you have if your business takes a loss.
UK self-employment tax for sole traders
The simplest business form is the sole trader. Sole traders are in business for themselves and assume responsibility for business results, operations, setting prices and scheduling. A critical distinction between sole traders and employees is that the sole trader works for several clients at the same time, thereby avoiding issues of 'economic dependence' characteristics of being an employee. On the other hand, sole traders are distinguished from limited business structures in that the sole trader business is an extension of the business owner, even if the business has other employees. The sole trader business is not a legal entity separate from the owner.
Regular employment does not prohibit simultaneous status as a sole trader. The HMRC will consider you a trader if you regularly sell services or products for a profit, regularly make commissions selling for others or receive payment for a service you provide. The issues here are regularity of sales and intent for profit. Occasionally selling unwanted personal items or conducting transactions as part of engaging in a hobby does not make you a sole trader. However, if you do not register with the HMRC as a trader you cannot deduct losses and expenses from your income to reduce your tax liability.
As a sole trader, all business profits belong to you personally. Tax on profits as a sole trader will be added to your other personal income and assessed at your personal tax rate:
If you do intend to start business as a sole trader, you can register your intent here. If you’ve already registered to file self-assessment forms in the past, you can find the necessary sole trader registration forms here. If you expect to sell more than GBP 83,000 in goods and services, you will also need to register for Value Added Tax (VAT) compliance.
UK corporation tax for a limited company
Whereas the sole trader business is an extension of the individual, limited companies are legal entities in their own right. Thus the limited company must have separate bank accounts and records, and any profits earned belong to the company not the individual. After paying the corporate income tax – 20 percent on net earnings in most cases – the remaining profits may then be distributed among the members or shareholders. Recipients must claim their distributions on a self-assessment form.
There are several types of limited companies in the UK. In each type (limited by shares, limited by guarantee or public limited) the members’ personal liability for the company’s obligations are limited to their unpaid share value or agreed upon guarantee levels.
If you are the director of a limited company you accept legal responsibilities for the performance, taxes and reporting of the company – and may be held personally responsible if the company does not comply with the relevant laws and regulations. In addition, as a director of the company, you will need to file a personal self-assessment return with the HMRC.
Partnership structures and UK taxes
The UK offers several types of partnerships to meet your business structuring needs. Regardless of the type of partnership, all partners will need to file a personal self-assessment form and pay both income tax and National Insurance on their portion of the partnership profits. Partnerships that expect to achieve more than GBP 83,000 in sales must also register for VAT.
UK corporation tax for ordinary partnerships
Conceptually, ordinary partnerships are very similar to sole traders with the notable exception that several individuals – or even other business entities – share in the responsibilities and potential liabilities of the business. All net profits are shared between the partners who each include them in their income tax reporting. One partner must be nominated as the responsible party for tax and reporting purposes. This partner must send in a self-assessment form on behalf of the partnership each year.
UK corporation tax for limited partnerships
The limited partnership is a hybrid between ordinary partnerships and limited companies. In this business form the partners are either general or limited. All general partners can be held personally and severally responsible for unpaid partnership debts. Limited partners are liable only up to the amount of their personal investment in the partnership. One general partner must file a self-assessment form on behalf of the partnership.
Limited liability partnership and UK corporation tax
The limited liability partnership is another business hybrid. In this form each partner’s liabilities are limited to the amount invested in the partnership. One partner must be designated as responsible for filing a self-assessment form on behalf of the partnership.
National Insurance for sole traders and partnerships
If you have profits from your sole trader business or a partnership, you will be responsible to make National Insurance contributions based on your self-assessment form. There are two potential National Insurance rates which you may be liable depending on your profits.
If your business profits or share of the partnership profits are at least GBP 5,965, your personal liability is GBP 2.80 for each week your business or partnership is in operation.
If you are living abroad and making voluntary Class 2 contributions, or if you are an investor (for example, in real estate with rental income), or a non-UK resident that is self-employed in the UK, then you will not make your Class 2 payments through the self-assessment process. Rather you will need to make timely and regularly scheduled payments using any of a variety of payment options acceptable to the HMRC.
If your business profits or share of the partnership profits are at least GBP 8,060, additional liabilities are due:
- Profits ranging from GBP 8,060–43,000 incur a personal National Insurance liability of 9 percent in addition to the weekly charge.
- Profits higher than GBP 43,000 incur a personal liability of 2 percent on the profits earned or received.
Allowable business expenses
Businesses can claim certain expenses against their gross revenues to reduce their reportable profits. Allowable expenses include office supplies, travel, uniforms, employee and subcontractor costs, purchase costs on goods for resale or manufacturing supplies, financial charges, utilities and marketing.
Certain purchases qualify for a capital allowance. These include renovations, research and development, patents, dredging and mining, equipment and machinery, and business vehicles.
If you own property and use it for a holiday letting business, many expenses related to operating the property-related business – including mortgage expenses – can be used to reduce reportable income. In order to claim these expenses the property must be available for letting for at least 210 days per tax year (which runs from 6 April to 5 April), and it must be let out for at least 105 days, with no party letting it for more than 31 days.
Any product purchased for business purposes – such as goods intended for resale – but taken out of the business for personal use by an owner or employee must be reported as a taxable benefit on the individual’s self-assessment form.
Various business-related tax relief
UK employers can claim up to GBP 3,000 against Class 1 National Insurance contributions.
If you operated a business as a sole trader or were part of a partnership you may be able to claim a reduction in capital gains tax to only 10 percent on business assets sold. This relief is claimed at the time of filling out your self-assessment form, utilising Section A of the Entrepreneur’s Relief help sheet.
Business Asset Rollover Relief
Businesses or partnerships which sell certain assets and use some or all of sale proceeds to acquire new assets can delay paying capital gains until the new asset is sold. Forms for claiming rollover relief can be found here.
Property Tax Relief
Certain properties are eligible for a reduction in their business-rate property taxes from their local councils. Small businesses with a ratable property value of less than GBP 12,000 can get up to 100 percent relief. Businesses operating in a rural zone with a local population below 3,000 can apply for relief from 50–100 percent on properties with a ratable value under GBP 16,500. If you locate your business in an enterprise zone, you can receive up to GBP 55,000 over five years. The local councils work out the details of applying the relief.
Help with UK income tax questions
If you need help understanding your UK tax liabilities or reporting obligations, you can contact the HMRC.
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