Find out which self-employment tax or corporation tax is relevant to your UK business and calculate your net income, plus which business expenses can be claimed as 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.
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.
This guide to UK self-employed tax and net income calculation covers:
- Your UK corporation taxes depend on business structure
- UK self-employment tax for sole traders
- UK corporation tax for a limited company
- Partnership structures and UK taxes
- UK corporation tax for ordinary partnerships
- UK corporation tax for limited partnerships
- Limited liability partnership and UK corporation tax
- National Insurance for sole traders and partnerships
- Allowable business expenses
- Various business-related tax relief
- How to file business UK tax returns
- Help with UK income tax questions
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.
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:
2018–2019 tax year (ends 5 April 2019)
England/Wales/Northern Ireland tax band
Income tax rate
|Personal allowance||Up to £11,850||0%|
Scotland tax band
Income tax rate
|Personal allowance||Up to £11,850||0%|
- Higher rate £44,274–£150,000: 41%
- Top rate £150,000+: 46%
If you do intend to start business as a sole trader, you can register your intent online. If you’ve already registered to file self-assessment forms in the past, you can find the necessary sole trader registration forms online. If you expect to sell more than £83,000 in goods and services, you will also need to register for Value Added Tax (VAT) compliance.
Filing US taxes from the UK
Despite the fact that every US citizen and green card holder is required to file a tax return with the IRS even when living abroad, many expatriates still fail to do so. Many are unaware of these obligations, thinking that as an expat they do not need to pay or file tax returns in the US. You do! For more information and help filing your US tax returns from the UK, contact Taxes for Expats and see our guide to taxes for American expats.
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% 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.
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 £83,000 in sales must also register for VAT.
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.
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.
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.
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 £6,205, your personal liability is £2.95 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 £8,424, additional liabilities are due:
- Profits ranging from £8,424–£46,350 incur a personal National Insurance liability of 9% in addition to the weekly charge.
- Profits higher than £46,350 incur a personal liability of 2% on the profits earned or received.
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.
UK employers can claim up to £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% 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 online.
Property Tax Relief
Certain properties are eligible for a reduction in their business-rate property taxes from their local councils. Small businesses with a rateable property value of less than £12,000 can get 100% relief, while those with rateable values up to £15,000 can also claim some form of relief, the amount of which is calculated on a sliding scale.
If you locate your business in an enterprise zone, you can receive up to £55,000 over five years. The local councils work out the details of applying the relief.
Employers make income tax payments and National Insurance contributions on behalf of their employees through the PAYE system. Employers can use the PAYE system online, after registering as an employer.
If you are self-employed or for other reasons need to file a self-assessment form, you can do so online once you have a unique tax reference number. You can settle your self-assessment tax bill through a variety of means.
If you have registered with the HMRC to collect VAT, you can submit your collections through a variety of approved methods. Paying your corporate tax bill can also be done through a variety of approved methods.
If you need help understanding your UK tax liabilities, reporting obligations, or have questions, you can contact the HMRC.