Disclaimer: This post is for the year 2019/2020, it has been left purely as an historical illustrative guide to general tax concepts, until it is updated, please check with HMRC for updated figures and tax rules.
One of the most complicated things small business owners must deal with is TAXES – both business as well as personal. For many small business owners, the line between the personal and business tax is a thin one and mixed up finances along with constantly changing tax bands, and rates make it a complicated affair.
So to help you get make sense of it all, we have put together a quick overview covering all the tax rates and thresholds applicable in 2019/2020.
Let’s start with personal tax rates
As we all know, the more you earn, the higher the taxes you have to pay. The only way to keep a bit extra in your pocket is to calculate your incomes correctly and ensure you get all the allowances, thresholds, etc. right.
Income Tax rates & thresholds
Depending on your income, you will fall into one of the three rates: basic, higher, and additional. Check out the table below to find out which bracket is applicable to you:
| Taxable income | Tax rate | How much you pay |
| Up to £12,500 | — | 0% |
| £12,501 to £50,000 | Basic rate | 20% |
| £50,001 to £150,000 | Higher rate | 40% |
| over £150,000 | Additional rate | 45% |
Personal allowance
Personal allowance refers to the tax-free component of your income. In 2019/20, this zero-tax amount is £12,500. Let us illustrate how this works with an example – if you earn £80,000 in a year, then £12,500 is not considered a part of your taxable income. You will only be taxed on £80,000 – £12,500 = £67,500.
Once your income exceeds £100,000, the personal allowance threshold starts decreasing. 50% of your income above £100,000 will be deducted from £12,500, and the remaining will be your non-taxable component. The personal allowance stops altogether once your income exceeds £125,000.
Dividend tax rates
For dividends less than £2000, no tax is paid, however higher dividends attract taxes. This tax rate depends on your income; if you earn more, you pay more.
| Taxable income | Income Tax rate | How much you pay on dividends |
| Up to £12,500 | — | 0% |
| £12,501 to £50,000 | Basic rate | 7.5% |
| £50,001 to £150,000 | Higher rate | 32.5% |
| over £150,000 | Additional rate | 38.1% |
Capital gains tax
Every time you sell an asset for a profit, you have to pay tax on it. The CGT is applicable on sale of your personal possessions worth £6,000 or more, property that’s not your main home, your main home if you’ve let it out, used it for business or if it’s very large, any shares that are not in an ISA or PEP and all business assets.
The first £12,000 are tax-free, and you only start getting charged if your profit exceeds this limit.
| Your Taxable Income | The Income Tax Rate | Gains from Residential Property | Gains from Other Assets |
| £12,501 to £50,000 | Basic rate (20%) | 18% | 10% |
| £50,000 to £150,000 | Higher rate (40%) | 28% | 20% |
| over £150,000 | Additional rate (45%) | 28% | 20% |
National insurance rates
If you are over 16 years of age and earn over £166 a week as an employee or have a profit of over £6,365 per year as a self-employed person, then you must pay National Insurance.
For employees, the company or the employer is responsible for calculating and paying the NIC according to the rates mentioned below in the table –
The self-employed National Insurance contributions must be paid when annual earnings cross £6,365. If you earn more than that, then Class 2 NICs are applied, and you have to pay a fixed rate of £3 per week (£156 a year). If your business brings in £8,632 or more annually, then Class 4 NICs are applied. In this case, you have to pay 9% on profits between £8,632 and £50,000 and 2% on earnings of over £50,000.
Company tax rates
So that about wraps up the personal side of taxation. Now let us move on to discussing what your business is liable for.
Corporation tax
Every limited company that is profitable in the UK has to pay corporation tax. In 2019/20, this rate is 19% and is applied to profits after business expenses have been paid, but before dividends are paid.
VAT rate and threshold
VAT applies to your business only if you have registered your company for Value Added Tax. The registration threshold in 2019/20 is £85,000. Once a company sells goods/services worth more than £85,000 in 30 days, they must register for VAT. VAT is charged at the following rates across the UK
| 2019/20 | |
| The standard VAT rate (applicable to most goods and services) | 20% |
| The Reduced VAT rate (applicable to certain goods and services) | 5% |
| The Zero VAT rate (applicable to some goods and services -food, children’s clothes, etc.) | 0% |
Mileage allowances
If you use vehicles for your business operations, then you are eligible to claim that cost as a business expense. This will be deducted from your overall business profit, thus reducing your taxable income for corporation tax. The rates depend on the vehicle type and your mileage:
| First 10,000 miles | Over 10,000 miles | |
| Car / van | £0.45 | £0.25 |
| Motorcycle | £0.24 | £0.24 |
| Bicycle | £0.20 | £0.20 |
Tax is never simple
What we mentioned above should be enough to guide you through simple tax calculations, but it is by no means a complete list. If you feel your taxes are a tad more complicated, then we recommend that you get in touch with an experienced accountant to stay on the right side of the law. Doing business is a test of character — doing business papers shouldn’t be.
