Understanding Tax Thresholds: A Guide for Small Business Owners

Tax thresholds, in particular, can be a labyrinth for many small business owners. In this guide, we break down the various thresholds relevant to UK-based small businesses to help you plan efficiently and ensure compliance.

For the 2024/2025 tax year, the key tax thresholds include:

Personal Allowance & Income Tax

Every UK taxpayer has a right to a certain amount of income without having to pay any tax on it. The personal allowance for 2024/25 stands at £12,570. Any earnings over this threshold are taxable.

For sole traders or partners who are small business owners, the personal allowance is significant because it represents the point at which their taxable profits from the business will be assessed for income tax.

Once you’ve used up the personal allowance, Income tax is then charged in bands which have their own rate of tax. For 2024/25 the basic rate band runs from earnings falling between £12,571 – £50,270 at 20% and the higher rate band charges 40% on earnings over £50,270; there is also an additional rate band for those with income exceeding £150,000 which carries a rate of 45%. It’s worth noting that for those in Scotland, the income tax bands are slightly different.

Charity Relief

If your organisation is a HMRC recognised charity, you will get certain tax reliefs from income taxation, however, it’s worth noting that your charity may need to pay tax if you’ve:

• received income that does not qualify for tax relief
• spent any of your income on non-charitable purposes

Make sure you are up to date with the latest requirements and speak with a professional about any uncertainties.

National Insurance Contributions (NICs)

In addition to the income tax thresholds, small business owners also need to understand National Insurance Contributions (NICs) as these additional costs will affect profitability.  NICs are the amounts paid by workers, employers, and self-employed people that contribute towards state benefits and pensions.

For those who are self-employed, If your profits are £6,725 or more a year Class 2 contributions are treated as having been paid to protect your National Insurance record. This means you do not have to pay Class 2 contributions.

If your profits are more than £12,570 a year, you must pay Class 4 contributions.

For tax year 2024 to 2025 you’ll pay:

• 6% on profits between £12,570 and £50,270
• 2% on profits over £50,270
• If your profits are less than £6,725 a year you do not have to pay anything but you can choose to pay voluntary Class 2 contributions.
• The Class 2 rate for tax year 2024 to 2025 is £3.45 a week.

VAT Threshold

Value Added Tax (VAT) is a consumption tax levied on the value added to goods and services at each stage of production or distribution.

As of April 2024, the VAT registration threshold in the UK is £90,000. Businesses with a taxable turnover exceeding this threshold must register for VAT and charge VAT on their sales. However, businesses falling below this threshold can voluntarily register for VAT, which may be beneficial for reclaiming VAT on business expenses.

Small businesses must successfully navigate the VAT threshold in order to maintain compliance and efficiently manage cash flow.

Corporation Tax

For small businesses operating as limited companies, Corporation Tax applies to their profits. This includes anyone operating as:

• a limited company
• any foreign company with a UK branch or office
• a club, co-operative or other unincorporated association, for example a community group or sports club

For companies with profits up to £50,000, a small profits rate of 19% applies. Companies with profits between £50,001 and £250,000 may be entitled to marginal relief. For companies with profits exceeding £250,000, the main rate of Corporation Tax, currently 25%, will apply. 

Capital Gains Tax

Another thing to think about is Capital Gains Tax (CGT), especially if you’re selling business assets. Profits from the sale or other disposal of assets, including real estate, stock, and company assets, are subject to CGT.

For the tax year 2024–2025, the yearly CGT-free amount is £3,000. Depending on the asset’s kind and the individual’s overall taxable income, gains over this threshold are liable to CGT at different rates.

When thinking about selling assets or transferring their company, small business owners especially need to be aware of the effects of CGT.

Inheritance Tax

Small business owners should consider Inheritance Tax when reviewing their estate planning. IHT is payable on the value of an individual’s estate above the nil-rate band.  The standard Inheritance Tax rate is 40%. It’s only charged on the part of the estate above the threshold which is currently £325,000.

Business assets may qualify for Business Relief, reducing the taxable value for Inheritance Tax purposes, however, it is important to receive expert advice in this situation. Understanding Inheritance Tax thresholds and reliefs is crucial for succession planning and preserving your family wealth.

In summary

Our goal is to equip small business owners with the information and resources they need to successfully manage their finances. By staying informed and proactive, business owners can minimise tax liabilities and optimise their financial performance. 

It can be difficult to navigate the UK tax landscape at times and knowing the various tax thresholds and ramifications is crucial for effective tax planning and compliance.

Get in touch

If you’re a small business owner seeking expert guidance on tax planning and compliance, don’t hesitate to reach out to our team. Together, we can navigate the complexities of the tax system and help your business thrive.

At CJ Bookkeeping, we have access to specialist tax experts who are available to handle any tax complexities our clients may encounter and provide the expert advice they need. 

Remember, the information provided in this blog is for general guidance only and should not be considered professional advice. For personalised assistance, do get in touch.