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1. Personal Allowance: how much you can earn before paying tax

2. Income Tax rates

3. National Insurance contributions
4. Value Added Tax (VAT)
5. Corporation Tax
6. Starting a business isn’t easy. But we’re here to help

When do I start paying tax?

September 29, 2022

When you start a business, there’s plenty to think about. Funding, support, your online presence…And tax. That tends to be top of the list.If you’re a sole trader or the director of a limited company, there are different types of tax you’ll need to get to grips with. Whether you pay these taxes, as well as the amount of tax you pay, is determined by the amount of income your business makes, whether you’re a sole trader or limited company and if you’re entitled to any tax relief.However, you don't have to pay tax on all of your income. Knowing a thing or two about the taxes you owe and when to start paying them will help you budget across the year, making sure you have the right amount set aside for when it comes to paying your tax bills at the end of the year.

Personal Allowance: how much you can earn before paying tax

Your Personal Allowance is the amount of money you can earn each tax year before you start paying Income Tax.For this tax year (2022/23), your tax-free Personal Allowance is set at £12,570. If you’re earning less than this, you won’t have to pay any Income Tax on your earnings.If you earn more than £100,000 (the income threshold), your Personal Allowance will be reduced by £1 for every £2 you earn about the £100,000 mark — until it reaches £0. In essence, you don’t get a Personal Allowance on taxable income over £125,140.

Other allowances on your taxable income

On top of your Personal Allowance, you also get a marriage allowance of £1,260. With this in mind, you can transfer £1,260 of your Personal Allowance to your husband, wife or civil partner to cut down on your Income Tax bill.

To benefit as a couple, the lower earner must normally have an income below their Personal Allowance. You can find out how much tax you could save as a couple using this calculator.

Moreover, you’re entitled to a Personal Savings Allowance. This means you can get up to £1,000 in interest and not have to pay tax on it.How much allowance you get depends on which Income Tax band you’re in:

For basic rate taxpayers: £1,000

For higher rate taxpayers: £500

For additional rate taxpayers: £0

Income Tax rates

If you’re a sole trader, all profits earned after tax is yours to keep. The amount of tax you pay, however, is determined by the amount you earn and the Income Tax band you fall under.

Paying yourself from a limited company looks a little different. Even if you’re the only employee in your limited company, you’re still an employee and will need to pay yourself a salary. To pay yourself in the most tax-efficient way, you can supplement your income by paying yourself dividends — to find out how, you might find this article helpful.

Income Tax isn’t just paid by self-employed individuals. If you’ve ever worked as an employee, you’d have paid Income Tax on your earnings through Pay As You Earn (PAYE).

Income Tax is calculated based on how much you earn, whether that’s the amount you pay yourself as a salary or your total sole trader earnings after expenses.The Income Tax rates for the 2022/23 tax year in England, Wales and Northern Ireland are as follows:

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £150,000	40%
Additional rate	£150,000+	45%

Source: GOV.UK

Note: In the Autumn 2022 Mini-Budget, Chancellor Kwasi Kwarteng announced that in April 2023 the basic rate is due to drop from 20% to 19%.

Keep in mind that the tax band you fall into doesn’t apply to all of your income — just the amount that falls into that specific bracket.For example, if you earn £52,000 in a year, your tax breakdown is:

No Income Tax on the first £12,570

Basic tax rate applied to earnings between £12,571 to £50,270, meaning you pay 20% on £37,500 (£50,270 - £12,570 = £37,700)

Additional rate applied to the rest of your income, meaning you pay 40% on the remaining £1,730 (£52,000-£50,270 = £1,730)

If you live in Scotland, your Income Tax rates look a little different:

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Starter rate	£12,571 to £14,732	19%
Scottish basic rate	£14,733 to £25,688	20%
Intermediate rate	£25,689 to £43,662	21%
Higher rate	£43,663 to £150,000	40%
Top rate	£150,000+	45%

Source: GOV.UK

How do I start paying Income Tax?

Regardless of whether you’re a sole trader or limited company director, if you’ve earned more than £1,000, you’ll need to file a Self Assessment tax return to HM Revenue & Customs (HMRC).Self Assessment deadlines to be aware of:

You need to register for Self Assessment by the 5th October after the end of the relevant tax year where your income exceeded £1,000. For example, if your income exceeded £1,000 in the 2021/22 tax year, you’ll need to register for Self Assessment by 5th October 2022.

You have to file your Self Assessment and pay your tax bill by 31st January

National Insurance contributions

Income Tax isn’t the only tax you’ll need to pay on your income — you’ll also need to pay National Insurance contributions (NICs). These help build your entitlement for state benefits, such as the State Pension and Maternity Allowance.

As a self-employed sole trader, you’ll usually pay 2 types of National Insurance:

Class 2 if your profits are £6,725 or more a year
Class 4 if your profits are £11,909 or more a year

These rates are correct to the 2022/23 tax year, although are subject to change.

You can also pay voluntary National Insurance contributions if you wish.

If you’re an employee or director of a limited company, you’ll need to pay Class 1 contributions. The rates for the 2022/23 tax year are as follows:

Class	Rate for 2022/23
Class2	£3.15 a week
Class 4	10.25% on profits between £11,909 and £50,270

Note: In the Autumn 2022 Mini-Budget, the Chancellor announced that these rates are set to decrease by 1.25%.

To pay your NICs, you’ll need your National Insurance number close to hand.

Value Added Tax (VAT)

If your annual turnover in the last 12-month period exceeds £85,000 or you expect to surpass this amount in the next 30 days, you’ll need to register your business for Value Added Tax. This is the case for both sole traders and limited companies.

VAT is a consumer tax paid on goods and services. Depending on the goods or services you provide, the amount of VAT you’ll need to charge your customers — and subsequently forward onto HMRC — is determined by its VAT rate.

The VAT you owe can be calculated by subtracting the VAT you paid to the supplier, or the input VAT, from the VAT paid by the customer, the output VAT. You can work out how much VAT you’ll need to charge customers using our VAT calculator.

Diagram showing how input VAT and output VAT work

Once you’ve worked out how much VAT you owe HMRC, head over to our guide on how to pay your VAT bill.

Corporation Tax

When you set up as a limited company, you’ll need to register for Corporation Tax within the first 3 months of trading.

Corporation Tax is charged on limited company profits after tax, as well as on any gains made from selling assets such as land, property and shares. Some assets sold will also be subject to Capital Gains Tax (CGT), which you can read all about in this article.

For the 2022/23 tax year, Corporate Tax is charged at 19%, although this can be changed at the government’s discretion.If your taxable profits are £1.5m or less, you must pay your Corporate Tax bill within 9 months and 1 day of the end of your accounting period. If your taxable profits are more than this, you’ll need to pay in instalments instead.

Starting a business isn’t easy. But we’re here to help

At Ember, we take tax and accounting admin off of your shoulders, so you can spend more time focusing on what matters.

From round-the-clock support from expert accountants to filing your annual accounts, we’re on hand to help make tax less taxing. To try us out for free, come and say hello at ember.co.

Ellie PerkinsFreelance Writer

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