What Are Business Tax Brackets 2018? Tax Rates Simply Explained

May 30, 2018

Looking for information on business tax rates for the 2018/2019 financial year? Finding other resources confusing and overcomplicated? RS Accountants explains in simple terms.

If you operate a small business, you will have to pay tax. How much tax you owe depends on a variety of factors, but these factors always translate to different tax brackets.

A tax bracket is a rate of tax payment your business falls into, calculated by profits generated.

There are tax brackets for numerous different forms of income, which means tax payments can seem daunting for small business owners with little experience of financial management.

However, when you get past all the jargon and the scary figures, tax brackets are a simple and clearly laid out element of accounting that anyone can come to understand.

To ensure you are clear on what you owe, RS Accountants looks at business tax brackets of 2018:

Business Tax Brackets in 2018:

Corporation Tax Rate

Those who operate limited companies must pay a set amount of tax on all profits made by the business. This applies to gross income of all corporate assets.

That corporate tax rate is 19%.

It does not change no matter how much or little you earn. 

Income Tax Brackets

Business owners need to make a living, they do this by taking money out of their company as a salary — just as any employee would. These rates also apply to self-employed sole traders, who are paid directly by their customers.

The rates are:

  • Nontaxable — Any money you make up to £11,500 is not taxed by the government.
  • Basic Rate — Once you earn over £11,501 you will pay 20% on your income.
  • Higher Rate — Above £45,501 you will pay 40%.
  • Additional Rate — Those earning over £150,001 will pay 45%.

Important note: Tax bracket rates are applicable only to figures that fall within them. For example, if you earn £60,000 you will not pay 40% tax on that £60,000. Instead you will pay the appropriate fee per tax bracket in 2018.

Here is a brief calculation to explain, based on a £60,000 income:

  • £11,500 = untaxed
  • £11,501 – £45,500 charged at the 20% rate = £6700
  • £45,501 – £60,000 charged at the 40% rate = £5996

Total tax due = £12696

Dividend Tax Rate

When taking money out of a limited company, you can do so as an employee salary or, if you are a shareholder, via dividends. You can take as many dividend payments out of an LTD as you like, but you will face the following taxation rates:

  • Untaxed up to £5000

Following your £5000 allowance, your dividends are then applied to your income. This means you’ll pay certain percentages depending on which income bracket you fall into at the end of the year.

Percentage rates below show how much of your dividend payout will be taken as tax:

  • Basic Rate — 7.5%
  • Higher Rate — 32.5%
  • Additional Rate — 38.1%

Due to differences between dividend allowances and tax brackets, and income tax allowances and their tax brackets, there are ways you can optimise how you earn money via an LTD and reduce your payable tax. Get in touch with our small business accountants at RS Accountants today to find out more.  

VAT Tax Payments

Those businesses that earn over a certain figure will have to pay VAT on their earnings.

The tax rate for VAT payments is £85,000. All businesses, be they self-employed enterprises, partnerships or LTDs, must pay VAT on all income after this benchmark is reached.

VAT tax rates depend not on income but on the type of goods sold. You must pay:

  • 20% on most all goods and services.
  • 5% on goods sold that are deemed necessary but non-essential, including energy, mobility aids and health products such as nicotine patches.
  • 0% on items and services deemed necessary or exempt, such as food and children’s clothing.

You can search for what is covered under reduced VAT rates here.

To help businesses owners manage VAT — especially as it can be demanding if you have lots of invoices to record — the government introduced the flat rate VAT scheme.

Businesses can opt into this scheme, which means that they pay a fixed VAT rate on their annual income, rather than per item sold.

All businesses paying VAT are eligible for this flat rate if they earn less than £150,000 per year. The rate you will pay varies by your industry.

You can find the complete list of tax brackets in 2018 here.

At RS Accountants, we find many small businesses are reclaiming VAT from their clients incorrectly. Read about how to do it properly in our guide to VAT invoices.

National Insurance

National Insurance tax is perhaps the most complicated form of tax payment a business owner will need to handle, as the type you owe varies on your employment status. You will also need to pay National Insurance for employees of your company if you have any.

RS Accountants break down the tax brackets of 2018 for each type of employment status:

  • Sole Traders — If you are a sole trader, you are required to pay two types of National Insurance contributions. If you earn under £6,205, however, you do not paying.

– Once you start earning over £6,205, you will have to pay a weekly contribution (totalled at the end of the tax year, of £2.95). This totals £153.40. This is Class 2 National Insurance

– After you hit the next tax bracket, you must pay Class 4 National Insurance alongside Class 2. Class 4 requires tax payment of 9% on profits between £8,424 and £46,350.

– Similar to income tax, there is a higher rate of Class 4 NI, which means after hitting income of £46,351, you must pay 2% of all profits above this margin.

  • Small Business Owners — Those operating LTDs will pay National Insurance differently to sole traders. Technically, as an employee of your company, you must pay Class 1 National Insurance. Similar to Class 4 National Insurance, Class 1 has two rates:

– Those earning above £162 per week (gross income) must pay 12% NI.

– Those earning above £892 per week must pay 12% on the lower tax bracket, plus 2% on £893 or more.  

  • Employers — If you run a limited company and have employees, you must pay contributions towards their Class 1 National Insurance — this includes yourself as an employee. There is only one tax bracket in 2018 for employer National Insurance payments:

– If an employee is earning over £162 per week (gross income) employers must 13.8% of their wage as National Insurance.

Important note: When it comes to the additional 2% for Class 1 and Class 4 National Insurance tax rates, you should be aware that this is not an additional 2% on top of the 9/12% lower rate. This is a flat rate of 2% on profits above the secondary figure, either £46,351 for Class 4 or £893 per week for Class 1.

Still confused about tax brackets in 2018/2019 and need some expert insight? Our UK chartered accountants are here to help! Get in touch with us today and let us know about your tax needs.

0113 337 2130

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