Tax Rates 2019/2020: Easy Guide for Business Owners
Author: Russell SmithNovember 4, 2019
Looking for information on business tax rates for the 2019/2029 financial year? Finding other resources confusing and overcomplicated? RS Accountancy explains matters 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 understand.
To ensure you are clear on what you owe, RS Accountancy looks at the business tax brackets for 2019/2020:
Business Tax Brackets in 2019/2020:
Corporation Tax Rate 2019/2020
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.
The corporate tax rate is 19%.
This rate does not change, no matter how much or little you earn.
Personal Allowance & Income Tax Rates 2019/2020
Business owners need to make a living, so they draw money out of their company as a taxable salary — just as any employee would. Tax rates also apply to self-employed sole traders, who are paid directly by their customers.
The tax thresholds are:
- Nontaxable — The government does not tax any money you make up to £12,500.
- Basic Rate — Once you earn over £12,501, you will pay 20% on your income.
- Higher Rate — Above £50,001 you will pay 40%.
- Additional Rate — Those earning over £150,001 will pay 45%.
*Important note: These tax rates apply only to figures that fall within their limits. For example, if you earn £60,000, you will not pay 40% tax on the whole £60,000.
If you were to pay 40% on £60,000, that would be an unstainable tax bill of £24,000. Instead, you will pay the appropriate amount as per tax rates in 2019/2020.
Here is a brief calculation to explain, based on a £60,000 income:
- £12,500 = tax-free allowance
- £12,501 – £50,000 charged at the 20% rate = £7499.80
- £50,001 – £60,000 charged at the 40% rate = £3999.60
Total tax due = £11499.40
*Important note: It is possible to use couples allowance/marriage allowance to reduce your income tax rate in 2019/2020. Talk to our team about how we can positively impact your income tax bands and save you money.
Dividend Tax Rate 2019/2020
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 £2000
Following your £2000 allowance, your dividends become part of 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 taxed:
- Basic Rate — 7.5%
- Higher Rate — 32.5%
- Additional Rate — 38.1%
HMRC have provided a good example of how this works on their Gov website, which we will share here:
You get £3,000 in dividends in the 2019/2020 tax year. The dividend allowance is £2,000, so this means you pay tax on £1,000 of your dividends.
Your other taxable income is £35,000. Add this to your dividends of £3,000 and your total taxable income is £38,000.
You pay a rate of 7.5% on £1,000 of dividends because your total taxable income is within the basic tax band.
*Important Note: Due to differences between dividend allowances and tax rates in 2019/2020, and income tax allowances and their tax brackets, there are ways you can optimise how you earn money via an LTD company and reduce your payable tax.
According to the HMRC example, that would mean you pay £75 on your dividends, whereas if that £1000 were taken as an income, it would be taxed at 20%, meaning £200 worth of tax. Want more information? Get in touch with our small business chartered accountants at RS Accountancy today to discuss how to save money using this legitimate tax system.
VAT Tax Rates 2019/2020
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 the type of goods sold. You must pay:
- 20% on almost 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 business 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 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 according to your industry.
You can find the complete list of tax rates in 2019/2020 here.
*Important Note: At RS Accountancy, 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 Tax Rates 2019/2020
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 Trader and Self-Employment National Insurance Tax Rates
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 pay — this is the lowest level of tax-free income. The rules for payment are:
- Once you start earning over £6,365, you will have to pay a weekly contribution of £3 (billed at the end of the end as part of your self-assessment tax return). This contribution totals £156. This is Class 2 National Insurance
- After you hit the next tax rate, you must pay Class 4 National Insurance alongside Class 2. Class 4 requires a tax payment of 9% on profits between £8,632 and £50,000. This figure is on top of income tax.
- Similar to income tax, there is a higher rate of Class 4 NI, which means after hitting an income of £50,001, you must pay 2% of all profits above this margin.
Small Business National Insurance Tax Rates
Those operating LTD companies 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 £166 per week (gross income) must pay 12% NI.
- Those earning above £962 per week must pay 12% on the lower tax bracket, plus 2% on £963 or more.
Employer National Insurance Tax Rates
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 rate in 2019 for employer National Insurance payments:
- If an employee is earning over £166 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 extra 2% on top of the 9/12% lower rate, totalling 11% or 14%. This is a flat rate of 2% on profits above the top rate.
Still confused about tax rates in 2019/2020 and need some expert insight? Our chartered accountants are here to help! Get in touch with us today and let us know about your tax needs.
Russell Smith is an award-winning accountant and founder of RS Accountancy. With over a decade of experience running his company, he has worked with countless small businesses just like yours, helping them grow profits and manage their finances. Russell is also a prolific financial writer, having contributed to such publications as The Guardian, The Telegraph and The Daily Mail.