Can a Small Business Do Their Own Taxes?

There is no legal requirement for a small business to use an accountant to prepare its financial statements and tax returns. Some small business owners might want to save money on accountancy fees, and try to do their own tax returns, but just how feasible is this?

Well, in simple terms, yes, a small business can do its own taxes. But should a small business do its own taxes? That’s another question – here’s what we think.

Can a small business do their own taxes? Yes, a small business can do its own taxes but with over 14,000 pages of tax legislation governing the UK tax system, that is why we would not recommend a small business doing its own taxes, that is why you need an accountant. 

Whilst you do not legally need an accountant a time may come when you do need to think about the ability and knowledge, they will bring with them. Getting this wrong could prove costly from a financial and time point of view. 

We all know that running a business is stressful. Do you really need to compound that by trying to learn the rules and nuances of being an accountant to save a few pounds? It is a false economy eventually. Even if you do your own taxes as a small business can you trust and rely on something you may not understand?

Think of the implications of small businesses doing their own taxes and getting something wrong. For example, you may find it difficult to get loans or a mortgage if your accounts and taxes have not been compiled by a trained professional. Some high street banks will still require sign-off from a professional accountant to make lending decisions. 

Small businesses with a turnover of less than £150,000 can use the simplified ‘cash-basis’ for preparing accounts and tax returns but banks do not accept this when making lending decisions.

You should consider hiring an accountant if you need help with your corporation tax, VAT, payroll, and self-assessment. These are the main taxes your small business may need to file. There are several other taxes such as Capital Gains Tax which you may also need to understand.

Based on how complex these areas can be, it’s sensible to get professional advice, rather than your small business do their own taxes.

There are several more things to consider, we have answered several of the key questions you will need to know when deciding can a small business do its own taxes.

How much can a small business make before paying taxes?

There are only two certainties in life, death, and taxes.

You can get up to £1,000 each tax year in tax-free allowances for property or trading income. If you have both types of income, you’ll get a £1,000 allowance for each. 

If your annual gross property income is £1,000 or less, from one or more property businesses you will not have to tell HMRC (HM Revenue and Customs) or declare this income on a tax return. You may have to complete a tax return for other income.

If your annual gross trading income is £1,000 or less, from one or more trades you may not have to tell HMRC, however, there are circumstances when you must register for Self-Assessment and declare your income on a tax return.

Trading Allowance

The trading allowance is a tax exemption of up to £1,000 a year for individuals with trading income from:

• self-employment
• casual services, for example, babysitting or gardening (help sheet 325 has more information about other taxable income)
• hiring personal equipment, for example, power tools

If your annual gross income from these is £1,000 or less, you do not need to tell HMRC, unless:

• you cannot use the allowances
• you must register for Self-Assessment and declare your income on a tax return

You must tell HMRC if you have:

• gross trading income over £1,000 – register for Self-Assessment
• other gross income over £1,000 up to £2,500 – contact HMRC
• other income over £2,500 – register for Self-Assessment

This allowance does not apply to trading income from a partnership.

For the purposes of this article, we are concentrating on small business taxes. For further information on the property allowance check out the HMRC guidance.

Self-employed

If you’re starting a new self-employed business and expect your annual gross income to be no more than £1,000, you may not have to register for Self-Assessment but can voluntarily if your gross income will go above £1,000 and you want to be in Self-Assessment.

You must register for Self-Assessment and declare your income on a tax return when:

• you’ve made a loss and want to claim relief on a tax return (check helpsheet 227 for more information about losses)
• you want to pay voluntary Class 2 National Insurance contributions to help qualify for some benefits
• you want to claim Tax Free Childcare for childcare costs based on your self employment income
• you want to claim Maternity Allowance, based on your self-employment

You can still use the trading allowance, but you’ll need to complete a Self-Assessment return using the guidance that helps you fill out the tax return.

If your gross income for a tax year is more than £1,000, you must register for Self-Assessment by 5 October in the following tax year. 

Self-employed taxes

You do not need an accountant as a sole trader. You may want one to help you prepare your year-end accounts and tax filings. Depending on the size of your sole trader business you will have to:

• produce accounts
• calculate capital allowances
• complete self-assessment tax return
• payroll
• bookkeeping
• VAT returns

These are all time-consuming and complex tasks. Bookkeeping alone covers raising sales invoices, processing purchases, paying suppliers, recording expenses and mileage claims, reconciling the bank accounts, VAT returns etc

These are just the things to keep you on the straight and narrow. An accountant can also serve as a business advisor and support your business to help you grow your business.

You should consider hiring a professional (for example an accountant) if you need help with your tax return.

When you are self-employed you pay taxes based on your trading profits. Trading profits are different to the amount of cash in the bank, and your drawings and may require adjustments to what you see in your bookkeeping software such as stock, accruals, prepayments, and depreciation to mention a few items. Getting this wrong could lead to you paying too much or too little tax.

As a sole trader, you pay tax on the profits of the business and not the drawings you have taken from the business. 

Example

• Income: 45,000
• Costs: (10,000)
• Trading profit: 35,000
• Tax: (5,000)
• Net profit: 30,000
• Drawings: 20,000
• Available: 10,000

Check out our guide on how much should a small business owner pay themselves to understand what this might look like.

The self-employed taxes you will pay are:

• Income tax
• Class 2 NI (National Insurance)
• Class 4 NI

More on those in just a second but first we need to explain the timings of these tax payments.

Do I have to pay tax in my first year of self-employment?

When paying tax as a sole trader you pay in arrears based on the earlier periods’ profit. You do not know the amount until you have completed your first trading period. The amount of tax is then paid to HMRC when completing your self-assessment tax return. 

You will also have to make payments on account towards the following year in two instalments on 31st January and 31st July. This means that if you owe £5,000 tax for the first year you will also have to pay an added £2,500 on each of those dates towards the following year’s tax. 

In this example, you would pay £7,500 on 31st January and £2,500 on 31st July. This is important to consider when deciding how much you should pay yourself as a sole proprietor.

As you will not pay tax in your first year of self-employment it is important to start saving that money for tax so you do not get a nasty surprise in year two.

Handy Hint: Remember if you are more successful in the next year your payments on account may not be enough to pay your tax bill and there will be even more money to pay. This often catches people out.

First year self-employed when do I pay tax?

When you are self-employed you need to submit your self-assessment tax return and pay any tax due by 31 January following the year that you started running your business.

For example, if you started your own business in July 2022, you would pay tax in January 2024. As the tax year runs from 6^th April 2022 to 5^th April 2023. This is an exceptionally long time for that first payment. You need to plan for this as you will be well on your way with year two of trading before you have even paid for year one. This trips most people up.

• 31^st January 2024 – tax due for the first trading year
• 31^st January 2024 – 1^st payment on account for 2023/24
• 31^st July 2024 – 2^nd payment on account for 2023/24

‘Payments on account’ are advance payments towards your tax bill (including Class 4 National Insurance if you’re self-employed).

You must make 2 payments on account every year unless:

• your last Self-Assessment tax bill was less than £1,000
• you’ve already paid more than 80% of all the tax you owe, for example through your tax code or because your bank has already deducted interest on your savings

Each payment is half your previous year’s tax bill. Payments are usually due by midnight on 31 January and 31 July.

If you still have tax to pay after you’ve made your payments on account, you must make a ‘balancing payment’ by midnight on 31 January next year.

Example

Your bill for the 2022 to 2023 tax year is £3,000. You made 2 payments on account last year of £900 each (£1,800 in total).

The total tax to pay by midnight on 31 January 2024 is £2,700. This includes:

• your ‘balancing payment’ of £1,200 for the 2022 to 2023 tax year (£3,000 minus £1,800)
• the first payment on account of £1,500 (half your 2022 to 2023 tax bill) towards your 2023 to 2024 tax bill

You then make a second payment on account of £1,500 on 31 July 2024.

If your tax bill for the 2022 to 2023 tax year is more than £3,000 (the total of your 2 payments on account), you’ll need to make a ‘balancing payment’ by 31 January 2024.

Does my small business have to pay taxes?

Yes, if you’re generating income as a small business, you must pay taxes. Whether you do your own taxes or employ an accountant, they will need to be filed. 

What taxes do small businesses pay?

The self-employed taxes you will pay are:

1. Income tax
2. Class 2 NI
3. Class 4 NI

You will pay income tax on the trading profits of the business and not the drawings you have taken from the business. Trading profits are calculated by deducting allowable expenses, deductions, capital allowances from your income. 

The amount of income tax you will pay depends on your total taxable income. If you have other sources of income such as employment or property rental this all needs to be factored in through your self-assessment calculations.

You usually pay 2 types of National Insurance if you’re self-employed:

• Class 2 if your profits are £6,725 or more a year (2022/23)
• Class 4 if your profits are £9,881 or more a year (2022/23)

You make Class 2 NI contributions if you’re self-employed to qualify for benefits like state pension. Most people pay the contributions as part of their self-assessment tax bill. This equates to £3.15 a week for 2022/2023 tax year.

You pay Class 4 NI contributions based on the profits of your business. For the 2022/2023 tax year that was 10.25% on profits between £9,881 and £50,270 and 3.25% on profits over £50,270.

Other types of taxes small businesses might pay:

1. PAYE
2. Employee and Employer National Insurance
3. Capital Gains Tax
4. VAT

If you employ staff, you will have to deduct PAYE and National Insurance from employees. Whilst not technically taxes small businesses pay as you are deducting from the employees you must pay this over to HMRC by the 22^nd of the month following the pay periods ending up to 5^th of the month. 

On top of the deductions from the employees as an employer, you will have to pay Employer National Insurance contributions so employing staff will cost you in added taxes.

As a sole trader if you sell any assets of the business and make a profit you may have to pay capital gains tax. There are some reliefs you might qualify for such as Gift Hold Over Relief if the asset was used for trading or Entrepreneurs Relief.

VAT is a tax levied on the end customer by the government. You must register for VAT if your turnover exceeds the VAT threshold of £85,000 (2022) or you can voluntarily register if it makes sense for you too.

Small business tax return?

When operating as a self-employed business you need to file a self-assessment tax return with HMRC. You may have more than one self-employment in which case you will complete the self-employed section for each different trade. This form is called an SA103. There are different versions depending on the complexity of your business.

Here is the SA103S which is the short form format. Have a look at this to get an idea of what it looks like and the information you will need to provide HMRC when completing the self-assessment tax return.

Depending on the size of your small business you will likely have to:

• produce accounts
• calculate capital allowances
• complete self-assessment tax return
• payroll
• bookkeeping
• VAT returns

You should consider hiring a professional (for example an accountant) if you need help with your tax return.

Getting the accounts and tax of your business wrong can have disastrous consequences. Trying to do it yourself might not be the best choice.

You must weigh up the size of your business, potential tax, and complexity of your business affairs. 

Conclusion

With over 14,000 pages of tax legislation governing the UK tax system, that is why we would not recommend a small business doing its own taxes, that is why you need an accountant. 

Accountants spend years learning their trade and become qualified professionals. To retain their professional qualification, they must also complete several hours Continued Professional Development (CPD) each year to ensure they are keeping up with the changing business and tax legislation.

Can a small business do its own taxes? Yes. Should a small business do its own taxes? No.

Not having an accountant working with your business could mean you make mistakes which could cost you time and money which could have been avoided. There is a tendency when running a small business that you want to do things yourself and save cost but what are the costs overall to your business of making mistakes?

A good accountant should be viewed as an investment to the business, not a cost. Any good accountant should save you more money than they cost even if that just equates to the time, they save you from doing things yourself.

Getting this wrong could trigger an HMRC investigation.

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