What is a small business classed as in the UK?

You’ve most likely searched “what is a small business” to understand the number of staff or level of turnover that would typically class a business as ‘small’. Although you might only have a few members of staff and what you consider as a small turnover, that doesn’t necessarily qualify you as a small business in the eyes of HMRC. It’s really important to classify your business correctly as it can affect all kinds of important business support, grants, taxes and more.

So what is a small business in the UK? And what size is a small business in the UK? In this quick guide, we’ll explain the key points you need to know, starting with what the definition of a small business is in the UK and what types of small businesses there are.

Small business definition: What is a small business?

Let’s begin with what the UK Government defines as a small business. The term SME (small-to-medium enterprise) is often used to refer to small businesses but can apply to any business with fewer than 500 employees.

However, there are also sections of the Government that work with the EU definitions of micro, small and medium-sized businesses, which are broken down like this:

• A micro business has less than 10 employees and a turnover of less than £2m
• A small business has less than 50 employees and a turnover of less than £10m
• A medium business has less than 250 employees and turnover under £50m

A commonly-used statistic is that SMEs make up 99% of the UK’s business population with more than 12 million people employed by them, but small businesses have disproportionately been impacted by Brexit, the pandemic and the cost-of-living crisis. In fact, back in 2020 there were 5.9 million small businesses in the UK, now there are just 5.5 million, a 6.6% drop.

When submitting documents to HMRC or setting up your business, be sure to check the definitions given for the document being submitted via the GOV.UK website.

Types of small business

Now that we’ve covered the slightly flexible UK small business definition, what kind of businesses qualify as a small business? Here are some typical examples:

• Sole proprietorship - We mentioned above that a large number of small businesses (or micro businesses) have no employees and these are likely to be sole proprietorships. These are businesses managed by one person without external aid, so freelancers and consultants often fall into this category.
• Limited liability company (LLC) - If you want to be protected from being liable for your small business debts, forming a limited company is the way to go.
• Limited partnerships - Similarly, this is a limited company with two or more individuals forming a partnership, dividing profits and losses amongst themselves.
• Non-profits - These are organisations that seek to promote charitable causes through fundraising, donations, etc.
• Cooperative - These are associations where members each get a vote in the democratic running of the business, regardless of how much capital they have invested.

Advantages of being classed as a small business

There are many advantages to being a small business like this, not least that there is typically much less paperwork and bureaucracy involved than at a large corporate business. There are also benefits when it comes to paying taxes, with tax relief schemes available for small businesses, because the Government actively wants to help small and independent businesses grow.

For example, small businesses may be eligible for Small Business Rate Relief, which is a tax break depending on the rateable value of your property or premises, while you can save on National Insurance with the Employment Allowance of up to £5,000 a year.

There’s also Research and Development tax relief available, designed to help encourage innovation in small businesses, while those in the creative industries can benefit from the Creative Industry Tax Relief.

Of course, there are also challenges, and you need to make sure you have the right management skills for small business owners. You also need to be hands-on with all of the financials because, for small businesses, knowing the value of your business can be important for many reasons, like attracting investment or just making informed decisions.