What Are Business Rates and How Do They Hit Your Small Business

Bottom line: business rates are the tax you pay to your local council for occupying a shop, office, warehouse, or workshop, calculated by multiplying the "rateable value" of the property by a government multiplier, and for most small firms with a rateable value under £15,000 there's relief available that can wipe out the bill entirely. Most owners never check whether they're on the right rateable value, and that single gap costs small businesses hundreds of pounds a year they didn't need to hand over.

What business rates are

Business rates are a property tax. If your business operates from a shop, office, factory, warehouse, or pretty much any non-domestic building, the council can bill you for it, separately from your rent and separately from any tax on your profits. It's collected by local councils in England, Wales and Scotland (Northern Ireland runs its own version), but the amount you pay is set nationally, not by the council itself.

The confusing bit for most new business owners is that this has nothing to do with how much money the business makes. A struggling boutique on the high street and a wildly profitable accountancy firm in the same size unit can pay near enough the same rates bill. The tax is on the space, not the success.

How the bill is worked out

Every non-domestic property in England has a "rateable value" set by the Valuation Office Agency (VOA), a rough estimate of what the property would rent for on the open market on a set date. Your annual bill is that rateable value multiplied by a figure set by government each year, called the multiplier.

For the 2025/26 rating year the standard multiplier sat at around 55.5p, and the small business multiplier (which applies if your rateable value is under £51,000) sat at around 49.9p. So a shop with a rateable value of £20,000 would face a bill of roughly £9,980 before any relief is applied. That's before you've paid a penny of rent, business insurance, or wages.

Councils then apply any relief you're entitled to, add or subtract transitional adjustments if there's been a recent revaluation, and send you the final figure, usually payable monthly across ten or twelve instalments.

The relief that matters for small firms

This is the part that saves most small businesses real money, and the part most owners under-use:

• If your rateable value is £12,000 or below, you get 100% small business rate relief, meaning no bill at all.
• Between £12,001 and £15,000, relief tapers down gradually, so you pay a percentage rather than the full amount.
• If your rateable value is under £51,000, you're charged using the lower small business multiplier automatically, even without applying for anything else.
• Retail, hospitality and leisure properties get an extra discount on top, though this has been cut back sharply in recent years and now sits at around 40%, capped at £110,000 per business, rather than the 75% relief that ran during and just after the pandemic.

Here's the uncomfortable part nobody likes admitting: that relief cut from 75% to 40% happened quietly, in an Autumn Budget most small business owners never read, and plenty of shop owners are still budgeting on last year's discount without realising their bill has effectively doubled. If you run a cafe, salon, gym, or small retail unit, check your actual bill this year against last year's, not the percentage you remember someone mentioning on the news.

The 2026 change worth knowing about

From 2026/27, government has introduced permanently lower multipliers for retail, hospitality and leisure properties with a rateable value under £500,000, funded by a higher multiplier applied to the largest properties, those valued at £500,000 or more, think big-box retail and distribution warehouses, not your local unit. It's a genuine structural shift rather than a temporary discount that gets renewed (or quietly cut) every Budget, and it's aimed squarely at high street shops and hospitality venues rather than online-only businesses or offices. If that's your sector, it's worth asking your accountant or checking your latest bill line by line to see whether the new multiplier has been applied correctly, because councils don't always get the transition right on the first bill.

Empty property rates: the trap that catches people out

If a commercial property sits empty, you still get charged, just after a grace period. Most empty properties get three months rate-free before full rates kick in; industrial premises like warehouses get six months. After that, you're paying full rates on a property nobody is using, which is exactly the scenario that pushes small landlords and business owners to accept a below-market tenant rather than hold out for the right one.

I've seen this play out with a client who ran a small consultancy from a leased office in Kent. She downsized her team, moved most of the work online, and gave notice on half the floor she was renting, but the landlord couldn't re-let the vacated section for four months. The rates bill on that empty space alone came to just over £1,100 for the quarter, money spent on a room nobody sat in. It's the kind of cost that never shows up in the "starting a business" checklists but absolutely shows up on the bank statement.

The story that shows why checking your rateable value matters

A separate client, a small events and training business, had been paying rates on a rateable value that was set years earlier, before the unit next door was demolished and before footfall on that stretch of the street dropped noticeably. She'd never questioned the figure because the bill "seemed about right" and she had bigger things to worry about, chasing invoices, running her own marketing, keeping clients happy.

When she finally went through the VOA's Check, Challenge, Appeal process, her rateable value was reduced by just over 18%, backdated to the start of the current list. The refund on the overpaid amount came to a little under £2,300. That's not a rounding error. That's close to two months of a part-time employee's wages, sitting unclaimed because nobody checked a figure that gets set once every few years and then largely ignored.

The process itself isn't complicated, but it is slow. You register on the government's business rates valuation service, "check" the details held about your property (floor area, use, any changes), then "challenge" the valuation if something looks wrong, with evidence, and only escalate to a formal "appeal" if the challenge stage doesn't resolve it. Councils and the VOA won't chase you to do this. It sits entirely on the business owner to notice.

Steps to make sure you're not overpaying

• Find your current rateable value on the government's "Find a business rates valuation" service, it's free and public.
• Compare it against similar properties nearby, same size, same use class, similar street.
• Check whether you're already receiving small business rate relief, some councils require an application even when you're eligible, they don't always apply it automatically.
• If your rateable value looks out of line with reality (empty units nearby, reduced footfall, a change in how the space is used), start the Check, Challenge, Appeal process rather than assuming it'll sort itself out at the next revaluation.
• If you're moving premises, downsizing, or closing part of a unit, tell the VOA and your council straight away, not months later, because backdating only goes so far.

What this means if you work from home or sell online

If you run your business from a spare bedroom with no separate business entrance, no staff coming to the property, and no part of the home used exclusively and permanently for the business, you typically won't be liable for business rates at all, though your council can still ask to inspect this. The line gets blurrier the moment you build a garden office, hire staff who work from the property, or convert part of the house permanently for storage or client visits.

This is one of the quiet reasons so many small brands have shifted toward selling through channels that don't require a rated physical footprint at all. A shop unit on the high street means a rateable value, a rates bill, and business insurance on the premises. Selling through social commerce, using the right Instagram tools for a small team or setting up shop through TikTok Shop, sidesteps that entirely. It's not a like-for-like swap, a physical shop brings passing trade and browsing behaviour a feed can't replicate, but it's worth knowing the tax difference is real and significant before you sign a five-year lease on a unit you could trade around instead.

The same logic applies to how you present and educate customers. Businesses that used to hire meeting rooms or event spaces (each one adding to a rates-liable footprint if held long-term) now run product demos and client onboarding through webinar software instead, cutting both the rent and the associated rates exposure without cutting the reach.

Where this trips up growing businesses specifically

Rates get more painful, not less, as a small business grows, and that's the part most advice pieces skip past. A sole trader working from home pays nothing. The moment that same business takes on its first office, even a modest one, it steps straight into a rates liability that scales with square footage rather than revenue. I've watched founders take on premises the day turnover crossed a comfortable threshold, only to find the rates bill alone ate a chunk of the margin they'd just started generating, because nobody budgeted for it as a fixed cost the way they'd budgeted for rent.

It's also why more growing businesses are choosing to add senior expertise without adding a rated headcount and desk, bringing in a fractional AI officer or a fractional CMO on a part-time or contract basis rather than hiring full-time and needing another desk, another chair, and eventually another square foot of rated office space to house them in.

And if you do keep a physical premises, whether that's a shop, a studio, or an office with a reception, it's worth making sure the address is working as hard as possible for you locally, since a rated location at least gives you something an online-only competitor doesn't: a real street address to build local SEO citations around, which can bring in the footfall and local search visibility that partly justifies paying the rates in the first place.

The honest truth about who this system favours

Business rates were designed for a high street economy that mostly doesn't exist anymore, and the system hasn't caught up as fast as the shops have closed. A small independent bookshop pays rates on its footprint while a warehouse fulfilling online orders for ten times the volume can, depending on size and location, end up paying proportionally less relative to turnover. The 2026 multiplier changes are a genuine attempt to correct part of this, taxing the biggest warehouse-style properties more to fund relief for smaller retail and hospitality units, but it doesn't touch offices, doesn't touch light industrial units outside that band, and doesn't touch the basic unfairness that two businesses with wildly different profitability, in similarly sized units, can end up with near-identical bills. If you're picking a premises size purely on ambition rather than current need "in case we grow into it", you're choosing to pay rates on space you're not using yet, and that's a cost few people factor in until the first bill lands.

Every AI guide I have written for owner run businesses is indexed on the AI for small business guide.

Frequently asked questions

Do I have to pay business rates if I run my business from home?

Usually not, provided no part of the home is used exclusively for business, there's no separate entrance, and staff don't come to the property to work. Build a permanent home office extension, hire staff on-site, or use part of the house solely for storage and stock, and your council can assess it for business rates even though you live there.

How do I know if I'm eligible for small business rate relief?

If your property's rateable value is £12,000 or under, you should get 100% relief. Between £12,001 and £15,000 the relief tapers. Check your rateable value on the government's valuation service and contact your local council directly, since some don't apply relief automatically even when you qualify.

Can I challenge my rateable value if I think it's wrong?

Yes, through the VOA's Check, Challenge, Appeal process. You check the property details held on record, challenge the valuation with evidence if it looks wrong, and escalate to a formal appeal if that doesn't resolve it. Successful challenges can be backdated, which is where the real money often gets recovered.

Will business rates go up in 2026?

It depends on the property type. Retail, hospitality and leisure properties under £500,000 rateable value benefit from a new permanently lower multiplier from 2026/27, while properties rated at £500,000 or above (mostly large warehouses and big-box stores) face a higher multiplier to fund it. Most standard offices and mid-sized units will see the usual small annual multiplier adjustment rather than a dramatic change.

Official documentation

• the UK government's business support pages