Tax is the part of running a business that most new founders dread — and put off. It feels complicated, the language is dense, and the fear of getting it wrong keeps people up at night. But here is the good news: for most small UK businesses, business tax is a small handful of taxes, each with simple rules. Understand which ones apply to you, when they are due, and what you can claim back, and you will be ahead of most beginners.
This guide walks through how business tax works in the UK in plain English — no jargon, no panic. Figures below are for the 2026/27 tax year (6 April 2026 to 5 April 2027).
First things first: your business structure decides your taxes
The UK taxes businesses differently depending on how they are set up:
- Sole trader (self-employed): you and the business are the same legal person. You pay Income Tax and National Insurance on your business profits through a Self Assessment tax return.
- Partnership: each partner pays Income Tax and National Insurance on their share of the profits, also through Self Assessment.
- Limited company: the company is a separate legal person. The company pays Corporation Tax on its profits, and you personally pay Income Tax (and possibly National Insurance) on what you take out as salary or dividends.
If you are just starting out and unsure which structure suits you, settle that question first — it shapes everything below.
If you are a sole trader or in a partnership
Income Tax on your profits
As a sole trader, HMRC taxes your profit, not your turnover. Profit means everything you earned minus your allowable business expenses. For the 2026/27 tax year in England, Wales and Northern Ireland:
- £0 – £12,570: 0% (your Personal Allowance)
- £12,571 – £50,270: 20% (basic rate)
- £50,271 – £125,140: 40% (higher rate)
- Over £125,140: 45% (additional rate)
Scotland sets its own bands, which differ slightly. The thresholds are frozen until April 2028.
National Insurance
Self-employed people pay two classes of National Insurance on profits:
- Class 2: once your profits are above the small profits threshold, this is treated as paid automatically inside your Self Assessment return — no separate bill. Below the threshold you can pay it voluntarily (currently £3.65 a week) to keep building your State Pension entitlement.
- Class 4: 6% on profits between £12,570 and £50,270, then 2% on profits above that. Both classes are calculated and paid together with your Income Tax.
How and when you pay: Self Assessment
You register as self-employed with HMRC, keep records of income and expenses, and file a Self Assessment tax return each year. The online deadline for the previous tax year is 31 January. If your tax bill is over £1,000, HMRC usually asks for “payments on account” — advance payments towards next year’s bill, due on 31 January and 31 July. This catches many first-year traders by surprise: your first January payment can be roughly 150% of what you owe, because it includes half of next year’s bill in advance.
If you run a limited company
Corporation Tax on company profits
Limited companies pay Corporation Tax on their taxable profits. For financial years starting 1 April 2026:
- Profits up to £50,000: 19% (the small profits rate)
- Profits between £50,000 and £250,000: marginal relief gradually increases the effective rate
- Profits over £250,000: 25% (the main rate)
You must register for Corporation Tax within three months of starting to trade, and file a Company Tax Return (form CT600) with HMRC within 12 months of the end of your accounting period. The tax itself is due earlier — 9 months and 1 day after the accounting period ends. Yes, you pay before you file, which trips up many new directors.
Taking money out: salary vs dividends
As a director, you are usually both an employee and a shareholder, and the two incomes are taxed differently:
- Salary is a tax-deductible expense for the company (it reduces the Corporation Tax bill), but it attracts Income Tax and National Insurance just like any employee’s pay. Employers pay 15% employer National Insurance above the £5,000 secondary threshold, though the Employment Allowance of up to £10,500 can offset it for eligible small employers.
- Dividends are paid from after-tax profits, carry no National Insurance, and get their own allowance: the first £500 of dividend income each year is tax-free. Above that, dividend tax rates are 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate).
Most owner-directors take a mix — typically a modest salary plus dividends — because it is usually more tax-efficient than salary alone. Get advice before choosing your split.
VAT: the tax that can apply to either structure
Whatever your structure, you must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. The standard VAT rate is 20%. You can also register voluntarily below the threshold, which some businesses do to look established or to reclaim VAT on purchases. If your turnover is climbing towards £90,000, read our guide to VAT registration in the UK first — missing the registration deadline brings penalties.
What you can claim back: allowable expenses
You only pay tax on profit, so claiming everything you are entitled to is perfectly legal tax planning — not a loophole. You can deduct costs that are “wholly and exclusively” for business use. Common ones beginners miss:
- A proportion of home office costs (or the simplified flat rate)
- Business mileage and travel (but not your normal commute)
- Software, subscriptions and tools used for work
- Professional fees — accountants, solicitors, insurance
- Equipment via capital allowances (the annual investment allowance lets you deduct up to £1 million of qualifying spending in the year you buy it)
- Employer pension contributions (for companies)
If your turnover is under £1,000 a year, you may not even need to claim expenses — the £1,000 trading allowance covers you.
Your key deadlines at a glance
| What | Deadline |
|---|---|
| Register as self-employed / for Corporation Tax | Within 3 months of starting |
| Self Assessment online return | 31 January |
| Self Assessment payments on account | 31 January and 31 July |
| Corporation Tax payment | 9 months + 1 day after accounting period |
| Company Tax Return (CT600) | 12 months after accounting period |
| Company accounts to Companies House | 9 months after year end |
Missing deadlines means automatic penalties and interest — HMRC does not send friendly reminders first.
5 mistakes beginners make with UK business tax
- Mixing personal and business money. Open a separate business bank account from day one, even if it is not legally required. It makes records and expenses ten times easier.
- Forgetting to register. You must register as self-employed or for Corporation Tax promptly. Late registration means penalties on top of the tax.
- Ignoring payments on account. Budget for that bigger-than-expected first January bill so it does not wreck your cash flow.
- Not keeping receipts. HMRC can ask for evidence going back up to six years. A simple cloud bookkeeping app solves this.
- Claiming nothing. New traders routinely under-claim expenses out of fear. If it is genuinely for the business, claim it.
From April 2026, Making Tax Digital for Income Tax also starts applying to self-employed people and landlords with combined qualifying income over £50,000 — worth knowing if your business is growing.
Frequently asked questions
Do I pay tax on money I reinvest in my business?
Not directly on reinvestment. Tax is calculated on profit, so money you spend on genuine business costs reduces the profit you are taxed on. Money left sitting as profit in a limited company, though, will attract Corporation Tax whether you spend it later or not.
How much should I set aside for tax?
A rough rule of thumb for sole traders: set aside 20–30% of profit in a separate savings account as you earn it. Limited company directors should ask their accountant for a tailored figure, since Corporation Tax plus dividend tax stack up differently.
What happens if I cannot pay my tax bill on time?
Contact HMRC before the deadline, not after. You may be able to arrange a Time to Pay plan to spread the bill in instalments. Interest still accrues, but penalties for non-payment are reduced when you come forward voluntarily.
Should I hire an accountant or do it myself?
If your affairs are simple — sole trader, few expenses — many people manage with bookkeeping software. A limited company with directors, dividends and payroll is where an accountant usually pays for itself. Either way, the legal responsibility for your tax return stays with you.
The bottom line
UK business tax comes down to three questions: What is your structure? What did you actually profit? And when is it due? Get those right, keep clean records, set money aside as you earn, and meet your deadlines. Tax stops being scary the moment it becomes a habit — and the figures in this guide come from GOV.UK’s official guidance on Income Tax allowances and National Insurance thresholds, so you can check them against the source yourself.
3 Comments