Direct answer: In your first year, the business tax you pay depends on your structure. A limited company pays Corporation Tax on its profits, while a sole trader pays Income Tax and National Insurance on profits through Self Assessment. Most startups pay no VAT until taxable turnover passes £90,000 in a rolling 12 months — but the deadlines start from day one, so set them up before you trade.
Tax is the part of starting a business nobody puts on the launch checklist, yet it causes the most expensive surprises. Founders assume tax can wait until “we are making money”. In practice, HMRC expects you to be registered, keeping records and watching thresholds from your very first sale — even if your first-year bill turns out small, or nothing at all.
This guide covers what a UK startup pays in year one, with the real 2026/27 rates, worked examples in pounds, and a deadline checklist for your diary. It is general guidance, not professional tax advice.
First, which business tax applies to you?
Your legal structure decides your tax. There are only two common starting points for a UK startup, and they are taxed in completely different ways:
| Your structure | Main business tax | How you pay it |
|---|---|---|
| Sole trader | Income Tax + National Insurance on your profits | Self Assessment tax return each year |
| Limited company | Corporation Tax on the company’s profits | Company Tax Return (CT600); tax paid separately from your personal tax |
A sole trader and their business are the same person for tax purposes, so business profit is added to your personal income. A limited company is a separate legal person: the company pays its own tax, and you are taxed again personally only on what you take out, as salary or dividends. That separation is one reason many growing startups incorporate — but it also brings company filing duties, even in a loss-making first year. For the wider picture, see our guide to how business tax works in the UK.
Corporation Tax: what limited-company startups pay
For the financial year starting 1 April 2026, UK Corporation Tax has two headline rates, unchanged since April 2023:
| Taxable profit | Rate |
|---|---|
| £50,000 or less | 19% (small profits rate) |
| £50,001 to £250,000 | 25% reduced by marginal relief (effective rate between 19% and 25%) |
| Above £250,000 | 25% (main rate) |
Most first-year startups sit comfortably in the small profits band. The worked examples below show how the bill is calculated — and note that tax is charged on taxable profit (sales minus allowable expenses and reliefs), not on turnover.
Worked example 1 — small profits rate. Your startup makes £35,000 of taxable profit in its first year. Corporation Tax is £35,000 × 19% = £6,650. You do not pay tax on the money still sitting in the company bank account beyond that; you only face personal tax when you draw money out.
Worked example 2 — marginal relief. Your startup makes £150,000 of taxable profit. At the 25% main rate that would be £37,500, but marginal relief reduces it by £1,500, giving a bill of £36,000 — an effective rate of 24%. The relief tapers away gradually, so there is no sudden cliff edge at £50,000.
Two deadlines matter more than the rate itself. Corporation Tax is normally due 9 months and 1 day after your accounting period ends, while the Company Tax Return itself is due 12 months after the period ends. A company must also register with HMRC within three months of starting to trade, even if it makes a loss. You can check the current figures on GOV.UK’s Corporation Tax rates page before you file.
Income Tax and National Insurance: what sole-trader startups pay
As a sole trader, you register for Self Assessment, keep records of income and expenses, and file one tax return covering your business profit alongside any other income. Your profit is taxed at your marginal Income Tax rate after your personal allowance, and National Insurance contributions are calculated on the same profit figure.
Worked example. Suppose your first-year sales are £40,000 and your allowable expenses — stock, software, travel, a share of home-office costs — come to £12,000. Your taxable profit is £28,000, and that £28,000 (not the £40,000 turnover) is what Income Tax and National Insurance are worked out on. This is why keeping every receipt matters: every legitimate expense you forget is profit HMRC taxes you on.
Register for Self Assessment by 5 October following the tax year in which you started trading, and file and pay by the following 31 January online. Miss those dates and penalties start at £100 for a late return, even if no tax is owed — a painful first lesson many founders learn only once.
VAT: the threshold most startups do not cross in year one
You must register for VAT when your taxable turnover passes £90,000 in any rolling 12-month period, or when you expect it to pass £90,000 in the next 30 days alone. Registration is free, you must tell HMRC within 30 days of the end of the month in which you crossed the threshold, and you start charging VAT from the effective date of registration.
Most startups do not reach £90,000 in year one, so VAT is usually a “watch it, don’t pay it yet” tax. The trap is the rolling window: HMRC looks at the last 12 months at every month-end, not at your tax year. Check your rolling total monthly, especially after a big contract lands. Voluntary registration can pay off if your customers are mostly VAT-registered businesses, but if they are consumers, adding 20% to prices can lose sales — take advice before volunteering.
What startup costs can you claim?
Pre-trading expenses count too. Costs you incur in the seven years before you start trading — market research, a laptop bought for the business, professional advice — can generally be treated as if they were incurred on your first day of trading, as long as they would have been allowable. Keep the receipts and a simple note of what each cost was for.
Day to day, claim only costs wholly and exclusively for the business: stock, software, business travel, marketing, accountancy fees, and a reasonable share of home costs if you work from home. Personal spending, client entertaining and fines are not allowable. A separate business bank account makes year-end ten times easier, because business and personal spending are never mixed.
Your first-year deadline checklist
| Task | When |
|---|---|
| Limited company: register with HMRC for Corporation Tax | Within 3 months of starting to trade |
| Sole trader: register for Self Assessment | By 5 October after the tax year you started in |
| Check rolling 12-month turnover against the £90,000 VAT threshold | At every month-end |
| Corporation Tax payment (limited companies) | 9 months and 1 day after the accounting period ends |
| Company Tax Return (limited companies) | 12 months after the accounting period ends |
| Self Assessment return and payment (sole traders) | 31 January following the tax year |
Three mistakes that cost new startups money
1. Mixing personal and business money. Paying suppliers from a personal account and taking drawings in cash makes your return a guessing game — and guessing invites HMRC questions. One business account fixes most of it.
2. Ignoring the VAT rolling window. Founders check turnover at year-end and miss that they crossed £90,000 mid-year. By the time HMRC notices, VAT is owed on sales from the date they should have registered, even though customers were never charged it.
3. Leaving everything until January. The Self Assessment rush in January is when mistakes happen and accountants are fully booked. Reconcile monthly, even if it is just an hour with a spreadsheet, and year-end becomes a formality.
Frequently asked questions
Do I pay business tax if my startup makes a loss in year one?
Usually no tax is due on a loss, but you must still register and file. Sole traders can often carry a trading loss forward against future profits, and companies carry losses forward against future profits of the same trade — so record the loss properly rather than skipping the return.
Is Corporation Tax charged on turnover or profit?
On taxable profit: your sales minus allowable business expenses, capital allowances and any available reliefs. A startup with £100,000 of sales and £80,000 of allowable costs is taxed on roughly £20,000, not £100,000.
Do I need to register for VAT as soon as I start?
No — only when you pass the £90,000 rolling threshold, expect to pass it in the next 30 days, or choose to register voluntarily. But you must monitor the threshold from day one, because registration, once triggered, is backdated to the correct effective date.
Should I be a sole trader or a limited company for tax?
There is no single right answer. Sole trader is simpler and cheaper to run; a limited company can be more tax-efficient once profits are high enough to leave money in the company, and it limits your personal liability. Compare both on your expected first-year profit — and revisit the choice as profits grow.
Conclusion
First-year business tax is less frightening once you know which tax applies to you: Corporation Tax at 19% up to £50,000 of profit for limited companies, Income Tax and National Insurance on profit for sole traders, and VAT only once you pass £90,000 of rolling turnover. Set up a business account, keep every receipt, check the VAT threshold monthly, and diary the dates in the checklist above. Do those four things and your first tax return will be routine, not a crisis.
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