What’s the real cost of business tax in the UK? Small businesses have a range of different tax obligations, ranging from corporation tax, VAT (value added tax), dividend tax, to National Insurance taxes on salaries.
Tax obligations can seem daunting when you’re running a business. For example, a company with profits under £50,000 will pay 19% corporation tax, while profits above this threshold face a steeper 25% rate. Every small business owner faces crucial decisions about VAT registration at £85,000, managing business rates relief for properties under £12,000, and handling various tax requirements.
We have groups your business tax responsibilities into eight main areas:
- Corporation tax – payable at different rates based on profit levels
- Value Added Tax (VAT) – payable at various rates, normally 20% on qualifying sales
- Income tax – payable at different rates based on salary
- National Insurance contributions – payable at 13.8% on salaries
- Business rates tax – payable at various rates based on the size, value and type of property
- Capital Gains Tax (CGT) – payable at various rates based on the gain in capital value of an asset
- Dividend tax – payable at various rates from 8.75% to 39.35% on dividends
- Other taxes – such as vehicle excise duty
This practical guide explains the most commonly encountered business taxes in the UK and we explain the potential tax obligations and when and how its due.
First, register for taxes my business will have to pay
Tax obligations need your attention right from the start when you begin a business in the UK. A proper setup of your tax accounts will give a smooth path to compliance and help you avoid penalties.
First steps after business registration
Your tax registrations should be your top priority after you register your business. Sole traders must complete their self-assessment registration by October 5th in their second tax year. You can start your registration as soon as you begin trading, in spite of that.
Limited companies work differently. HMRC receives notification from Companies House when you incorporate. You’ll get a letter at your registered office address within 14 days from HMRC that explains everything in your tax responsibilities.
Your limited company needs to register for corporation tax within three months of starting any business activity. These activities include:
- Buying and selling goods for profit
- Providing services
- Advertising
- Managing investments
- Employing staff
- Earning interest from business activities
Setting up your tax accounts
A Government Gateway account forms the foundations of your business tax management. You should have these ready before you start:
- Your Government Gateway User ID and password
- Business details including UTR (Unique Taxpayer Reference)
- National Insurance number (for sole traders)
- Company registration number (if applicable)
- VAT registration number (if applicable)
Your UTR arrival triggers several important steps. Log into your business tax account on the gov.uk website with your company’s Government Gateway credentials. Next, enter your company details, including registration number, business start date, and annual accounts date.
Your business must register for VAT when taxable turnover reaches £90,000 in a 12-month period. This is a big deal as it means that £90,000 in the next 30 days also requires registration. Some businesses choose voluntary VAT registration even with lower turnover.
Paying staff or yourself as a director means you need employer registration before the first payday. You can register up to two months ahead, though getting your employer’s PAYE reference number usually takes five working days.
Your business records should track:
- Money spent and received
- Assets owned by the business
- Debts owed to or by the company
- Stock owned
- Goods and services bought and sold
Missing tax registrations can lead to penalties. Understanding which taxes apply to your business structure is a vital part of compliance. All but one of these businesses need self-assessment – sole traders and partnerships must register, while limited companies need both corporation tax and self-assessment registration for directors.
1. Corporation Tax
Corporation Tax is a tax on the profits of limited companies and some organisations. There are two main rates:
- 19% small profits rate for companies with profits up to £50,000
- 25% main rate for companies with profits over £250,000
For companies with profits between £50,000 and £250,000, Marginal Relief provides a gradual increase between these rates.
Key points:
- You must register for Corporation Tax within 3 months of starting your business
- Corporation tax is paid 9 months and 1 day after the end of your accounting period
- You need to file a Company Tax Return annually, even if you made a loss
It’s worth noting that some company costs are added in pre-profit and some are only allowable post-profit. In effect, this means that some costs will reduce your company’s profit and therefore reduce the corporation tax payable, and other costs will not reduce your company’s profit and so will not reduce the corporation tax payable. For small businesses, the two costs most commonly considered are pension and dividend payments to directors. Pension payments are pre-profit, so they reduce the profit and so reduce the corporation tax due. Dividends are post-profit, so do not reduce the company’s profit and do not reduce the corporation tax due.
For example, if you are the sole director of your company and it makes £100,000 profit, you could:
a) keep the profit within the company, so corporation tax is payable on £100,000
b) make a company pension contribution (up to a maximum of £60,000 per year) to your director’s personal pension plan, in which case the profit is £40,000 so corporation tax would be payable on £40,000 (£100,000 – £60,000); there is no personal tax to pay on the pension contribution. The company retains £40,000 minus tax and your personal pension plan has £60,000.
c) make a company dividend distribution of say £40,000 (to a maximum that is supported by the profit) to you as a shareholder, in which case the profit remains at £100,000 and corporation tax would be payable on £100,000 and personal dividend tax payable on the £40,000 dividend. The company retains £60,000 minus tax and you personally have £40,000 minus tax.
Note that you can combine b and c above.
2. Value Added Tax (VAT)
VAT is a tax added to most goods and services. In 2025, the current VAT registration threshold is £90,000. If your VAT taxable turnover exceeds this in any 12-month trading period, you must register for VAT.
Key points:
- Standard VAT rate is 20%
- Some goods and services have reduced (5%) or zero (0%) rates
- Once registered, you must charge VAT on your sales and can reclaim VAT on your purchases
- Consider voluntary registration if you sell to other VAT-registered businesses
3. Income Tax
For sole traders and partnerships, Income Tax is paid on business profits. The tax-free Personal Allowance is £12,570 for the 2024/25 tax year.
Current Income Tax rates (2024/25):
- Basic rate: 20% on income between £12,571 to £50,270
- Higher rate: 40% on income between £50,271 to £125,140
- Additional rate: 45% on income over £125,140
Key points:
- You must complete a self-assessment tax return annually
- Income Tax is usually paid in two instalments on 31 January and 31 July
- Consider making payments on account to spread the cost
4. National Insurance Contributions
National Insurance is a tax on earnings and self-employed profits. There are different classes of National Insurance, depending on your employment status and earnings.
For self-employed individuals:
- Class 2 NICs: £3.45 per week (2024/25) if your profits are £6,725 or more a year
- Class 4 NICs: 9% on profits between £12,570 and £50,270, and 2% on profits over £50,270
For limited companies:
- Employers pay Class 1 NICs of 13.8% on employee earnings above £9,100 per year
- Employees pay Class 1 NICs of 12% on earnings between £12,570 and £50,270, and 2% above that
5. Business Rates
Business rates are charged on most non-domestic properties, such as shops, offices, and factories. The amount you pay depends on your property’s ‘rateable value’.
Key points:
- Small business rate relief is available if your property’s rateable value is less than £15,000
- You can estimate your business rates using the government’s business rates calculator
- Some properties may be eligible for other reliefs or exemptions
6. Capital Gains Tax
Capital Gains Tax (CGT) is paid on the profit when you sell (or ‘dispose of’) something that has increased in value. For business assets, the rates are:
- 10% for basic rate taxpayers
- 20% for higher and additional rate taxpayers
Key points:
- There’s an annual tax-free allowance (£6,000 for 2024/25)
- Some business assets may qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief)
- Keep detailed records of asset acquisitions and disposals
7. Dividend Tax
If your company pays dividends, the shareholder receiving the dividend will need to pay tax on any amount over the dividend allowance (£500 for 2024/25). The rates are:
- Basic rate taxpayers: 8.75%
- Higher rate taxpayers: 33.75%
- Additional rate taxpayers: 39.35%
Key points:
- Dividends are paid from post-tax profits (ie they will not reduce the profit on which your business pays corporation tax)
- They can be a tax-efficient way of extracting profits from your company
- Consider the balance between salary and dividends for optimal tax efficiency
8. Other Taxes and Considerations
Depending on your business activities, you might also need to consider:
- Stamp Duty Land Tax when purchasing property
- Vehicle Excise Duty for company vehicles
- Climate Change Levy for energy-intensive businesses
- Insurance Premium Tax on business insurance policies
9. Tax-Deductible Expenses
Understanding what expenses are tax-deductible can significantly reduce your tax bill. Common allowable expenses include:
- Office costs (stationery, phone bills, etc.)
- Travel costs
- Clothing expenses (uniforms, protective wear)
- Staff costs
- Stock and raw materials
- Financial costs (insurance, bank charges)
- Costs of your business premises
- Advertising and marketing
Keep accurate records of all business expenses, as HMRC may request evidence.
Corporation Tax Explained
UK small businesses need to understand their corporation tax obligations. The tax rate structure changed substantially on April 1, 2023. Now there’s a two-tier system that affects businesses based on their profit levels.
How to calculate your tax bill
Companies making profits above £250,000 pay the main corporation tax rate of 25%. Small businesses with profits of £50,000 or less pay a lower rate of 19%. Companies with profits between these amounts can get marginal relief, which helps smooth out the tax rate increase.
Here’s the quickest way to calculate your corporation tax:
- Determine your taxable total profits (TTP)
- Apply the appropriate rate based on your profit level
- Factor in any marginal relief if applicable
The marginal relief calculation uses this formula for businesses with profits between £50,000 and £250,000: 3/200 × (£250,000 – Augmented Profits) × Taxable Total Profits/Augmented Profits.
Payment deadlines and methods
You must pay your corporation tax nine months and one day after your accounting period ends. If your accounting period ends on the last day of a month, payment is due on the first day of the tenth month.
HMRC lets you pay through these methods:
- Same or next-day payments through online banking
- Faster Payments or CHAPS transfers
- Debit or corporate credit card payments online
- Direct Debit (takes 3-5 working days)
HMRC doesn’t accept postal payments for corporation tax anymore. Remember to pay on the last working day before the deadline if it falls on a weekend or bank holiday.
Available tax reliefs
Small businesses can reduce their tax bill through various reliefs. You can deduct running costs and claim capital allowances for business assets.
R&D relief is a great way to get benefits for innovative companies. R&D intensive loss-making businesses can claim a higher credit rate of 14.5% for qualifying expenditure. Your R&D expenditure needs to be at least 40% of total expenditure to qualify.
The Patent Box scheme is a chance to reduce your tax. Companies pay just 10% corporation tax on profits from qualifying patents. This covers income from:
- Patent rights sales or licences
- Sales of patented products
- Products containing patented inventions
- Intellectual property infringement income
Creative industry tax reliefs (CITR) help businesses making profits from theatre, film, television, animation or video games. You can also claim relief on goodwill and other relevant assets, plus terminal, capital and property income losses.
VAT Registration and Returns
VAT (Value Added Tax) is a key part of the UK tax system. Small business owners need to think over when to register and which VAT scheme fits their needs. These choices can substantially affect how their business runs.
When to register for VAT
The VAT registration threshold rose to £90,000 starting April 1, 2024. Your business must register for VAT in two main situations:
- Your VAT taxable turnover goes beyond £90,000 in any 12-month period
- You expect your VAT taxable turnover to exceed £90,000 in the next 30 days
HMRC needs to know within 30 days once you cross this threshold. Your registration date starts one month and one day after the month-end when your sales went over the limit.
Of course, businesses can choose to register for VAT even if their turnover stays below £90,000. This move lets you reclaim VAT on eligible business purchases and helps project your business’s professional image.
Different VAT schemes
HMRC provides various VAT schemes that make tax management easier based on your business’s size and type. Each option comes with its own benefits and rules:
1. Annual Accounting Scheme This scheme needs just one VAT return each year instead of four. Your estimated taxable turnover should be £1.35 million or less to qualify. You pay in advance throughout the year – either nine monthly instalments or three quarterly ones.
2. Flat Rate Scheme Businesses with turnover under £150,000 can use this scheme. It makes VAT calculations easier by using a fixed percentage of your total turnover. Your industry sector determines the percentage, which works great for businesses with few expenses.
3. Cash Accounting Scheme Businesses earning less than £1.35 million can use this scheme. It lets you account for VAT when payments happen rather than when invoices go out. This works really well if your customers take time to pay.
4. VAT Margin Scheme This scheme helps businesses selling second-hand goods, artwork, antiques, and collectibles. You calculate VAT on your profit margin instead of the full selling price.
After VAT registration, you need to:
- Add the right VAT rate to your sales invoices
- Send in VAT returns, usually every three months
- Pay your VAT to HMRC within one month and seven days after your VAT period ends
Monthly returns might work better if you expect regular VAT refunds. On top of that, all VAT-registered businesses now need to follow Making Tax Digital rules and use compatible software for their VAT returns.
The UK’s VAT threshold ranks among the highest in the OECD, right up there with Switzerland. This keeps about 3.2 million small UK businesses outside the VAT system. This is a big deal as it means that the UK threshold is more than double the EU and OECD average of £44,000 and £34,700 respectively.
Managing Payroll Taxes
Small business owners in the UK must handle payroll taxes properly when they employ staff. HMRC’s Pay As You Earn (PAYE) system requires employers to handle income tax and National Insurance deductions correctly.
PAYE basics
HMRC collects employee taxes mainly through PAYE. Employers must take out tax and National Insurance contributions from wages before paying their staff. Each employee’s tax code and National Insurance category letter determines these deductions.
The tax code 1257L remains the most common one for 2023-2024. This applies to employees who have one job without untaxed income or benefits. Your payroll information needs to reach HMRC through Full Payment Submission (FPS) before or on payday.
Your core PAYE duties include:
- Keeping accurate payroll records
- Telling HMRC about new employees
- Giving out P60s when the tax year ends
- Sending P11D forms for employee benefits
- Handling statutory payments such as sick pay and maternity pay
National Insurance contributions
Employer National Insurance rules will change from April 2024. You’ll pay Class 1 NI when employee earnings go above £242 weekly, £1,048 monthly, or £12,570 yearly. You must also pay Secondary Class 1 NI contributions.
Employer NI contributions will rise to 15% in April 2025. The secondary threshold will drop from £9,100 to £5,000, which will affect 1.2 million employers. The Employment Allowance will jump from £5,000 to £10,500 to help small businesses.
Right now, you must pay Class 1A National Insurance at 13.8% on most taxable benefits. This rate covers:
- Termination payments over £30,000
- Sporting testimonial payments above £100,000
- Several employee benefits
Employee benefits and tax
You need to think about tax when offering benefits in kind. These must be reported on P11D forms, and you’ll need to pay the right National Insurance contributions. Common taxable benefits cover:
- Company cars
- Health insurance
- Travel expenses
- Childcare provisions
HMRC’s guidelines help you work out the taxable value of company cars with private fuel benefits. Employee accommodation also faces tax unless it’s ‘job-related’.
One company phone with paid bills stays free from tax and National Insurance. However, paying back employees for their personal phone contracts attracts both tax and NI contributions.
HMRC can charge penalties and interest if you don’t meet PAYE requirements. You should keep detailed records because HMRC might ask to see your calculations up to three years after the tax year ends.
Self Assessment Tax Returns
Self-employed individuals and business owners need to follow specific tax reporting rules through the Self Assessment system. You need to understand these requirements to stay compliant, avoid penalties and manage your small business taxes well.
Filing requirements
You must file a Self Assessment under several situations. We need to file tax returns if we earned more than £1,000 annually from self-employment. On top of that, it applies to anyone with property income, foreign earnings, or savings and investment income over £10,000.
The Self Assessment calendar for 2023-24 has some important deadlines. New filers must register by 5 October 2024. Paper returns are due by 31 October 2024, while you have until 31 January 2025 for online submissions.
Tax payments follow a clear schedule. The main payment is due by midnight on 31 January 2025. This is a big deal as it means that if your tax bill is over £1,000, you might need to make extra ‘payments on account’. These advance payments each make up 50% of last year’s tax and are due on 31 January and 31 July.
Late submissions come with automatic penalties. You’ll get a £100 fine right away, plus £10 daily charges after three months, up to £900. After six months, you’ll pay either £300 or 5% of the tax you owe – whichever is more.
You need these essential documents:
- Income and expenditure records
- Business-related invoices and receipts
- Bank statements and accounting records
- Details of pension contributions
- Evidence of charitable donations
HMRC wants you to keep records for five years after the submission deadline. During this time, you should keep complete documentation as HMRC might ask to check your calculations or claims.
Property income has its own thresholds. You need to register right away if you earn more than £2,500, while earnings between £1,000 and £2,500 mean you should contact HMRC directly.
HMRC gives you several ways to pay. Online banking, Faster Payments, and CHAPS transfers work for same or next-day processing. You can also use debit cards and corporate credit cards online, while Direct Debits take 3-5 working days to process.
Your profits might go down, and you can ask to reduce your payments on account. This helps prevent paying too much and keeps your cash flow healthy. Keeping accurate records throughout the year makes filing easier and gives you exact tax calculations.
Small business taxes
There are a lot of different taxes your small business might have to pay; our suggestion to help you manage your taxes effectively is to:
- Sign up for all relevant taxes when you begin trading
- Maintain clear records of every business transaction
- File your returns and pay taxes ahead of deadlines
- Use all tax reliefs and schemes available to you
- Keep track of new tax rates and threshold changes
Proper tax planning isn’t just about compliance – it’s an integral part of your overall business strategy. By managing your taxes effectively, you can free up resources to invest in growth, innovation, and the long-term success of your small business.
Relevant UK Government links:
- https://www.gov.uk/browse/business/business-tax
This page provides comprehensive information on various business taxes. - https://www.gov.uk/government/organisations/hm-revenue-customs/contact/newly-self-employed-helpline
HMRC’s helpline for newly self-employed individuals. - https://www.gov.uk/calculate-your-business-rates
A tool to help you calculate your business rates.
These government resources offer valuable information and support for small businesses navigating their tax obligations. Remember to regularly check these sources for the most up-to-date information, as tax laws and thresholds can change annually.
FAQs
Q1. What are the current corporation tax rates for small businesses in the UK? As of April 2023, UK businesses with profits under £50,000 pay 19% corporation tax, while those earning over £250,000 face a 25% rate. Companies with profits between these thresholds qualify for marginal relief, resulting in a gradual increase in the effective tax rate.
Q2. When do I need to register for VAT in the UK? You must register for VAT when your taxable turnover exceeds £90,000 in any 12-month period or if you expect it to surpass this threshold in the next 30 days. However, you can also opt for voluntary registration even if your turnover is below this limit.
Q3. How often do I need to submit VAT returns? Typically, VAT returns are submitted quarterly. However, if you expect regular VAT refunds, monthly returns might be more beneficial. Since April 2022, all VAT-registered businesses must comply with Making Tax Digital requirements, using compatible software for VAT returns.
Q4. What are the key deadlines for Self Assessment tax returns? For the 2023-24 tax year, first-time filers must register by 5 October 2024. Paper returns are due by 31 October 2024, while online submissions can be made until 31 January 2025. The main tax payment is due by midnight on 31 January 2025.
Q5. How long should I keep my business tax records? HMRC requires businesses to retain tax records for five years following the submission deadline. This is crucial as HMRC might request evidence to verify calculations or claims during this period. Keeping comprehensive documentation helps ensure compliance and smooth audits if required.
