Running a business does not mean paying every tax in the UK system. Your obligations depend mainly on your legal structure, profit, turnover, employees, premises and how you take money from the business.
So, what taxes do small businesses pay in the UK? Sole traders usually deal with Income Tax and self-employed National Insurance. Limited companies normally pay Corporation Tax, while directors and shareholders may separately pay tax on salaries or dividends. VAT, payroll taxes, business rates and taxes on asset sales apply only when particular conditions are met.
The guide below explains the main rules for 2026/27 in plain English, with practical examples.
What Taxes Do Small Businesses Pay in the UK?
Start with the business structure and activities.
| Situation | Likely tax obligation |
|---|---|
| Sole trader | Income Tax and Class 4 National Insurance on taxable profit |
| Ordinary partnership | Partners pay tax and National Insurance on their profit shares |
| Limited company | Corporation Tax on company profits |
| Shareholder receiving dividends | Personal dividend tax may apply |
| VAT-taxable turnover above the threshold | VAT registration and returns |
| Business with employees | PAYE administration and employer National Insurance |
| Business using commercial premises | Business rates or a devolved equivalent |
| Sale of business assets | Capital Gains Tax or Corporation Tax on gains |
| Importing goods | Import VAT and possibly Customs or excise duties |
VAT charged to customers and PAYE deducted from employees are generally collected and passed to HMRC. Employer National Insurance and Corporation Tax are direct business liabilities.
Taxes for Sole Traders and Partnerships
A sole trader is not legally separate from the owner. The business does not pay Corporation Tax; the owner normally pays Income Tax and National Insurance through Self Assessment.
Income Tax on Profit
Taxable profit is broadly business income minus allowable expenses and relevant tax adjustments. It is not the same as sales, cash held or personal withdrawals. Qualifying running costs can be deducted when calculating taxable profit.
For 2026/27, the standard Personal Allowance is £12,570. In England, Wales and Northern Ireland, taxable income then falls into 20%, 40% and 45% bands. Scottish taxpayers use different bands for earnings and business profits. The Personal Allowance starts to reduce when total income exceeds £100,000.
Example: A sole trader in England has £55,000 of sales and £15,000 of allowable expenses, leaving £40,000 taxable profit. Assuming no other income and a full Personal Allowance, indicative Income Tax is £5,486: 20% of £27,430.
Self-Employed National Insurance
For 2026/27, Class 4 National Insurance is 6% on profits above £12,570 up to £50,270, then 2% above £50,270. If profits are at least £7,105, Class 2 contributions are generally treated as paid to protect the person’s National Insurance record. Below that level, voluntary Class 2 contributions cost £3.65 a week.
In the £40,000-profit example, Class 4 National Insurance is about £1,645.80. Combined with the simplified Income Tax calculation, the total is £7,131.80 before other income, reliefs, pension contributions, student loans or payments on account.
An ordinary partnership files a partnership return, but each partner is usually taxed individually on their allocated profit share. Individual partners may owe Income Tax and Class 4 National Insurance through Self Assessment.
Taxes for Limited Companies
A limited company is a separate legal and taxable entity. Money in its bank account belongs to the company, not automatically to its director or shareholders.
Corporation Tax
For the financial year beginning 1 April 2026, the small profits Corporation Tax rate is 19% for profits of £50,000 or less. The main rate is 25% above £250,000. Companies between those limits may receive marginal relief, producing a gradual rise in the effective rate.
The limits are reduced for short accounting periods and divided according to the number of associated companies. Related companies can therefore reach higher effective rates sooner than a standalone business.
A standalone company with a 12-month accounting period and £40,000 taxable profit would normally owe £7,600 Corporation Tax at 19%, leaving £32,400 after tax.
Salary and Dividends
A director’s salary is processed through PAYE and may create employee and employer National Insurance liabilities. Dividends are paid from profits available after Corporation Tax and do not reduce the company’s taxable profit.
For 2026/27, the dividend allowance is £500. Dividend income above available allowances is taxed at 10.75%, 35.75% or 39.35%, depending on the shareholder’s tax band and other income.
There is no universally best salary-and-dividend split. The result depends on total income, available profits, pension plans, benefits and the company’s cash requirements.
VAT
VAT is based on taxable turnover, not profit. A business generally must register when VAT-taxable turnover exceeds £90,000 in a rolling 12-month period. Registration can also be required when the business expects to exceed the threshold within the next 30 days. Voluntary registration is possible below the threshold.
The standard VAT rate is 20%, the reduced rate is 5%, and some supplies are zero-rated. Other supplies may be exempt or outside the scope; those categories are not interchangeable. Product classification and temporary sector rules can affect the correct treatment.
A VAT-registered business normally charges output VAT and reclaims eligible input VAT on purchases. It pays HMRC the difference or may receive a repayment. Returns are usually submitted every three months.
Registration can affect pricing. Consumer-facing businesses may need to raise prices or absorb part of the VAT, while VAT-registered business customers can often reclaim eligible VAT.
Payroll Taxes When Employing Staff
Employers normally operate PAYE, deducting Income Tax and employee National Insurance from wages and sending them to HMRC. Those deductions come from the employee’s gross pay.
Employer National Insurance is an additional business cost. For most employees in 2026/27, the standard rate is 15% on earnings above the £5,000 annual secondary threshold, although category-specific zero-rate bands and reliefs can apply.
Eligible employers can reduce their Class 1 National Insurance liability through Employment Allowance, worth up to £10,500 for the tax year. Eligibility should be checked rather than assumed.
When hiring, budget for employer National Insurance, pension contributions, holiday pay and payroll administration as well as salary.
Business Rates on Commercial Premises
Businesses occupying shops, offices, workshops or warehouses may pay business rates, usually based on the property’s rateable value rather than profit.
In England, Small Business Rate Relief can apply where the property’s rateable value is below £15,000 and the business generally uses one property. A qualifying sole property valued at £12,000 or less receives 100% relief; relief tapers between £12,001 and £15,000.
The systems and reliefs differ in Scotland, Wales and Northern Ireland, so English thresholds should not be applied across the UK.
A home-based business does not usually pay business rates merely because it operates from a home. Liability can arise, however, if part of the property is separately valued or used exclusively or specially adapted for business.
Other Taxes That May Apply
A sole trader or partner may face Capital Gains Tax when selling business assets or all or part of a business. From 6 April 2026, qualifying gains under Business Asset Disposal Relief are taxed at 18%, subject to eligibility conditions. A company generally pays Corporation Tax on chargeable gains from asset disposals.
Commercial property purchases can trigger Stamp Duty Land Tax in England or Northern Ireland, Land and Buildings Transaction Tax in Scotland, or Land Transaction Tax in Wales.
Importing goods can create import VAT and Customs Duty. The amount depends on factors including the product’s commodity code, origin and customs procedure.
Construction businesses may also fall within the Construction Industry Scheme. Under CIS, contractors generally deduct money from certain subcontractor payments and pass it to HMRC as an advance payment towards the subcontractor’s tax and National Insurance.
Businesses handling products such as alcohol or tobacco may also encounter excise duties.
How to Estimate and Budget for Tax
Use the correct tax base before applying any rate:
- Identify whether you are a sole trader, partner or company.
- Separate turnover from taxable profit.
- Record allowable expenses and keep supporting evidence.
- Monitor VAT using rolling 12-month taxable turnover.
- Calculate payroll and premises liabilities separately.
- Include the owner’s other income when estimating personal tax.
- Move a sensible portion of receipts into a separate tax account.
Payments on account can make a sole trader’s first substantial Self Assessment payment feel large because it may include the balancing bill plus an advance towards the next year. Forecast cash flow before the deadline, not after filing.
Important Tax Deadlines
For Self Assessment, a person who newly needs to file generally tells HMRC by 5 October after the tax year ends. The normal online filing and payment deadline is 31 January, with another payment-on-account deadline on 31 July where applicable. The 2025/26 online return and balancing payment are due by 31 January 2027.
A small company usually pays Corporation Tax nine months and one day after its accounting period ends and files its Company Tax Return within 12 months.
VAT returns are usually quarterly and normally due one calendar month and seven days after the period ends. Electronic PAYE payments are normally due by the 22nd of the following tax month.
From 6 April 2026, some sole traders and landlords with qualifying self-employment and property income above £50,000 must use Making Tax Digital for Income Tax. It changes record-keeping and reporting, not tax payment dates.
Common Mistakes to Avoid
Frequent errors include treating turnover as profit, mixing personal and business costs, spending VAT collected from customers, missing the rolling VAT threshold, taking dividends without sufficient distributable profits and overlooking employer National Insurance when costing a hire.
Accurate bookkeeping will not eliminate tax, but it makes legitimate deductions easier to support and reduces deadline surprises.
FAQs
1. What Taxes Do Small Businesses Pay in the UK?
Sole traders and individual partners generally pay Income Tax and Class 4 National Insurance on profit. Limited companies pay Corporation Tax, while owners may pay personal tax on salary or dividends. VAT, payroll taxes, business rates, Capital Gains Tax and import duties apply only when the relevant threshold, property use or transaction arises.
2. Do Small Businesses Pay Tax on Turnover or Profit?
Income Tax and Corporation Tax are generally based on taxable profit. VAT registration is based on VAT-taxable turnover, while business rates are linked mainly to commercial property value. A business therefore needs to track sales, expenses, payroll and premises separately.
3. How Much Can a Small Business Earn Before Paying Tax?
There is no single tax-free amount for every small business. A sole trader may use a Personal Allowance against total income, but a company can owe Corporation Tax from its first pound of taxable profit. The £90,000 VAT threshold is a registration threshold based on taxable turnover, not a profit allowance.
4. Does a Limited Company Pay Both Corporation Tax and Dividend Tax?
The company pays Corporation Tax on its taxable profits. When post-tax profits are distributed, the shareholder may owe personal dividend tax after available allowances. These are separate liabilities paid by separate taxpayers: the company and the individual shareholder.
5. Do I Need to Register for VAT Below £90,000?
Not usually because of historic turnover alone, but voluntary registration is allowed. It can help with reclaiming eligible input VAT, especially when customers are VAT-registered, but it may increase consumer prices or reduce margins. Registration can become compulsory sooner when taxable turnover is expected to exceed the threshold within 30 days.
6. Can Business Expenses Reduce My Tax Bill?
Allowable expenses reduce taxable profit, not tax pound for pound. Costs must satisfy the relevant tax rules, and personal spending is not deductible. Mixed-use costs may need a reasonable business proportion supported by records. Some asset purchases follow separate capital allowance rules rather than being treated as ordinary running expenses.
Conclusion
Understanding what taxes small businesses pay in the UK starts with five facts: structure, taxable profit, VAT-taxable turnover, payroll and premises. Sole traders, partnerships and companies are taxed differently, while VAT and business rates can arise even when profit is modest.
Keep reliable records, monitor thresholds throughout the year and reserve cash before deadlines. Good tax planning is less about shortcuts and more about making informed decisions while claiming the reliefs the rules genuinely allow.
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