An Introduction to UK Business Taxes

For most people, tax is just something you see on your payslip that your employer calculates for you and kindly pays over to HMRC. However, if you are a business owner, or looking to start a business, then tax is something you need to learn about to enable you to make the best choices for your business.

Whether you're a contractor embarking on the self-employed journey or running a limited company with a team of staff, you need to understand different taxes and what you will be responsible for. This guide will give you a quick overview about the taxes you may be liable to report and pay.

The 5 Main Taxes You Might Deal With:

Tax Type	Who It Applies To	What It’s For
Income Tax	Sole traders & individuals	Tax on your earnings (e.g. business profits) and other income (e.g. dividends, interest)
National Insurance	Sole traders, company directors, employees.	Builds your state pension & covers social benefits
Corporation Tax	Limited companies	Tax on company profits
VAT	Most businesses with turnover over £90k	Sales tax you collect on behalf of HMRC
PAYE (Payroll)	Employers (including company directors)	Income tax & NI on employee salaries

1. Income Tax

Most people are likely to be familiar with Income tax, or at least will have paid some. This is the tax that you pay on earnings through work and investment income.

If you’re a sole trader, you’ll pay Income Tax on your business profits – not your total income. Profits are calculated by deducting your tax allowable expenses from your taxable income.

If you are a Director/Shareholder of your own company, you will be liable to Income Tax if you pay yourself a salary or take dividends.

If you are self-employed, or a company director, you must file a Self-Assessment tax return each year.

The amount of Income Tax you pay depends on your total level of earnings based upon the table below. with different tax rates paid on your income between certain bands.

Income Tax bands for 2025/26 (England):

Band	Tax Rate
Personal Allowance (up to £12,570)	0%
Basic rate (£12,571–£50,270)	20%
Higher rate (£50,271–£125,140)	40%
Additional rate (over £125,140)	45%

2. National Insurance (NI)

If you’re a sole trader/self-employed:

• You’ll pay Class 4 NI on profits over £12,570 at 6% and at 2% on profits over £50,270

• Class 2 NI was abolished in 2024, but can still be paid voluntarily

  
  

If you run a limited company:

• You’ll pay NI on your salary through PAYE

You may also pay employer’s NI if you have staff who's earnings are above the threshold.

3. Corporation Tax (For Limited Companies)

If you’ve set up a limited company, the company itself pays tax on its profits.

• Corporation Tax is 25% on profits (as of 2025) for companies who's profits are £250,000 and above. For small companies with profits up to £50,000 there is a lower rate of 19%, and for companies with profits between £50,000 and £250,000 a marginal tax relief is given against the 25% rate.

• You’ll also pay income tax if you take money out (e.g. via dividends as a shareholder or your salary as a director)

• If you take a salary as a Director, this is an allowable deduction for the company in calculating it’s taxable profits. Dividends paid to shareholders are always paid from the remaining profits after corporation tax.

  
  

4. VAT (Value Added Tax)

You must register for VAT if your taxable turnover goes over £90,000 in a 12-month period, and you do not meet any of the exemption criteria. You can also register voluntarily if it makes sense for your business.

What VAT involves:

• Charging VAT on your sales (usually at 20%)

• Claiming VAT back on business expenses

• Submitting quarterly VAT returns

• Paying VAT to HMRC

  
  

Tip: VAT can be fiddly – chat to an accountant, especially if you are considering registering voluntarily.

5. PAYE & Payroll Taxes

If you employ people (including yourself as a company director), you’ll likely need to register for PAYE and run a payroll system.

This includes:

• Deducting Income Tax and NI from salaries

• Paying employer’s NI

• Filing Real Time Information (RTI) reports every time you pay someone

• Sending payments to HMRC

  
  

Even small businesses with just one employee need to do this right.

Reporting Taxes

If you are self-employed or a director/shareholder, you will be responsible for declaring and paying your own tax to HMRC, and that of any employees. The table below provides a summary of the different filings required and the corresponding deadlines:

Tax Deadlines at a Glance

Task	Deadline
Register as sole trader	5 October (during the second tax year)
File Self Assessment	31 January (after the tax year)
Pay Self Assessment tax	31 January (after the tax year)
Register for Corporation Tax	Within 3 months of trading
File Corporation Tax return	12 months after company year-end
Pay Corporation Tax	9 months + 1 day after company year-end
VAT returns	Usually every quarter
Payroll submissions (RTI)	On or before each payday

HMRC may issue penalties for not registering on time for the correct taxes, filing your returns after the deadline or making late payments of Tax and NIC.

Do I Need to Pay All These Taxes?

No – just the ones that apply to your business structure and setup.

Here’s a simple reminder of which taxes you may need to pay:

Business Type	Likely Taxes
Sole Trader	Income Tax, NI, VAT (if registered), PAYE (if you have employees)
Limited Company	Corporation Tax, PAYE (if you have employees or take a salary as a director), Income tax (on Salary and Dividends), VAT (if registered)

Final Thoughts

We all need to pay tax to keep our country running yet it is something which many people do not have enough knowledge of. If you are looking to start a business, or you’re already up and running, make sure you understand what applies to you, and don’t leave it until the last minute. Understanding and planning for tax can make a big difference to your success as a business owner.

And remember: you don’t have to figure it all out alone.

Need help staying on top of your taxes? Talk to Purcell’s Accountancy Ltd  – we’ll guide you through it, help you stay compliant, and keep more of what you earn.