Even a profitable UK small business can run into serious cash flow problems if it misunderstands its tax obligations. HMRC collected £814.0 billion in tax receipts in 2024/25, according to HMRC’s tax receipts statistics. Understanding UK small business taxes is essential for budgeting, avoiding penalties and deciding how to extract profits from your company. Many women founders start as sole traders and later incorporate as the business grows, so the right structure can change over time.
Your business structure determines what you pay. A sole trader pays income tax and National Insurance on profits through Self Assessment. A limited company pays corporation tax on its profits, and you pay income tax and dividend tax on what you extract. The figures below are for the 2026/27 tax year. Thresholds and rates change regularly, so always check the latest guidance on GOV.UK.
National Insurance for the self-employed
National Insurance is not technically a tax, but it is money you pay to the government and it affects your entitlement to the State Pension and certain benefits. Everyone in the UK should have a National Insurance number, usually allocated shortly before their 16th birthday.
Class 2 National Insurance was effectively abolished for self-employed people from April 2024. You no longer pay it automatically if your profits are above the Small Profits Threshold, set at £6,725 for 2026/27, HMRC confirms. If your profits are below that threshold, you can still pay Class 2 voluntarily, currently £3.50 a week, to protect your State Pension record. Check the latest rate on GOV.UK and contact HMRC to arrange voluntary contributions.
Once your profits exceed the Lower Profits Limit of £12,570 for 2026/27, you pay Class 4 National Insurance as a percentage of your profits. For 2026/27, Class 4 is charged at 6% on profits between £12,570 and £50,270, and at 2% on profits above £50,270, HMRC confirms.
National Insurance for company directors and employees
If you run a limited company and pay yourself a salary, the position is different. Class 1 employee National Insurance is deducted from your wages if your salary is above the primary threshold of £12,570 a year, or roughly £242 a week, in 2026/27, HMRC says. The employee rate is 8% on earnings between the primary threshold and the upper earnings limit of £50,270, and 2% above that.
The company also pays Class 1 employer National Insurance on salaries above the secondary threshold of £5,000 a year, or around £96 a week, from April 2025, HMRC states. From April 2025, the employer rate increased to 15%, HMRC states. However, most employers with a National Insurance liability of £100,000 or less can claim the Employment Allowance, which rose to £10,500 a year from April 2025, HMRC confirms. Both employee and employer National Insurance are paid to HMRC through the PAYE scheme.
Income tax on business profits
Income tax works differently depending on your structure. As a sole trader, you pay income tax on your business profit once it exceeds your personal allowance of £12,570 for 2026/27, HMRC confirms. You report this through your Self Assessment tax return, which must be filed online by 31 January following the end of the tax year, with any tax due paid by the same date.
If you trade through a limited company, you pay income tax on any salary the company pays you. Income tax on a salary is deducted by the company under PAYE and paid to HMRC. Depending on your total income, including dividends, you may also need to complete a Self Assessment return.
The UK income tax system is progressive. For 2026/27, the basic rate is 20% on taxable income up to £37,700, the higher rate is 40% on income between £37,701 and £125,140, and the additional rate is 45% on income above £125,140, according to HMRC. The personal allowance is reduced by £1 for every £2 of income above £100,000, so it reaches zero at £125,140.
Dividend tax for owner-directors
Many owner-directors take a small salary and withdraw further profits as dividends. Dividends are taxed separately, and the rates are lower than income tax, but the tax-free allowance is small.
- First £500 of dividends — tax-free (the dividend allowance for 2026/27, HMRC confirms)
- 8.75% for dividends falling within the basic-rate band
- 33.75% for dividends falling within the higher-rate band
- 39.35% for dividends falling within the additional-rate band
Dividends are treated as the top slice of your income, so they are taxed after your salary and other earnings. This mix of salary and dividends is common, but it must be recorded properly, with dividend vouchers and board minutes, and declared on your Self Assessment tax return.
VAT registration and rates
VAT is not just a consumer tax; it is a major consideration for businesses. Whether you are a sole trader, partnership, LLP or limited company, you must register for VAT if your taxable turnover exceeds £90,000 in any 12-month period. The VAT registration threshold rose to £90,000 from 1 April 2024 and remains at that level for 2026/27, HMRC confirms.
The standard VAT rate is 20%, HMRC says. Some goods and services are zero-rated, including most food, children’s clothing, books and newspapers. Others, such as domestic fuel and children’s car seats, attract the reduced rate of 5%. A small number of supplies, including some financial services and education, are exempt from VAT altogether.
Once registered, you must charge VAT on your taxable sales and can usually reclaim the VAT you pay on business purchases and expenses. All VAT-registered businesses must keep digital records and submit VAT returns using Making Tax Digital-compatible software. If you are a sole trader, our Making Tax Digital checklist for self-employed women sets out what you need before you start.
Corporation tax for limited companies
This is where sole traders and limited companies differ most. A limited company pays corporation tax on its profits, and there is no personal allowance. As soon as the company makes a profit, corporation tax is due.
For the 2026/27 financial year, the main rate of corporation tax is 25% for companies with profits above £250,000, HMRC confirms. Companies with profits of £50,000 or less pay the small profits rate of 19%, and marginal relief applies to profits between £50,000 and £250,000, HMRC says. The tax is payable nine months and one day after the end of the company’s accounting period, and the associated returns are usually more complex than a sole trader’s Self Assessment.
Given the interplay between salary, dividends, employer National Insurance and corporation tax, many limited companies appoint an accountant to ensure they remain compliant and tax-efficient. If you are deciding whether to incorporate, our guide to sole trader vs limited company structures explains how the tax differences affect women founders.
Business rates on commercial property
Business rates are a local tax on non-domestic property. If you run your business from commercial premises or an office, you will usually pay business rates based on the property’s rateable value, which is set by the Valuation Office Agency. You may qualify for reliefs such as small business rate relief, rural rate relief or charitable rate relief, depending on your circumstances.
If you are a sole trader working from home, you will not usually pay business rates unless you have a dedicated business area and regularly see clients or customers at the property. If your home use is more than incidental, contact your local council to check whether business rates apply.
Managing your UK small business taxes
Understanding your UK small business taxes is essential if you want to avoid penalties and manage cash flow. HMRC can charge interest and penalties for late filing and late payment, and the amounts can escalate quickly. Keep accurate records, diarise key deadlines, and do not hesitate to seek professional advice when your affairs become complex.
Action steps
- Check your business structure is still tax-efficient using our sole trader vs limited company guide.
- Register for HMRC online services and set calendar reminders for Self Assessment, VAT and corporation tax deadlines.
- Review your allowable expenses before the tax year ends. Our allowable expenses guide explains what you can claim.
- If you are VAT-registered, confirm your Making Tax Digital software is compatible and your digital records are up to date.
A little preparation now can save you money and stress later.
