Even successful small businesses can run into difficulties if they misunderstand the tax rules that apply to them. The UK tax system is complicated, and it is not unusual for business owners to miss a deadline, misread a threshold or record an expense incorrectly. The result can be an unexpected bill, interest charges or even a penalty. Doing your research early and keeping accurate records is the best way to stay on the right side of HMRC.
Whether you operate as a sole trader or a limited company affects what you pay and how you report it. Below is a practical overview of the main UK small business taxes you need to understand, with figures for the 2025/26 tax year unless stated otherwise. Key dates to remember are the Self Assessment deadline of 31 January and, for limited companies, the corporation tax payment deadline nine months and one day after the accounting period ends.
National Insurance
National Insurance (NI) is not technically a tax, but it is money collected by HMRC 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 your 16th birthday.
If you are self-employed and file a Self Assessment tax return, your NI position depends on your trading profits. For 2025/26:
- Class 2 NI is no longer compulsory for self-employed people whose profits are at or above the Small Profits Threshold of £6,725. If your profits are below this level, you can still pay Class 2 voluntarily at £3.45 a week to protect your State Pension record and certain benefits.
- Class 4 NI is charged at 6% on profits between £12,570 and £50,270, and at 2% on profits above £50,270.
Mandatory Class 2 contributions were abolished for most self-employed people from 6 April 2024, so check that any guidance you follow reflects the current rules.
If you run a limited company and take a salary, the company must operate PAYE. For 2025/26, employee Class 1 NI is due at 8% on salary between the primary threshold of £12,570 a year and the upper earnings limit of £50,270 a year, and at 2% above that. The company also pays employer Class 1 NI at 15% on salary above the secondary threshold of £5,000 a year, although the Employment Allowance may reduce or eliminate this bill.
Dividend tax
Many owner-directors take a small salary and the rest of their income as dividends. Dividends are not a deductible expense for corporation tax, but they do not attract NI. Each individual has a dividend allowance, which is £500 for 2025/26. Dividend income above the allowance is taxed at:
- 8.75% within the basic-rate band
- 33.75% within the higher-rate band
- 39.35% within the additional-rate band
Because dividends sit on top of your other income, the rate you pay depends on your total taxable income for the year. This is why many directors plan a mix of salary and dividends to manage their overall tax bill.
Income tax
Income tax is relatively straightforward for many sole traders. You pay it on your business profit once it exceeds your personal allowance, which is £12,570 for 2025/26 and is frozen at this level until April 2028. Above the allowance, the UK rates are 20% (basic rate), 40% (higher rate) and 45% (additional rate). If you live in Scotland, the bands and rates are set by the Scottish Government and are different from the rest of the UK.
For limited companies, income tax applies to the salary and dividends you receive. The company deducts income tax from your salary through the PAYE scheme and pays it to HMRC. Dividend tax, described above, is reported through your Self Assessment tax return. Sole traders may also need to make payments on account, which are advance payments towards the following year’s tax bill.
VAT
Value Added Tax (VAT) applies to most goods and services. You must register for VAT if your taxable turnover over the last 12 months exceeds £90,000, or if you expect it to exceed that figure in the next 30 days. The standard VAT rate is 20%. Some goods and services qualify for the reduced rate of 5% or are zero-rated, and a small number are exempt.
Once registered, you must charge VAT on relevant sales, submit VAT returns and pay the VAT due, usually quarterly. Making Tax Digital for VAT means most businesses must keep digital records and use compatible software to file returns. Smaller businesses may be able to use the VAT Annual Accounting Scheme or Cash Accounting Scheme to simplify cash flow.
Corporation tax
Corporation tax is paid by limited companies, not sole traders. A company pays corporation tax on its profits, with no personal allowance. For accounting periods starting on or after 1 April 2023, the rates are:
- 19% on profits up to £50,000 (small profits rate)
- 25% on profits over £250,000 (main rate)
- Marginal relief applies to profits between £50,000 and £250,000, giving an effective rate between 19% and 25%
The £50,000 and £250,000 thresholds are reduced if a company has one or more associated companies. Corporation tax is due nine months and one day after the end of the company’s accounting period, and the return must usually be filed within 12 months. Because company accounts, dividend planning and salary decisions are closely linked, many small companies use an accountant to make sure nothing is missed.
Business rates
Business rates are a property tax on non-domestic premises. If you rent or own a shop, office, factory or warehouse, you will normally pay business rates to your local council. The amount is based on the property’s rateable value and the multiplier set by the government.
If you work from home as a sole trader, you usually do not pay business rates unless you have converted part of your home into dedicated business premises or regularly receive clients there. If you are unsure, contact your local council. You may also qualify for small business rate relief if your property’s rateable value is below £15,000, or full relief if it is £12,000 or less.
This guide is for general information only. Tax rules and thresholds change frequently, so always check the latest figures on GOV.UK or speak to a qualified accountant before making decisions.
