Small businesses in the UK may have to pay several different taxes, depending on how the business is structured, how much it earns, whether it employs people and whether it operates from commercial premises.
A sole trader will normally pay Income Tax and National Insurance on business profits. A limited company generally pays Corporation Tax, while its directors and shareholders may also have personal tax liabilities on salaries and dividends. VAT, employer National Insurance and business rates may apply in addition.
There is no single “small business tax rate”. The correct tax treatment depends on the business’s legal structure, taxable profit, turnover, location and activities.
Quick Answer: What Taxes Do Small Businesses Pay?
The main taxes that may apply to a UK small business are:
- Income Tax for sole traders and individual business partners
- Class 4 National Insurance on qualifying self-employed profits
- Corporation Tax for limited companies
- VAT when taxable turnover exceeds the registration threshold, or when a business registers voluntarily
- PAYE and employer National Insurance when the business employs staff
- Dividend Tax when company shareholders receive dividends
- Business rates on certain commercial properties
- Other activity-specific charges, including Construction Industry Scheme deductions, Capital Gains Tax, customs duty and import VAT
For the 2026–27 tax year, the standard Personal Allowance is £12,570. Self-employed Class 4 National Insurance is generally charged at 6% on profits between £12,570 and £50,270 and 2% above £50,270. Limited-company Corporation Tax ranges from 19% to 25%, depending on taxable profits and related-company rules. usiness Taxes at a Glance
| Tax or obligation | Who may pay it? | Important 2026–27 figure or rule |
| Income Tax | Sole traders and individual partners | Standard Personal Allowance of £12,570 |
| Class 4 National Insurance | Self-employed people | 6% from £12,570 to £50,270; 2% above £50,270 |
| Corporation Tax | Limited companies | 19% small profits rate; 25% main rate |
| Marginal Relief | Companies with intermediate profits | Generally applies between £50,000 and £250,000 |
| VAT | Businesses exceeding the taxable turnover threshold | Registration threshold of £90,000 |
| Employer National Insurance | Businesses employing staff | 15% above the £5,000 annual secondary threshold |
| Employment Allowance | Eligible employers | Reduction of up to £10,500 |
| Dividend Tax | Individual company shareholders | £500 allowance; rates of 10.75%, 35.75% and 39.35% |
| Business rates | Businesses using eligible non-domestic premises | Relief may apply, depending on location and rateable value |
| Making Tax Digital for Income Tax | Certain sole traders and landlords | Mandatory from April 2026 where qualifying income exceeds £50,000 |
These figures apply under the rules in force on 29 July 2026. Corporation Tax uses financial years beginning on 1 April, whereas personal Income Tax normally uses tax years running from 6 April to the following 5 April. s Apply to Different Business Structures?
The legal structure of a business is one of the main factors determining how its profits are taxed.
What Taxes Does a Sole Trader Pay?
A sole trader is not legally separate from the individual running the business. The owner is generally taxed personally on the business’s taxable profit.
The main liabilities are usually:
- Income Tax on taxable profits
- Class 4 National Insurance when profits exceed the relevant threshold
- VAT where registration is required or chosen
- PAYE and employer National Insurance if the business employs people
- Business rates where qualifying commercial premises are occupied
Taxable profit is normally calculated by deducting allowable business expenses from business income. It is profit—not the amount withdrawn from the business bank account, that is generally used for Income Tax purposes.
For 2026–27, self-employed people pay Class 4 National Insurance at 6% on profits over £12,570 up to £50,270 and 2% above £50,270. Where profits are at least £7,105, Class 2 contributions are normally treated as paid for National Insurance record purposes.
People with lower profits may be able to make voluntary Class 2 contributions, charged at £3.65 per week for 2026–27. s Does a Business Partnership Pay?
An ordinary partnership generally completes a partnership tax return, but the partnership itself does not normally pay Income Tax on its total profit.
Instead, each individual partner usually pays:
- Income Tax on their allocated share of partnership profits
- Class 4 National Insurance where applicable
- Tax on other income received personally
A partner can be taxed on their allocated profit even when some of that money remains in the business rather than being withdrawn. Limited liability partnerships and partnerships involving companies can have additional rules, so professional guidance may be appropriate.
What Taxes Does a Limited Company Pay?
A limited company is legally separate from its directors and shareholders. It normally pays Corporation Tax on taxable profits from trading, investments and chargeable gains.
The company may also have to account for:
- VAT
- Employer National Insurance
- PAYE deductions
- Business rates
- Corporation Tax on gains from selling company assets
- Industry-specific taxes or deductions
Directors and shareholders may then have separate personal liabilities on salaries, benefits, dividends or gains from selling shares.
How Much Corporation Tax Does A Small Company Pay?
For the financial year beginning 1 April 2026, the Corporation Tax rates are:
- 19% small profits rate where profits are £50,000 or less
- Marginal Relief where profits are between £50,000 and £250,000
- 25% main rate where profits exceed £250,000
The thresholds can be reduced where a company has associated companies or where its accounting period is shorter than 12 months. Companies receiving certain investment income may also be excluded from the small profits rate.
Businesses should check the official Corporation Tax rates and allowances when preparing forecasts or year-end tax calculations. on Tax Example
Consider a limited company with:
- Sales of £85,000
- Allowable business costs of £45,000
- Taxable profit of £40,000
- No associated companies or other complications
At the 19% small profits rate, its estimated Corporation Tax would be:
£40,000 × 19% = £7,600
The company would retain £32,400 after Corporation Tax. This does not mean the owner can take all £32,400 without further tax. A salary, dividend or benefit provided to the owner may create a separate personal tax liability.
How Much Income Tax Does a Sole Trader Pay?
For England, Wales and Northern Ireland in 2026–27, a person receiving the full Personal Allowance generally pays:
| Band | Taxable income after allowances | Rate |
| Personal Allowance | Up to £12,570 | 0% |
| Basic rate | Up to £37,700 | 20% |
| Higher rate | £37,701 to £125,140 | 40% |
| Additional rate | Above £125,140 | 45% |
The Personal Allowance can be reduced for people with adjusted net income above £100,000.
Scottish taxpayers have different rates and bands for earnings and self-employment income. For 2026–27, Scotland uses rates of 19%, 20%, 21%, 42%, 45% and 48%. Dividend and savings taxation remains subject to UK-wide rules. er Tax Example
Suppose a sole trader in England has:
- Turnover of £60,000
- Allowable expenses of £20,000
- Taxable profit of £40,000
- No other income
- A full £12,570 Personal Allowance
The indicative calculation would be:
Income Tax:
£40,000 − £12,570 = £27,430 taxable income
£27,430 × 20% = £5,486
Class 4 National Insurance:
£40,000 − £12,570 = £27,430
£27,430 × 6% = £1,645.80
Indicative combined amount: £7,131.80
This simplified example excludes payments on account, student loan repayments, pension contributions, other income, tax reliefs and adjustments. A Scottish taxpayer could receive a different result because Scottish Income Tax bands apply.
Do Small Businesses Have To Register For VAT?
A business generally has to register for VAT when its VAT-taxable turnover exceeds £90,000 over a rolling 12-month period.
Registration may also be required when the business expects its taxable turnover to exceed £90,000 within the next 30 days alone. Businesses below the threshold can usually register voluntarily, which may be useful where customers are VAT-registered and the business incurs significant recoverable input VAT.
The principal VAT rates are:
- 20% standard rate for most goods and services
- 5% reduced rate for certain qualifying supplies
- 0% zero rate for specific goods and services
Zero-rated sales remain taxable supplies and normally count towards the VAT registration threshold. Exempt sales are treated differently.
Businesses should review the official VAT registration rules rather than assuming every sale is treated in the same way. hold Example
A consultancy has taxable turnover of £82,000 over the previous 12 months. It has not crossed the compulsory registration threshold.
Three months later, its rolling 12-month turnover reaches £92,000. It may then have to register, even if its turnover for the accounting year has not yet reached £90,000.
This is because the normal VAT test uses a rolling 12-month period, not simply the business’s financial year.
What Payroll Taxes Does a Small Employer Pay?
A business employing staff generally has to operate PAYE. It deducts Income Tax and employee National Insurance from employees’ pay and sends the amounts to HMRC.
The business may also pay employer Class 1 National Insurance. For 2026–27, the standard employer rate is 15% on qualifying earnings above the £5,000 annual secondary threshold.
Eligible employers may reduce their employer National Insurance liability by claiming up to £10,500 through the Employment Allowance. However, eligibility restrictions apply, including special rules for companies where the only employee above the secondary threshold is also a director. National Insurance Example
A qualifying employee earns £20,000 during the year.
A simplified employer National Insurance calculation would be:
£20,000 − £5,000 = £15,000
£15,000 × 15% = £2,250
This is the employer’s liability before applying any available Employment Allowance or special National Insurance category.
PAYE Income Tax and employee National Insurance are normally deducted from the employee’s gross pay. Employer National Insurance, by contrast, is normally an additional employment cost for the business.
Do Company Directors Pay Tax On Dividends?
Dividends are paid from profits remaining after Corporation Tax. They are not normally deductible when calculating the company’s taxable profit.
For 2026–27, individuals have a £500 Dividend Allowance. Dividends above that allowance are taxed according to the person’s overall Income Tax band:
- 10.75% ordinary dividend rate
- 35.75% upper dividend rate
- 39.35% additional dividend rate
The £500 allowance is a zero-rate band rather than an exemption from reporting requirements in every situation. A shareholder’s total salary, dividends and other income must be considered together when establishing the applicable rate. ould not assume that dividends are always more tax-efficient than salary.
The result can change depending on Corporation Tax, employer National Insurance, available allowances, pension contributions and the shareholder’s other income.
Do Small Businesses Pay Business Rates?
A business may have to pay business rates if it occupies a shop, office, warehouse, factory or other non-domestic property.
In England, eligible businesses occupying one property with a rateable value of £12,000 or less may receive 100% Small Business Rate Relief. Relief gradually reduces for rateable values between £12,001 and £15,000.
The rules differ across England, Scotland, Wales and Northern Ireland. Local councils or the appropriate devolved authority determine bills and administer relevant relief schemes.
Businesses operating from home may not normally pay business rates unless part of the property is used exclusively for business, has been adapted for commercial use or customers and employees regularly attend. Taxes Might Apply?
Not every small business will pay these taxes, but additional liabilities can arise from particular transactions or industries.
Capital Gains Tax
A sole trader or partner may face Capital Gains Tax when disposing of business assets or selling all or part of a business. A company generally pays Corporation Tax rather than Capital Gains Tax on gains from selling its assets.
Individuals may qualify for Business Asset Disposal Relief when detailed eligibility conditions are met. Relief should not be assumed before the ownership period, business type and disposal conditions have been checked.
Construction Industry Scheme Deductions
Businesses working in construction may have obligations under the Construction Industry Scheme. Contractors may need to verify subcontractors, make deductions from relevant payments and submit monthly returns to HMRC.
CIS deductions are usually advance payments towards the subcontractor’s eventual tax and National Insurance liability, rather than a separate final tax.
Import VAT and Customs Duty
A business importing products into the UK may have to pay import VAT and customs duty. The treatment depends on factors such as the goods’ classification, origin, customs value and applicable trade arrangements.
Taxes on Business Property Transactions
Buying or leasing commercial property may create Stamp Duty Land Tax liabilities in England and Northern Ireland. Scotland uses Land and Buildings Transaction Tax, while Wales uses Land Transaction Tax.
What Is Making Tax Digital For Income Tax?
Making Tax Digital for Income Tax became mandatory from 6 April 2026 for many sole traders and landlords whose qualifying gross income from self-employment and property exceeded £50,000 in the relevant earlier tax year.
Affected taxpayers generally need to:
- Keep digital income and expense records
- Use compatible accounting software
- submit quarterly updates to HMRC
- Complete the required end-of-year tax process
The threshold is based on qualifying income before expenses, not taxable profit. HMRC states that the threshold falls to more than £30,000 from April 2027 and more than £20,000 from April 2028, subject to the applicable rules and exemptions. portant distinction.
A sole trader with £55,000 of gross qualifying income and £25,000 of expenses may fall within Making Tax Digital even though the resulting profit is only £30,000.
What Are the Main Small Business Tax Deadlines?
| Obligation | Normal deadline |
| Register for Self Assessment when newly required | 5 October following the relevant tax year |
| File a paper Self Assessment return | 31 October following the tax year |
| File an online Self Assessment return | 31 January following the tax year |
| Pay Self Assessment tax | Normally 31 January, with a possible payment on account on 31 July |
| Pay Corporation Tax for a standard small company | Nine months and one day after the accounting period ends |
| File a Company Tax Return | 12 months after the accounting period ends |
| Submit VAT Return and payment | Usually one month and seven days after the VAT period |
| Report employee pay through payroll | On or before the employee’s normal payday |
Corporation Tax payment is normally due before the Company Tax Return filing deadline. Large companies can be subject to quarterly instalment rules instead. Small Business Prepare for Its Tax Bill?
A small business can reduce the risk of an unexpected tax bill by building tax planning into its regular bookkeeping.
Practical steps include:
- Keeping business and personal transactions separate
- Updating bookkeeping at least monthly
- Monitoring VAT-taxable turnover on a rolling 12-month basis
- Recording receipts and evidence for allowable expenses
- Setting aside part of incoming cash for tax
- Checking whether payments on account will be due
- Reviewing payroll liabilities before hiring
- Forecasting Corporation Tax before paying dividends
- Checking whether Making Tax Digital applies
Resources such as the UK Small Business Blog can help owners understand wider business administration topics, but tax decisions should ultimately be checked against current HMRC guidance or discussed with a suitably qualified professional.
Frequently Asked Questions
How much tax does a small business pay in the UK?
There is no fixed percentage for every small business. Sole traders generally pay Income Tax and National Insurance based on profit. Companies usually pay Corporation Tax at between 19% and 25%, after which shareholders may pay tax on money extracted from the company.
Is there a tax-free allowance for small businesses?
There is no universal small-business tax-free allowance. Individuals may receive a Personal Allowance, currently £12,570 for 2026–27. A £1,000 trading allowance may also apply in limited circumstances, although claiming actual business expenses may be more appropriate where those expenses exceed the allowance. all business 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. Making Tax Digital for Income Tax uses qualifying gross income before expenses when determining whether the mandatory threshold has been exceeded.
Does a new business have to pay tax in its first year?
A new business can have a tax liability in its first year if it makes taxable profits, employs staff, registers for VAT or carries out another taxable activity. The payment may not become due until after the accounting period or tax year ends.
Does a sole trader pay Corporation Tax?
No. A sole trader normally pays personal Income Tax and National Insurance on taxable business profit. Corporation Tax is generally paid by incorporated companies and certain organisations.
Does a limited company pay Income Tax?
A limited company normally pays Corporation Tax rather than Income Tax on its profits. Directors and shareholders may personally pay Income Tax on salaries, benefits or dividends received from the company.
Can a business voluntarily register for VAT?
Yes. A UK-established business can generally apply for voluntary VAT registration while below the £90,000 compulsory threshold. The business will normally have to charge VAT on taxable sales and comply with VAT record-keeping and return requirements.
Are business taxes lower for companies than sole traders?
Not necessarily. A company may offer planning flexibility, but the overall result depends on Corporation Tax, salary, dividends, employer National Insurance, administrative costs and the owner’s wider circumstances. Incorporation should not be based on one headline tax rate alone.
Note: This article has been reviewed against official HM Revenue & Customs and UK Government guidance.
