Start a business and suddenly everyone wants a piece. HMRC especially. But what taxes do business owners pay in the UK? Depends on your setup.
Sole trader? Limited company? Partnership? Each one gets taxed differently. None of them are simple.
Sole Traders Pay Income Tax
If you’re a sole trader, HMRC essentially treats your business income as personal income. You pay income tax not on your gross revenue but rather on your profits.
For example, you brought in £60,000 in sales but had £20,000 in expenses. You are being taxed on £40,000, not £60,000.
The personal allowance in 2025/26 is £12,570. And you don’t pay tax on that part. After that:
- 20% on £12,571 to £50,270
- 40% on earnings from £50,271 to £125,140
- 45% on income above £125,140
So, if you made £40,000 profit as a sole trader, for example, you’d pay nothing on the first £12,570 and then 20% on the remaining £27,430. That’s the equivalent of approximately £5,486 in income tax.
Plus National Insurance. We will get there in a moment.
Limited Companies Pay Corporation Tax
What taxes do businesses pay in the UK, if they’re limited companies? Corporation tax, for starters.
Currently 19% for profits up to £50,000. For those making between £50,000 and £250,000, a marginal rate is gradually applied. Above £250,000, you’re paying 25%.
How much tax does a limited company pay in the UK? So, for example, let’s say your business had a profit of £80,000. You would pay 19% on the initial £50,000 (£9,500) and then a marginal rate on £30,000. Comes out to a total of £16,750.
The HMRC website has a corporation tax calculator that will do the sums for you. Saves doing it on paper.
Limited companies also need to file a CT600 form every year declaring their corporation tax. Miss the deadline and you’ll get fined. HMRC doesn’t mess about.
National Insurance Is a Right Pain
Sole traders pay National Insurance at class 2 and class 4. Class 2 is a fixed weekly sum of £3.45 if your profits exceed £12,570. That’s about £179 a year.
Class 4 is 9% on profits between £12,570 and £50,270, then at the rate of 2% on anything above that.
So on a £40,000 profit you would pay 9% on £27,430 (around £2,469) plus your Class 2 contribution of £179. Total National Insurance: around £2,648.
Directors of limited companies pay Class 1 National Insurance on their salary. If your salary is £12,570 (the tax-free allowance), then you won’t pay any National Insurance on it. Go above that and you’re paying 13.8% employer’s National Insurance plus whatever the employee rate is.
Most directors take a small salary and the rest in dividends to reduce National Insurance. More on that in a second.
VAT If You’re Making Decent Money
Once your turnover hits £90,000 in a 12-month period, you need to register for VAT. That’s total sales, not profit.
The standard VAT rate is 20%. You charge VAT on your sales, pay VAT on your purchases, and give HMRC the difference every quarter.
Some businesses are on the Flat Rate Scheme, where you charge 20% VAT but only pay a lower percentage to HMRC based on your industry. Keeps things simpler if you’re a small business.
VAT registration isn’t optional once you hit that threshold. Register late and HMRC will backdate your liability and probably fine you too.
Dividends Get Taxed Too
Limited company owners often take dividends instead of salary. Dividends are taxed differently and there’s no National Insurance on them.
The first £500 of dividends are tax-free in 2025/26. After that:
- 8.75% for basic rate taxpayers
- 33.75% for higher-rate taxpayers
- 39.35% for additional rate taxpayers
So if you took £30,000 in dividends and you’re a basic rate taxpayer, you’d pay 8.75% on £29,500 (the first £500 is free). That’s about £2,581.
Remember though – your company already paid corporation tax on those profits before paying dividends. So you’re effectively getting taxed twice. Just at lower rates than if you’d taken it all as salary.
Business Rates If You’ve Got Premises
Got a shop, office, or warehouse? You’re paying business rates. It’s like council tax but for commercial properties.
The amount depends on your property’s rateable value. Small businesses can get relief, sometimes up to 100% but you need to apply for it.
When do small businesses pay taxes in the UK? Business rates are usually paid in 10 monthly instalments from April to January. You can pay annually if you prefer.
PAYE If You’ve Got Employees
Hire anyone and you’re running a PAYE scheme. You need to:
- Register as an employer with HMRC
- Deduct income tax and National Insurance from wages
- Pay employer’s National Insurance (13.8% on earnings above £175 per week)
- Send everything to HMRC every month or quarter
There’s also Workplace Pensions to sort. Auto-enrol eligible employees and contribute at least 3% of their salary. They contribute 5%. A total of 8% is going into their pension.
Miss a PAYE payment and HMRC charges interest. Miss it regularly and they’ll investigate you. Not fun.
Capital Gains Tax When You Sell
Sell your business or business assets and you might pay Capital Gains Tax. For 2025/26, the annual exemption is £3,000.
After that, you’re paying:
- 10% if you’re a basic rate taxpayer
- 20% if you’re a higher or additional rate taxpayer
Business Asset Disposal Relief (used to be called Entrepreneurs’ Relief) can reduce the rate to 10% on up to £1 million of qualifying gains. Worth looking into if you’re selling up.
Self Assessment Every January
Sole traders file a Self Assessment tax return every year. The deadline is 31st January for online filing.
You need to declare all your income, claim expenses, and pay whatever tax you owe. Miss the deadline and you’ll get fined £100 straight away. Leave it longer and the fines increase.
Limited company directors also file Self Assessment if they’re taking income from the company.
There’s a small business tax calculator in the UK on various websites that estimates what you’ll owe. Helps you plan ahead so you’re not scrambling in January.
Estimated Tax Payments
If your tax bill was over £1,000 last year, HMRC makes you pay “payments on account” for the following year.
These are basically estimated tax payments due on 31st January and 31st July. You’re paying half your expected tax bill each time.
Then when you file your actual return, you either pay the difference or get a refund.
Catches people out because you’re essentially paying tax a year in advance. Need to budget for it or you’ll get stung.
Business Tax UK Calculator Tools
HMRC has calculators on their website for most of this:
- Income tax calculator
- National Insurance calculator
- Corporation tax calculator
- VAT Flat Rate Scheme calculator
Worth using them before you commit to anything. Accountants also have software that does all the calculations automatically.
What This Means in Practice
So what taxes do business owners pay in the UK? Depends entirely on your setup.
Sole trader making £40,000 profit? You’re paying about £5,486 in income tax plus £2,648 in National Insurance. Total: £8,134.
Limited company making £40,000 profit? Pay 19% corporation tax (£7,600), then take the rest as dividends and salary. You’ll probably end up paying less overall than a sole trader but you’ve got more admin.
Partnership? Each partner pays tax on their share of the profits like a sole trader.
VAT registered? Add that to your quarterly tasks.
Got employees? PAYE every month.
Own premises? Business rates.
It adds up fast. Most business owners end up paying 25-40% of their profits in various taxes once you add everything together.
Getting Help
Honestly, get an accountant. Costs a few hundred quid a year but they’ll save you more than that in avoided mistakes.
HMRC’s guidance is detailed but it’s written like legal documents. Accountants translate it into English and make sure you’re claiming all the reliefs you’re entitled to.
They’ll also tell you whether you’re better off as a sole trader or limited company. Depends on your income, your expenses, and what you’re planning long-term.
The Bottom Line
Running a business in the UK means dealing with multiple taxes. Income tax or corporation tax. National Insurance. VAT if you’re doing well. PAYE if you’ve got staff. Business rates if you’ve got premises.
It’s complicated on purpose, as HMRC wants their money and they’ve created multiple ways to get it.
Budget for tax from the start. Put 30-40% of your profits aside for tax payments. You might not need it all but better to have it saved than to be scrambling to pay HMRC in January.
File everything on time. Pay everything on time. Keep good records. And seriously, get an accountant. They’re worth every penny.
