UK Business Tax: A Complete Guide for Entrepreneurs

By Emma Thompson · Last updated 2026-06-08

Understanding Your Tax Obligations

Tax is one of the most complex and important aspects of running a business in the UK. Getting it wrong can result in penalties, interest charges, and in serious cases, criminal prosecution. Getting it right — and planning proactively — can save you thousands of pounds each year. This guide covers every major tax that UK business owners need to understand.

Self Assessment and Income Tax (Sole Traders and Partnerships)

If you are self-employed as a sole trader or a partner in a partnership, you pay Income Tax on your business profits through the Self Assessment system.

How Self Assessment Works

1. Register for Self Assessment with HMRC by 5 October in your second year of trading (register as soon as you start to be safe)

2. Keep records of all income and allowable expenses throughout the year

3. Complete your tax return online by 31 January each year (covering the previous tax year, which runs 6 April to 5 April)

4. Pay your tax bill by 31 January (for any balance owed) and 31 July (for your payment on account)

Income Tax Rates (2024/25)

| Band | Taxable Income | 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% |

Note: The Personal Allowance is reduced by £1 for every £2 of income above £100,000, and is zero for income above £125,140.

Payments on Account

HMRC requires most self-employed people to make advance payments towards their next year's tax bill. These are called "payments on account" and are each 50% of your previous year's tax bill, paid on 31 January and 31 July. This can create a cash flow challenge in your first year of trading — plan ahead.

Allowable Business Expenses

You can deduct allowable business expenses from your income before calculating your tax bill. Common allowable expenses include:

• Office costs: Stationery, postage, printing, computer consumables

• Travel: Business mileage (45p per mile for the first 10,000 miles, 25p thereafter), public transport, parking, hotels for business travel

• Premises: Rent, rates, utilities for business premises; a proportion of home costs if you work from home

• Staff costs: Salaries, employer NI, pension contributions

• Marketing: Advertising, website costs, business cards

• Professional fees: Accountant, solicitor, business insurance

• Equipment: Computers, tools, machinery (via capital allowances)

• Training: Courses directly related to your current business

What you cannot claim: Personal expenses, client entertainment (not allowable for tax purposes), fines and penalties, clothing (unless a uniform or protective clothing), commuting costs.

Working From Home

If you work from home, you can claim a proportion of your household costs as a business expense. HMRC allows a simplified flat rate:

• 25–50 hours/month: £10/month

• 51–100 hours/month: £18/month

• 101+ hours/month: £26/month

Alternatively, you can calculate the actual proportion of costs attributable to business use (more complex but potentially higher).

Corporation Tax (Limited Companies)

If you run a limited company, the company pays Corporation Tax on its profits. You as a director/shareholder pay Income Tax separately on your salary and dividends.

Corporation Tax Rates (2023/24 onwards)

| Profit Level | Rate |

|---|---|

| Up to £50,000 | 19% (small profits rate) |

| £50,001 – £250,000 | Marginal relief applies |

| Over £250,000 | 25% (main rate) |

Marginal relief tapers the rate between 19% and 25% for profits between £50,000 and £250,000. The effective rate for profits of £100,000 is approximately 21.5%.

Key Corporation Tax Deadlines

• File your Company Tax Return (CT600): Within 12 months of your accounting period end

• Pay Corporation Tax: Within 9 months and 1 day of your accounting period end

• File annual accounts with Companies House: Within 9 months of your accounting period end

Director Salary and Dividends

Most owner-managed limited companies pay directors a low salary (typically around £12,570 — the Income Tax Personal Allowance, or £9,100 — the secondary NI threshold) and the remainder as dividends. This is more tax-efficient because:

• Dividends are taxed at lower rates than salary (8.75% basic rate, 33.75% higher rate, 39.35% additional rate in 2024/25)

• Dividends do not attract National Insurance

• The company gets Corporation Tax relief on the salary but not on dividends

Example: A director taking £9,100 salary + £40,000 dividends pays significantly less tax and NI than one taking £49,100 as salary.

Important: Always take advice from an accountant before setting your salary and dividend strategy, as the optimal split depends on your personal circumstances.

VAT (Value Added Tax)

VAT is a consumption tax charged on most goods and services sold in the UK. The standard rate is 20%.

When Must You Register for VAT?

You must register for VAT if:

• Your VAT-taxable turnover in the previous 12 months exceeds £90,000 (the current threshold as of April 2024)

• You expect your turnover to exceed £90,000 in the next 30 days

You can also register voluntarily if your turnover is below the threshold — this can be beneficial if you sell mainly to VAT-registered businesses (you can reclaim input VAT on your purchases).

VAT Rates

| Rate | What It Applies To |

|---|---|

| 20% (Standard) | Most goods and services |

| 5% (Reduced) | Domestic energy, children's car seats, some renovation work |

| 0% (Zero-rated) | Food (most), children's clothing, books, newspapers, public transport |

| Exempt | Financial services, insurance, health services, education |

How VAT Works

• You charge VAT on your sales (output VAT)

• You reclaim VAT on your business purchases (input VAT)

• You pay HMRC the difference (or receive a refund if input VAT exceeds output VAT)

• Most businesses file VAT returns quarterly

Making Tax Digital for VAT

All VAT-registered businesses must use Making Tax Digital (MTD) compatible software to keep digital records and submit VAT returns. You cannot submit VAT returns manually via the HMRC website.

VAT Schemes

Several special VAT schemes can simplify administration or improve cash flow:

• Flat Rate Scheme: Pay a fixed percentage of your gross turnover as VAT (rates vary by industry). Simpler but may cost more or less than standard VAT depending on your business.

• Cash Accounting Scheme: Pay VAT when customers pay you (not when you invoice). Helps cash flow for businesses with slow-paying customers.

• Annual Accounting Scheme: File one VAT return per year and make advance payments. Reduces administration.

National Insurance Contributions (NICs)

National Insurance is paid by both employees and employers, and by the self-employed. It funds the NHS, state pension, and other benefits.

Self-Employed NICs

| Class | Who Pays | Rate (2024/25) | On What |

|---|---|---|---|

| Class 2 | Self-employed | £3.45/week | Profits above £12,570 |

| Class 4 | Self-employed | 9% | Profits £12,570–£50,270 |

| Class 4 (higher) | Self-employed | 2% | Profits above £50,270 |

Note: Class 2 NICs were abolished from April 2024. Self-employed people now only pay Class 4 NICs, but still receive NI credits towards the state pension.

Employer NICs (Limited Companies)

If you pay yourself or employees a salary, the company pays employer NICs:

• 13.8% on earnings above £9,100/year (secondary threshold)

• This is why many owner-managed companies set director salaries at or just below £9,100

Capital Gains Tax (CGT)

If you sell a business asset (equipment, property, shares) for more than you paid for it, you may owe Capital Gains Tax on the profit.

CGT Rates for Business Assets (2024/25)

• Basic rate taxpayers: 10% on most assets

• Higher/additional rate taxpayers: 20% on most assets

• Residential property: 18% (basic) / 24% (higher)

Business Asset Disposal Relief (formerly Entrepreneurs' Relief)

If you sell all or part of your business, you may qualify for Business Asset Disposal Relief, which reduces CGT to 10% on the first £1 million of qualifying gains (lifetime limit). Conditions apply — you must have owned the business for at least 2 years and been a director/employee.

Making Tax Digital (MTD)

HMRC is rolling out Making Tax Digital across all taxes:

• MTD for VAT: Already mandatory for all VAT-registered businesses

• MTD for Income Tax (MTD ITSA): Mandatory from April 2026 for sole traders and landlords with income over £50,000; April 2027 for income over £30,000

• MTD for Corporation Tax: Planned but not yet mandated

Under MTD for Income Tax, you will need to submit quarterly updates to HMRC (not full tax returns — just summaries of income and expenses), plus a final declaration at year end.

Key Tax Deadlines Summary

| Deadline | What's Due |

|---|---|

| 5 October | Register for Self Assessment (if not already registered) |

| 31 October | Paper Self Assessment tax return deadline |

| 31 January | Online Self Assessment tax return deadline + payment of tax owed + first payment on account |

| 31 July | Second payment on account (Self Assessment) |

| 9 months + 1 day after year end | Corporation Tax payment |

| 12 months after year end | Corporation Tax return (CT600) |

| 9 months after year end | Annual accounts filed with Companies House |

| Quarterly | VAT returns |

| Monthly | PAYE payments to HMRC |

Tax Planning Tips

1. Use your allowances: Every UK taxpayer has a Personal Allowance (£12,570), a Capital Gains Annual Exempt Amount (£3,000 in 2024/25), and a Dividend Allowance (£500 in 2024/25). Use them.

2. Maximise pension contributions: Pension contributions reduce your taxable income. A sole trader can contribute up to 100% of their earnings (up to £60,000/year) to a pension and get full tax relief.

3. Claim all allowable expenses: Many business owners under-claim expenses. Keep receipts for everything and review the HMRC guidance on allowable expenses regularly.

4. Time your income and expenses: If you are approaching a higher tax band, consider deferring income or bringing forward deductible expenses to reduce your bill.

5. Consider incorporation: If your profits exceed approximately £30,000–£40,000, incorporating as a limited company often becomes more tax-efficient. Take advice from an accountant.

6. Use the Annual Investment Allowance: You can deduct 100% of the cost of most plant and machinery (up to £1 million/year) from your profits in the year of purchase.