What taxes do small businesses pay?

Almost every headline figure in UK small business tax has moved since 2023. Corporation tax is no longer a flat 19%: it runs 19% to 25% with an effective 26.5% band in between. The VAT registration threshold is £90,000, not £85,000. The additional rate of income tax starts at £125,140, not £150,000. Dividend tax rose 2% on 6 April 2026. Business rates were rebuilt from two multipliers into five. And Making Tax Digital for Income Tax went live in April 2026 for sole traders and landlords with more than £50,000 of gross income.

As such, there is no such thing as a single “small business tax”. A small UK business pays a set of different taxes, and which ones apply depends on how it is structured, what it sells, whether it employs anyone and whether it occupies premises. The distinction about whether to trade as a limited company or a sole trader tends to rest on the liability protections rather than any previous tax advantages.

All figures below are for the 2026/27 tax year, which runs 6 April 2026 to 5 April 2027, and for corporation tax financial year 2026, which runs 1 April 2026 to 31 March 2027.

What is the definition of a small business in the UK?

There are three different definitions in use and they are not interchangeable. Using the wrong one is how businesses end up assuming they are exempt from something they are not.

The Companies Act 2006 definition governs how a company prepares and files its accounts. A company is small if it meets at least two of three conditions. These thresholds were uplifted for financial years beginning on or after 6 April 2025.

	Micro-entity	Small	Medium
Turnover not more than	£1m	£15m	£54m
Balance sheet total not more than	£500,000	£7.5m	£27m
Employees not more than	10	50	250

 

The previous small company thresholds were £10.2m turnover and £5.1m balance sheet, so the turnover test rose by nearly 50%. Companies that were medium-sized are now small, with the lighter filing and audit position that follows.

One rule catches people out. In a company’s first financial year it qualifies by meeting the conditions in that year. After that, its size only changes if it meets or stops meeting the conditions in two consecutive financial years, so a single unusual year does not move it.

Audit exemption uses the same thresholds but has its own exclusion list. Public companies, subsidiaries that do not qualify separately, insurance and banking businesses, and companies with shares on a regulated market cannot claim it whatever their size. A company can be small and still legally require an audit.

The Department for Business and Trade definition, used in official statistics and in eligibility for business support, ignores turnover entirely and counts employees only: micro is 0 to 9, small is 0 to 49, medium is 50 to 249. This is the definition behind most published figures about how many small businesses there are in the UK.

So a business with 20 employees and £12m turnover is small under all three. A business with 45 employees and £30m turnover is small for statistics and support, but medium-sized for accounts purposes.

What do small businesses need to do before they start paying tax?

Registration is not one step, it is several, each with its own trigger and deadline.

Register for Self Assessment if you are a sole trader or a partner. The deadline is 5 October following the end of the tax year in which you started trading, so someone who began in June 2026 must register by 5 October 2027. Miss it and a failure-to-notify penalty can follow.

Register the company at Companies House if you are incorporating. Corporation tax registration usually happens at the same time.

Register for VAT once taxable turnover exceeds £90,000 in any rolling 12 months, or if you expect to exceed it in the next 30 days alone. This is not tied to your accounting year.

Register as an employer before the first payday if you take on staff. This can be done up to two months ahead and the PAYE reference takes several working days.

Keep records from day one. Sole traders and partnerships must keep records for five years after the 31 January filing deadline for the relevant return. Companies must keep records for six years from the end of the accounting period. Records kept badly are the most common reason a legitimate expense claim fails.

Note that the cash basis is now the default for sole traders and partnerships, from the 2024/25 tax year onwards. You record income when it is received and expenses when they are paid, and you must actively elect out to use traditional accruals accounting. The old turnover limits on using the cash basis were removed entirely, as was the £500 cap on interest deductions.

Corporation tax

Corporation tax is paid by limited companies on their profits. It has not been a flat 19% since 31 March 2023.

Profits	Rate
Up to £50,000	19%, the small profits rate
£50,001 to £250,000	Marginal relief applies, giving an effective 26.5% on profits in this band
Over £250,000	25%, the main rate

 

The band in the middle is where the confusion sits. A company does not pay 26.5% on all its profits. Marginal relief tapers the rate so the overall bill rises gradually, and 26.5% is the effective rate on each additional pound earned inside the band.

Corporation tax examples:

Profit	Corporation tax	Effective rate
£20,000	£3,800	19.00%
£50,000	£9,500	19.00%
£60,000	£12,150	20.25%
£100,000	£22,750	22.75%
£150,000	£36,000	24.00%
£250,000	£62,500	25.00%

 

The associated companies rule is the trap. Both the £50,000 and £250,000 limits are divided by one plus the number of associated companies. A company with one associated company has limits of £25,000 and £125,000. On £100,000 of profit that raises the bill from £22,750 to £24,625, an extra £1,875 for owning a second company. Anyone running more than one company needs to know this before setting up the next one.

Deadlines. A small company pays corporation tax nine months and one day after the end of its accounting period, so a company with a 31 March year end pays by 1 January. The CT600 return is filed separately and is due 12 months after the end of the period, which means the tax is due before the return. Companies with profits above £1.5m pay in quarterly instalments instead, and those above £20m pay earlier still.

Late filing penalties doubled on 1 April 2026: £200 for being one day late, £400 at over three months, and £1,000 or £2,000 for a third successive failure.

Income tax

Income tax is paid by individuals, so it applies to sole traders and partners on their share of profits, and to company directors on salary and dividends taken from the company. The company itself pays corporation tax, not income tax.

Band	Taxable income	Rate
Personal allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271 to £125,140	40%
Additional rate	Over £125,140	45%

 

The additional rate starts at £125,140, not £150,000. It moved on 6 April 2023.

There is also an effective rate above 45% that no table shows. The personal allowance is reduced by £1 for every £2 of income above £100,000, disappearing entirely at £125,140. Inside that £25,140 band the marginal rate is 60%, because each extra pound is taxed at 40% and also strips 50p of allowance that was previously untaxed. Directors with control over how much they take from a company can often avoid this band deliberately.

These thresholds are frozen until 5 April 2031 following the Budget in 2025, which extended the freeze by three further years. Frozen thresholds with rising profits mean a growing share of income taxed at higher rates without any rate changing.

Scotland sets its own rates on non-savings income, with six bands rather than three, and a higher rate starting at £43,663 rather than £50,270. Scottish taxpayers are identified by an S prefix on the tax code.

Two small allowances are worth knowing. The trading allowance of £1,000 means income below that need not be reported at all, useful for genuinely tiny side income. The property allowance is a separate £1,000 and both can be used in the same year.

Dividend tax

Dividends are how most owner-managers take profit out of a company, and they are taxed separately from salary at their own rates. Those rates rose on 6 April 2026.

	2025/26	2026/27
Dividend allowance	£500	£500
Ordinary rate, within the basic rate band	8.75%	10.75%
Upper rate, within the higher rate band	33.75%	35.75%
Additional rate	39.35%	39.35%, unchanged

 

Note that the increase applied to the ordinary and upper rates only. The additional rate was left alone.

The dividend allowance is £500, down from £2,000 in 2022/23 and £1,000 in 2023/24, so a figure of £2,000 in older guidance is now four times too generous. And dividends are paid out of profit that has already borne corporation tax, so the total tax on money extracted this way is the corporation tax plus the dividend tax, not the dividend tax alone.

The 2 point rise costs real money at modest scale. A director taking £30,000 of dividends in the higher rate band pays £10,725 in 2026/27 against £10,125 the year before, an extra £600 for the same dividend.

National Insurance Contributions

Four classes of NIC still exist, but what each one does has changed substantially.

Class 1 is paid on employment earnings, by both employee and employer. Employees pay 8% between £12,570 and £50,270 a year, then 2% above. Employers pay 15% on everything above £5,000 a year per employee. That employer rate and threshold changed in April 2025, from 13.8% above £9,100, and it is the single largest increase in employment costs in recent years. The Employment Allowance offsets up to £10,500 of employer National Insurance a year, but cannot be claimed by a company whose only employee paid above the threshold is a sole director.

Class 2 is the one most guidance gets wrong. It stopped being a compulsory charge on 6 April 2024. Self-employed people with profits above £12,570 no longer pay it at all. It survives only as a voluntary contribution, at £3.65 a week in 2026/27, for people who want to fill a gap in their record.

Class 3 is voluntary, at £18.40 a week, used to fill gaps in a National Insurance record where Class 2 is not available.

Class 4 is paid by the self-employed on profits: 6% between £12,570 and £50,270, then 2% above. So a sole trader with £40,000 of profit pays £1,645.80 in Class 4, and one with £70,000 pays £2,656.60.

Someone with profits between the small profits threshold of £7,105 and £12,570 pays no Class 2 and no Class 4, but is treated as having paid Class 2, which credits their record for state pension purposes automatically with no action required. Below £7,105 there is no automatic credit, and voluntary Class 2 must be paid to protect the record.

VAT

VAT registration is compulsory once taxable turnover exceeds £90,000 in any rolling 12 month period, or if you expect to exceed it in the next 30 days alone. The threshold rose from £85,000 on 1 April 2024. The deregistration threshold is £88,000.

The test is a rolling 12 months, not your financial year. A business can cross the threshold in October on the strength of a busy summer and must register even though its accounting year has months to run.

Rates are 20% standard, 5% reduced on things such as domestic energy, and 0% on most food and children’s clothing. Zero-rated is not the same as exempt: a zero-rated business can still reclaim input VAT, an exempt one generally cannot.

Returns and payment are due one calendar month and seven days after the end of the VAT period, and the same date applies to both. A quarter ending 31 March is due by 7 May. This is not “within 37 days”, a formulation that appears in older guidance and gives the wrong date in most months.

Making Tax Digital applies to all VAT-registered businesses, regardless of turnover, and has done since the first VAT period starting on or after 1 April 2022. Records must be kept digitally and returns filed through compatible software. The old rule limiting this to businesses above the registration threshold is long gone.

Three schemes can simplify things for smaller businesses:

Scheme	Join if turnover	Leave at	What it does
Flat Rate	£150,000 or less excluding VAT	£230,000 including VAT	Pay a fixed sector percentage of gross turnover, with no input VAT reclaim beyond certain capital assets
Cash Accounting	£1.35m or less	£1.6m	Account for VAT when paid rather than invoiced, which helps cash flow if customers are slow
Annual Accounting	£1.35m or less	£1.6m	One return a year with interim payments on account

 

The Flat Rate Scheme has a sting. A limited cost business, meaning one spending less than 2% of turnover on goods, or under £1,000 a year, pays a flat 16.5% regardless of sector. That catches many consultancies and service businesses, for whom the scheme is usually worse than standard VAT accounting. There is a 1% discount in the first year of registration.

Payroll tax

Employing anyone means operating PAYE, which is the mechanism for collecting income tax and National Insurance from wages rather than a tax in its own right.

Registration is required unless no employee earns at or above the lower earnings limit of £129 a week and none has another job, a pension, or expenses and benefits. The exception is narrow, since a single employee with a second job removes it. A figure of £120 a week appears in older guidance and is the 2020/21 limit.

Every pay run needs a Full Payment Submission sent to HMRC on or before payday, and a compliant payslip given to the worker. Payment to HMRC is due by the 22nd of the following tax month electronically, or the 19th by post. Tax months run from the 6th to the 5th, not the calendar month, which resolves most confusion about these dates. Employers whose average monthly liability is under £1,500 can pay quarterly.

Late filing penalties run from £100 to £400 a month depending on headcount, and late payment penalties escalate from 1% to 4% of the amount by number of defaults in the year.

Two changes from 6 April 2026 affect employers directly. Statutory Sick Pay is now payable from the first day of absence rather than the fourth, and the earnings threshold that excluded low-paid workers has gone. And where workers are supplied through an umbrella company, responsibility for operating PAYE correctly now sits with the recruitment agency or the end client, who HMRC can pursue for underpaid PAYE.

Business rates

Business rates are charged on most non-domestic property and are frequently the largest single tax a small premises-based business pays. The system was rebuilt on 1 April 2026 and now has five multipliers in England where there used to be two.

Multiplier	2026/27
Small business, rateable value under £51,000	43.2p
Standard, rateable value £51,000 to £499,999	48.0p
Retail, hospitality and leisure, small business	38.2p
Retail, hospitality and leisure, standard	43.0p
High value, rateable value £500,000 and above	50.8p

 

The bill is broadly the rateable value multiplied by the relevant multiplier, before reliefs.

Small Business Rate Relief is the one that matters most at the smaller end. A rateable value of £12,000 or less means no business rates at all, provided it is the only property the business uses. Between £12,001 and £15,000 relief tapers from 100% to nothing:

Rateable value	Relief	Approximate bill
£12,000	100%	£0
£13,500	50%	£2,916
£14,000	33%	£4,032
£15,000	0%	£6,480

 

The grace period when taking on a second property was extended from 12 months to three years at Budget 2025, which makes expanding into a second site considerably less punishing.

The retail, hospitality and leisure discount has been replaced, not renewed. The temporary percentage discount, which was 40% in 2025/26 with a £110,000 cap per business, ended on 31 March 2026. In its place are the two permanent RHL multipliers above, set 5p below their equivalents, mandatory rather than discretionary and with no cash cap. For a shop with a rateable value of £30,000 that is worth £1,500 a year against the standard small business multiplier; for a restaurant at £80,000, £4,000. Describing RHL relief as a percentage discount is now wrong.

Also in force for 2026/27: a new 15% relief for pubs and live music venues on top of the RHL multipliers, 100% relief for ten years on electric vehicle chargepoints, and a redesigned transitional relief scheme worth £3.2bn to cushion the 2026 revaluation.

All of the above is England only. Scotland, Wales and Northern Ireland set their own multipliers and reliefs.

Capital gains tax

Capital gains tax applies when a business asset or the business itself is sold at a profit. It is easy to overlook until it is suddenly the largest tax bill the owner will ever face.

	2026/27
Annual exempt amount, individuals	£3,000
Annual exempt amount, most trustees	£1,500
Basic rate band	18%
Above the basic rate band	24%
Residential property	18% and 24%, the same as other assets
Business Asset Disposal Relief	18%, on gains up to a £1m lifetime limit

 

The main rates rose from 10% and 20% to 18% and 24% on 30 October 2024, deliberately aligning them with the residential property rates, so there is no longer a residential property surcharge. And Business Asset Disposal Relief has been rising in stages: 10% until 5 April 2025, 14% for 2025/26, and 18% from 6 April 2026. A relief once worth 10% against a 20% main rate is now 18% against 24%, so the benefit has narrowed from 10 points to 6.

For anyone contemplating a sale, BADR has become materially less valuable in two years, and the annual exempt amount has fallen from £12,300 in 2022/23 to £3,000.

Making Tax Digital for Income Tax

This is now live for sole traders and landlords rather than companies.

Qualifying income	Mandatory from
Over £50,000	6 April 2026, in force now
Over £30,000	6 April 2027
Over £20,000	6 April 2028

 

Qualifying income is gross, before expenses. It is turnover from self-employment plus property income, taken from the previous year’s tax return. That distinction decides who is in scope: a sole trader with £60,000 of turnover and £25,000 of profit is in scope now, because the test is the £60,000.

It counts self-employment income, UK and overseas property income and your share of jointly owned property income. It does not count employment income taxed through PAYE, dividends, pensions, or your share of partnership profits as an individual partner. Partnerships are not yet in scope at all.

Being in scope means three obligations. Keep digital records in compatible software, which HMRC does not supply. Send quarterly updates, due 7 August, 7 November, 7 February and 7 May. Then submit a final declaration through the software by 31 January as before. The quarterly updates are cumulative summaries, not four mini tax returns.

Some exemptions apply automatically, including qualifying income of £20,000 or less and having no National Insurance number. Digital exclusion on grounds of age, disability, health, location or religious belief requires an application.

Taxes for sole traders

A sole trader and their business are the same legal person for tax purposes, so business profit is taxed as personal income.

• Income tax on profits at 20%, 40% and 45%, after the £12,570 personal allowance.
• Class 4 National Insurance at 6% on profits between £12,570 and £50,270, then 2% above.
• Class 2 is no longer payable. Anyone still budgeting for a weekly flat rate of a few pounds can stop.
• VAT once taxable turnover passes £90,000.
• PAYE if they employ anyone, including employer National Insurance at 15%.
• Business rates if they occupy premises.
• Making Tax Digital if gross self-employment and property income exceeds £50,000.

 

Self Assessment is filed by 31 January online, with the same date for the balancing payment and the first payment on account. The second payment on account falls on 31 July. Payments on account are each half of the previous year’s tax bill, and are not required if last year’s bill was under £1,000 or if more than 80% of tax was already deducted at source.

The first year is the one that bites. A sole trader in their second year of trading can face the balancing payment for year one plus the first payment on account for year two on the same 31 January date, which is roughly 150% of a normal year’s tax in one payment.

Taxes for limited companies

A company is a separate legal person, so its taxes and its owner’s taxes are distinct.

The company pays corporation tax at 19% to 25% on profits, employer National Insurance at 15% on salaries above £5,000, VAT above £90,000 of turnover, business rates on premises, and Class 1A National Insurance at 15% on taxable benefits.

The owner separately pays income tax and employee National Insurance on any salary, and income tax on dividends at 10.75%, 35.75% or 39.35%. This is why extracting profit from a company involves two layers of tax, and why the salary and dividend mix matters.

Filing obligations run in parallel and have different deadlines. Annual accounts go to Companies House nine months after the financial year end, the CT600 to HMRC 12 months after the accounting period end, and the corporation tax payment is due at nine months and one day. A confirmation statement is due at least every 12 months, with a 14 day grace period, and failing to file it risks penalties and eventual strike-off.

From 1 April 2028, small companies and micro-entities must file profit and loss accounts with Companies House, with an option to opt out of publication but not out of filing. Abridged accounts will no longer be available, and all filings must be made through commercial software in iXBRL format, with web and paper filing withdrawn. The commencement was pushed back from April 2027, so companies have one full accounting year plus nine months to prepare.

Taxes for partnerships

A partnership is not taxed as an entity. It files a partnership return reporting the profit, then each partner is taxed individually on their share.

Each partner pays income tax and Class 4 National Insurance on their profit share through their own Self Assessment, on the same dates as a sole trader. The partnership itself registers for VAT in its own name once taxable turnover exceeds £90,000 in a rolling 12 months, and operates PAYE if it employs anyone.

Two points specific to partnerships. Partners are taxed on their profit share whether or not they drew the cash, which causes real problems where profits were reinvested. And a partner’s share of partnership profit does not count towards their qualifying income for Making Tax Digital, and partnerships are not yet within its scope, so a partner with £80,000 of partnership profit and no other business income is not currently mandated into it.

Limited liability partnerships are taxed the same way for income tax purposes but file accounts at Companies House like a company.

Some important tax-related deadlines

Date	What is due
22nd of each month	PAYE and National Insurance for the tax month ending on the 5th, paid electronically. The 19th if paying by post
One month and 7 days after each VAT quarter	VAT return and payment, same date for both
9 months after the financial year end	Annual accounts filed at Companies House
9 months and 1 day after the accounting period end	Corporation tax payment for a small company
12 months after the accounting period end	CT600 corporation tax return
31 January	Online Self Assessment return, balancing payment, and first payment on account
5 April	End of the tax year for individuals
6 April	Start of the new tax year
7 May, 7 August, 7 November, 7 February	Making Tax Digital quarterly updates, for those in scope
31 May	Give a P60 to each employee who was employed on 5 April
6 July	P11D and P11D(b) for expenses and benefits, and employee copies
22 July	Class 1A National Insurance on benefits. The 19th if paying by post
31 July	Second payment on account for Self Assessment
5 October	Register for Self Assessment, by 5 October following the end of the tax year in which you started trading
31 October	Paper Self Assessment return
30 December	File online if you want the tax collected through your PAYE code

 

There is no 31 December tax return deadline. The online filing deadline is 31 January. The real December date is 30 December, and it is the deadline for asking HMRC to collect what you owe through your tax code instead of paying it as a lump sum, which is a useful option rather than an obligation.

And 5 April is the end of the tax year, not the financial year. Financial year means something different: for corporation tax it runs 1 April to 31 March, and a company’s own financial year is whatever its accounting period is. The distinction matters because a company’s deadlines run from its own year end, not from 5 April.

Additional tax tips for small businesses

Separate the money before you need it. Set aside tax as income arrives rather than finding it at the deadline. The second-year Self Assessment double payment described above is the most common cash flow failure among new sole traders, and it is entirely predictable.

Claim the capital allowances you are entitled to. The Annual Investment Allowance gives 100% relief on up to £1m of qualifying plant and machinery a year, which covers the entire capital spend of almost every small business. Companies can also use full expensing for unlimited 100% relief on new main-rate plant and machinery. A new permanent 40% first-year allowance arrived on 1 January 2026 for main-rate plant where the other reliefs are unavailable, and unlike full expensing it is open to unincorporated businesses.

Note that the writing down allowance on the main pool was cut from 18% to 14% in April 2026, so relief on anything outside those first-year allowances is now slower. Periods straddling the change use a hybrid rate.

Get the structure right before the tax year, not after. Most meaningful decisions, such as incorporating, changing the salary and dividend mix, or registering for a VAT scheme, only work prospectively.

Check whether you have associated companies before setting up another one. As shown above, one associated company can add £1,875 to a corporation tax bill on £100,000 of profit.

Use software that talks to HMRC. With Making Tax Digital now covering all VAT-registered businesses and sole traders above £50,000, compatible software has moved from convenience to requirement.

Get advice at the points where it pays for itself: incorporating or disincorporating, selling the business or a substantial asset, crossing the VAT threshold, taking on the first employee, or profits approaching £50,000 where the corporation tax marginal band begins.

In summary

Which taxes apply to you depends on structure and circumstances, not size alone. Each one has a trigger, and knowing the trigger is more useful than memorising the actual rate that is to be applied.

Tax	What triggers it
Income tax or corporation tax	Making a profit. Sole traders and partners pay income tax, companies pay corporation tax
VAT	Taxable turnover passing £90,000 in any rolling 12 months
PAYE and employer National Insurance	Taking on your first employee
Business rates	Occupying premises
Capital gains tax	Selling the business, or a business asset