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Understanding the tax you need to pay is crucial when running a business. All businesses have to pay tax in some form, but the type depends on your business structure. This comprehensive guide explains everything you need to know.

Key takeaways – What tax should your business pay?

• Sole traders pay: Income tax, National Insurance, VAT (if you exceed the threshold), business rates and capital gains tax

• Partnerships pay: National Insurance, VAT (if you exceed the threshold), business rates andÌý capital gains tax

• Limited liability partnership pay: National Insurance, VAT (if you exceed the threshold), business rates and capital gains tax

• Limited companies pay: Corporation tax, National Insurance, VAT and business rates

What taxes do UK businesses pay?

Below is an overview of the types of small business tax you might need to pay, depending on your business structure, how much profit you make, and whether you pay yourself a salary or dividends.Ìý

Corporation tax

If you run a limited company, you must pay corporation tax on all business profits. This includes trading profits and those made from selling investments and assets.Ìý

How much tax you pay depends on the size of your profits.Ìý

• Under £50,000 – the small profits rate of 19% applies

• Over £250,000 – the main rate of 25% applies

• Between £50,000 and £250,000 – the main rate of 25% applies, but marginal relief can reduce this. You can calculate the relief due on the .

You must register for corporation tax within three months of starting to trade, with many businesses choosing to do so when they register as a limited company.

You won’t receive a bill for corporation tax, so it’s up to you to calculate how much you owe. You need to pay corporation tax annually and within nine months of the end of your financial year.Ìý

How to pay

To file your tax return, you need to complete a and submit it to HMRC, providing details of your company’s income minus any tax allowances and expenses.Ìý

Be aware that the deadline for filing your tax return is slightly later than the payment deadline – you must file it within 12 months of the end of your financial year. This makes it essential to prepare your accounts in advance so you know how much you owe.Ìý

To pay your tax, you need to log into your HMRC account and select your payment method from the following options: online payment, Direct Debit, company credit card, in person at a bank branch or over the phone.Ìý

Income tax

You must pay income tax on your profits if you are a sole trader, freelancer or a self-employed business owner, provided those profits exceed your personal allowance. This is £12,570 for the 2024/25 tax year.Ìý

The amount of income tax you pay depends on your tax band, as outlined below:

• You pay the basic rate of 20% on income of between £12,571 and £50,270

• You pay the higher rate of 40% on income of between £50,271 and £125,140

• You pay the additional rate of 45% on income over £125,140

On top of this, you have a ‘trading allowance’ that lets you earn up to £1,000 a year tax-free for self-employed work. There’s a separate ‘property allowance’ that allows you to earn up to another £1,000 a year tax-free if you earn income from land or property.

How to pay

To pay your income tax, you must complete a self-assessment tax return each year. If you’re filing on paper, the deadline is 31 October for the previous tax year. If you’re filing online, you have until 31 January to file.Ìý

However, this will change after April 2026, when sole traders with an annual income of more than £50,000 must start keeping digital records of accounts and send summaries every quarter rather than file a tax return each year. This will apply to those earning between £30,000 and £50,000 from April 2027.

If you’re an employer, every employee pays income tax on their salary through a deduction from their pay.

National Insurance

As a sole trader or freelancer, you also pay National Insurance. You must pay Class 4 National Insurance if your profits are over £12,570. For the 2024/25 tax year, you pay:

• 6% on profits of £12,570 to £50,270

• 2% on profits over £50,270

Since the start of the 2024/25 tax year, sole traders no longer need to pay Class 2 National Insurance. However, you can make voluntary contributions if you have profits of less than £6,725. The Class 2 rate for the 2024/25 tax year is £3.45 a week.

If you’re an employer, your employees pay their own National Insurance, but your business must also pay Class 1 National Insurance Contributions per employee. The rate for this is 13.8% for income above the secondary threshold of £9,100 a year. This rate is rising to 15% from 6 April 2025, while the secondary threshold is reducing to £5,000 a year.

How to pay

Sole traders pay National Insurance through self-assessment. If your limited company employs you, your contributions go out through payroll.Ìý

VAT

VAT (value-added tax) applies to most goods and services. If your annual taxable turnover is over the VAT threshold of £90,000, you have a legal obligation to register for VAT. If your annual taxable turnover is below this level, you can register voluntarily if you wish.

Registering for VAT means you must charge VAT on the products you sell to customers and pay VAT when you buy goods and supplies for your business.

In most cases, the VAT rate is 20%. However, a reduced rate of 5% applies to certain goods and services, such as home energy. A zero rate applies to items such as books, children’s clothes and most foods.

How to pay

Once you’re VAT-registered, you must submit a quarterly VAT return and pay HMRC the difference between the VAT you’ve charged your customers and the VAT you’ve paid. You can claim back the difference if you’ve paid more in VAT than you’ve received.

All UK VAT-registered businesses must sign up to Making Tax Digital (MTD). This involves keeping digital records and using MTD-compatible accounting software to complete and submit your VAT return online to HMRC.

Business rates

If you run your business from anywhere that isn’t a domestic property, you usually need to pay business rates. Rates are typically based on the property’s ‘rateable value’. This is its open market rental value, based on an estimate by the Valuation Office Agency (VOA) on 1 April 2021.Ìý

You should receive your business rates bill from your local council in February or March each year for the following tax year. In Northern Ireland, you should receive your bill in April.

To reduce your bill, you can apply for business rates relief – exactly what you can get depends on where you are in the UK and the type of business you run. For instance, if your property’s rateable value is less than £15,000, and your business only uses one property, you may be able to get Ìý

Alternatively, you may be able to get for the 2024/25 billing year if your business is in England and in the retail, hospitality and leisure industry.Ìý

How to pay

Like council tax, business rates in England, Scotland and Wales are usually paid in 10 installments over the year rather than 12. In Northern Ireland, you can pay in full or pay monthly installments. The easiest way to pay is by Direct Debit, but you may also be able to pay over the phone, online or at your bank.Ìý

Capital Gains Tax

Capital Gains Tax is payable on the profit made if you sell an asset that has increased in value. For a business, assets could include land and buildings, plants and machinery, or shares.Ìý

It’s the gain that’s taxed. You calculate it by taking the proceeds from the sale and deducting the cost of the purchase.Ìý

The amount you pay depends on your income tax bracket. As of 30 October 2024, rates have gone up, meaning basic-rate taxpayers now pay 18% (up from 10%), and higher and additional rate taxpayers pay 24% (up from 20%).Ìý

You may be able to reduce the amount of Capital Gains Tax you need to pay when selling all or part of your business through .ÌýÌý

How to pay

You need to include capital gains when you complete your self-assessment tax return. If you sold a property in the UK, you must report and pay any tax due within 60 days through your online account.

Dividend tax

If you’re a company shareholder, you can pay yourself in dividends. The first £500 is tax-free, but dividend tax is due on anything over this.Ìý

How much you pay depends on your income tax band. If you’re a basic-rate taxpayer, you pay 8.75%. If you’re a higher rate taxpayer, you pay 33.75%, and if you’re an additional rate taxpayer, you pay 39.35%.

Note that if your total income is from dividends, you can use up your personal allowance of £12,570 on top of your dividend allowance – so £13,070 in the 2024/25 tax year.

How to pay

If your dividends total less than £10,000, you need to inform HMRC. You can pay the tax through your self-assessment tax return or by getting HMRC to change your tax code so that HMRC takes the tax from your wages or pension.

If your dividends total more than £10,000, you must complete a self-assessment tax return.

How to reduce your business tax bill

There are several ways you might be able to lower your business tax bill.

As well as potentially claiming business rates relief or Business Asset Disposal Relief, you might be able to claim:

• if you’re an employer: This enables you to reduce your National Insurance bill by up to £5,000 a year (rising to £10,500 in April 2025).Ìý

• Annual Investment Allowance: This lets you deduct the costs of plant and machinery from your profit.

• Research and development tax relief: You might be able to claim this tax relief if you’re a limited company and invest in innovation and technological advancements.Ìý

In addition, you can deduct certain business expenses from your business income to reduce the amount of taxable profit.ÌýIn general, expenses should be business-related, but you might be able to claim part of the cost for items used both personally and for business.

If you’re self-employed, common examples of business expenses include travel costs, uniform expenses, office costs, such as stationery, marketing and advertising expenses and staff costs. You can view a comprehensive list on .Ìý

Limited companies also have allowable expenses that can lower their corporation tax bill.Ìý

How to stay on top of your business tax

When managing business tax, it’s crucial to keep accurate records so that you know how much you need to put aside for tax and ensure you file your tax returns on time.Ìý

Sole traders, partnerships and limited companies can use their online to check their tax position. This includes checking whether you have a tax return to complete and how much tax you’ve paid.Ìý

You can also use accounting software to help you keep track of all your expenses and receipts and simplify creating, sending, and chasing up invoices. It’s worth opening a business bank account, too, to keep your personal and business finances separate.Ìý

Finally, it’s vital to stay up to date and comply with any new tax rules.Ìý

If you’re feeling overwhelmed by all of this, it’s well worth hiring a tax advisor or accountant. They can help you stay on top of any tax changes and can often save you money by increasing your tax efficiency and improving your cash flow.

This content is for informational purposes and it's not intended as financial or professional advice. Please talk to a qualified professional for guidance relating to your business' needs.