Tax does not get simpler the more you earn, but it does get considerably easier to manage once you know what you are dealing with. This article runs through the main taxes that apply to UK businesses: income tax, National Insurance, capital gains tax, corporation tax, dividend tax and VAT, and covers who pays each one and how.
- Your business structure determines which taxes apply, how and when they are paid, and the administrative obligations you have to HMRC.
- Main UK business taxes include income tax, National Insurance, capital gains tax, corporation tax, dividend tax and VAT, each with distinct rules and rates.
- Owners must keep adequate records, understand how different taxes interact, and review figures annually as rates and thresholds are regularly updated.
Business Tax and Business Structure
The way a business is taxed depends on how it is structured. Sole traders and traditional partnerships pay income tax and National Insurance on their business profits through Self Assessment. Limited companies, by contrast, are separate legal entities that pay corporation tax on their profits, and their owners may then pay tax again personally when drawing income from the company.
The type of tax your business pays determines the rate of tax, the timing of payments, the obligations to HMRC and the administrative steps involved. For business owners deciding which structure to use, the tax implications of each choice are among the most significant factors to weigh. A working knowledge of the main UK business taxes helps business owners have better conversations with their accountants, avoid nasty surprises, and make more informed decisions throughout the year.
Income Tax: The Main Business Tax for Individuals
Income tax is paid by self-employed individuals on their trading profits. For business owners operating as sole traders or partners, profit from the business is treated as personal income and taxed at the applicable rate. The tax is collected through Self Assessment, with a return due by 31st January following the tax year end on 5th April.
England, Wales and Northern Ireland
For taxpayers in England, Wales and Northern Ireland, income tax rates and bands for 2026 are:
| Band | 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 personal allowance reduces by £1 for every £2 of income above £100,000 and disappears entirely once income exceeds £125,140.
Scotland
Scottish taxpayers pay Scottish income tax on earnings and most non-savings, non-dividend income. Scotland operates a six-band system for 2025/26:
| Band | Rate |
|---|---|
|
Starter rate (£12,571 to £15,397) |
19% |
|
Basic rate (£15,398 to £27,491) |
20% |
|
Intermediate rate (£27,492 to £43,662) |
21% |
|
Higher rate (£43,663 to £75,000) |
42% |
|
Advanced rate (£75,001 to £125,140) |
45% |
|
Top rate (over £125,140) |
48% |
Savings and dividend income is taxed at UK-wide rates for Scottish taxpayers, so the Scottish bands apply only to employment, self-employment and rental income.
National Insurance Contributions
National Insurance (NI) funds state benefits including the NHS, the State Pension, and statutory payments such as Statutory Maternity Pay. The class of NI paid depends on the individual’s status and the nature of the earnings.
Class 1: Employees and Employers
Employees pay Class 1 employee NIC on earnings above the Primary Threshold of £242 per week. The rates are 8% on earnings between £242 and £967 per week, and 2% on earnings above that. Employers pay Class 1 secondary NIC on employee earnings above the Secondary Threshold, which reduced from £9,100 to £5,000 per year from April 2025. The employer NIC rate increased from 13.8% to 15% from 6th April 2025.
The Employment Allowance increased to £10,500 per year from April 2025, with the £100,000 eligibility cap removed. Most small limited companies can use this allowance to reduce their employer NIC bill.
Class 1A and 1B
Employers pay Class 1A NIC at 15% on the taxable value of benefits in kind provided to employees, such as company cars or private medical insurance. Class 1B applies to items settled through a PAYE Settlement Agreement.
Class 2 and Class 4: Self-Employed
Self-employed individuals with profits above £6,845 per year pay Class 2 NIC at £3.50 per week. Those with profits above £12,570 pay Class 4 NIC at 6% on profits between £12,570 and £50,270, and 2% on profits above that.
Capital Gains Tax
Capital gains tax (CGT) applies when an individual sells or disposes of an asset at a profit. For business owners, this most often comes up on the sale of a business, shares or commercial property. CGT is a personal tax; limited companies pay corporation tax on their chargeable gains instead.
The annual exempt amount for individuals is £3,000 per tax year (2025/26). Gains below this threshold are not taxed. The CGT rates from 6th April 2025 are 18% for basic rate taxpayers and 24% for higher or additional rate taxpayers. Business Asset Disposal Relief (BADR) reduces the CGT rate to 18% from 6th April 2026 for qualifying disposals of business assets, including shares in a personal company and business goodwill, up to a lifetime limit of £1 million.
National Minimum Wage
Businesses employing staff must comply with National Minimum Wage (NMW) and National Living Wage (NLW) legislation. Paying below the legal minimum can result in arrears liability, civil penalties and public naming by the government. The rates from 1 April 2026 are:
| Worker category | Hourly rate |
|---|---|
|
Age 21 and over (National Living Wage) |
£12.71 |
|
Age 18 to 20 |
£10.85 |
|
Under 18 |
£8.00 |
|
Apprentice |
£8.00 |
These rates are reviewed annually by the Low Pay Commission and typically increase each April. The statutory National Living Wage is separate from the voluntary Real Living Wage set by the Living Wage Foundation, which currently stands at £13.45 nationally and £14.80 in London.
Corporation Tax
Corporation tax is paid by UK limited companies on their taxable profits. It is not paid by sole traders or traditional partnerships. The current rate structure, in place since April 2023, is 19% for profits up to £50,000, 25% for profits over £250,000, and marginal relief for profits between those two thresholds. Your accountant will be able to explain how to register your company for corporation tax with HMRC.
It is important to understand how a limited company calculates and pays its corporation tax bill, including how taxable profits are calculated, how marginal relief works and what expenses are deductible. For everything from registration through to filing and planning, there is a full standalone guide on corporation tax in the UK.
Dividend Tax
When a limited company distributes profits to shareholders as dividends, those dividends are taxed in the hands of the recipient. Each individual has a dividend allowance of £500 per year (2025/26 and 2026/27). Amounts above this are taxed at 10.75% in the basic rate band, 35.75% in the higher rate band, or 39.35% in the additional rate band for 2026/27. It is useful to understand how dividend tax is calculated and how it interacts with the personal allowance, and the current dividend tax rates and thresholds.
VAT
Value Added Tax (VAT) is a consumption tax added to the sale of most goods and services. Businesses must register for VAT once their taxable turnover exceeds £90,000 in a rolling 12-month period. The three VAT rates currently in force in the UK are:
| Rate | Amount | Applies to |
|---|---|---|
|
Standard |
20% |
Most goods and services |
|
Reduced |
5% |
Domestic fuel, children’s car seats, home energy |
|
Zero |
0% |
Children’s clothing, most food, books |
How Business Tax Obligations Interact
For many business owners, the question is not how each of these taxes works on its own but how they work together. A limited company director will typically deal with corporation tax at the company level, employer NIC on salary, personal income tax and employee NIC on that salary, and dividend tax on any distributions from profits. Sole traders pay income tax and Class 4 NIC on their profits directly, without also paying corporation tax at company level.
Comparing the two structures means looking at the total tax paid by both the business and the individual, not just the headline rates. The answer depends on profit levels, how income is drawn, and personal circumstances. A company with modest profits may pay less overall tax operating as a sole trader, while a higher-earning business may benefit from the limited company structure once all factors are accounted for.
Keeping Records and Meeting Deadlines
Every business owner in the UK has a legal obligation to keep financial records that support their tax returns. For sole traders and partners, HMRC requires records to be kept for at least five years after the Self Assessment filing deadline for the relevant tax year. Limited companies must retain accounting records for six years from the end of the accounting period. In both cases, that means invoices, bank statements, receipts and payroll records. HMRC can open an enquiry into any filed return and ask to see the supporting paperwork, so gaps in the records can create problems even where the figures themselves were correct.
Final Words
UK business tax covers a broad range of obligations, and the specific taxes that apply to any business depend on its structure, how it operates, and the decisions its owners make about how to extract and reinvest profit. Rate changes typically occur each April following the Budget, which makes it worth reviewing the figures annually, while the underlying structure of each tax changes little from year to year.
Tags: Accounting, HMRC, Tax
