UK Tax Guide
An expert-level overview of the UK tax system for sole traders, freelancers, landlords and limited companies. Use this guide to understand the main taxes, registrations, records, calculations, reliefs and compliance responsibilities that can affect a growing business.
UK tax guide
UK Tax Guide for Small Businesses
An expert-level overview of the UK tax system for sole traders, freelancers, landlords and limited companies. Use this guide to understand the main taxes, registrations, records, calculations, reliefs and compliance responsibilities that can affect a growing business.
1. Start with the business structure
ADVERTISE HEREPromote your business to Accounting Hire visitors.Ask about advertising opportunities →The first question is often not “how much tax will I pay?” but “who is legally carrying on the business?” A sole trader is an individual carrying on a trade, while a limited company is a separate legal entity. That difference affects how profits are taxed, how money can be taken out, record keeping, filing obligations and liability.
| Area | Sole trader | Limited company |
|---|---|---|
| Tax on business profit | Generally through the individual’s Income Tax calculation. | Company profits can be subject to Corporation Tax. |
| Owner extraction | Drawings are not normally a business expense and do not themselves create a separate tax charge. | Salary, dividends, benefits and other payments have different tax and accounting treatment. |
| Administration | Generally simpler. | More company records and filing responsibilities. |
| Personal liability | The individual is generally personally responsible for business debts. | Company liability is generally separate, subject to exceptions. |
2. Income Tax
For individuals, Income Tax is calculated on taxable income after relevant allowances and reliefs. Business owners should distinguish turnover, gross profit, net profit and taxable profit. They are not interchangeable.
For 2026/27 in England, Wales and Northern Ireland, the standard Personal Allowance is £12,570, subject to the usual rules. The basic rate band is £37,700 after allowances, with higher and additional rates applying above the relevant thresholds. Scotland has separate Income Tax bands.
3. National Insurance
Self-employed people may have National Insurance obligations based on profits. Employees and employers use different Class 1 rules. For 2026/27, the self-employed Class 4 rate is 6% between the Lower and Upper Profits Limits and 2% above the Upper Profits Limit; the Class 2 framework also has a Small Profits Threshold.
4. Corporation Tax
Limited companies calculate taxable profits under Corporation Tax rules. The accounting profit in the company’s accounts is not automatically the taxable profit: tax adjustments, capital allowances, disallowable expenditure and other rules can affect the calculation. Companies should also consider associated-company rules and accounting periods when looking at rates and thresholds.
5. VAT
VAT is separate from Income Tax and Corporation Tax. A business can be profitable without being VAT registered, and a VAT-registered business should not treat VAT collected from customers as ordinary sales income. Monitor taxable turnover against the current registration threshold, understand which supplies are taxable, and keep VAT records.
6. PAYE, salaries and benefits
If you employ staff or pay a director through payroll, PAYE may apply. Employers need to operate payroll correctly, report payments to HMRC, account for employer National Insurance and deal with workplace pension duties where applicable. Benefits in kind can create additional reporting and tax obligations.
7. Self Assessment
Self Assessment brings together income that HMRC needs to assess through a tax return. Common business-owner issues include registering on time, keeping records, reporting other income, claiming appropriate reliefs and understanding payments on account.
8. Payments on account
Payments on account can make a Self Assessment bill feel larger than expected because the system can require advance payments towards the following year’s liability. New sole traders should plan for this rather than treating the January bill as a one-off event.
9. Allowable expenses
For a sole trader, allowable business expenses can reduce taxable profit when they meet the applicable rules. Typical areas include professional fees, business insurance, office costs, qualifying travel, software and certain equipment. Mixed business/private expenditure needs careful treatment.
10. Capital expenditure and allowances
Buying an asset is not necessarily the same as claiming an ordinary revenue expense. Capital allowances and other tax rules can apply to qualifying purchases. Keep invoices, dates, descriptions and business-use evidence, especially for higher-value assets.
11. Records and evidence
- Sales invoices and till records.
- Purchase invoices and receipts.
- Bank statements and reconciliations.
- Payroll and pension records.
- VAT records where applicable.
- Mileage and travel records.
- Asset registers and purchase documentation.
- Evidence supporting tax reliefs and adjustments.
12. Tax planning without crossing the line
Good tax planning is usually about using legitimate allowances, reliefs, timing decisions and an appropriate structure while keeping accurate records. Avoid schemes that depend on artificial arrangements or claims you cannot substantiate. If a proposed transaction is unusually complex or tax-driven, obtain professional advice before implementing it.
13. Build a tax reserve
A practical business habit is to estimate the tax arising from profits and move an appropriate amount into a separate savings pot. The right percentage depends on the owner’s total income, structure and circumstances, but the principle is simple: do not mistake money owed to HMRC for available business cash.
14. Useful tax review checklist
Official sources
GOV.UK tax guidance · Income Tax · Corporation Tax · VAT registration