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As a new business owner, navigating the details of financial management, particularly small business taxes in the UK, can prove to be a real learning curve. Making sure you know which small business tax rate applies to your new venture, as well as the types you’re liable to pay, can help you avoid any hefty fines.

Remember, asking questions is inevitable when starting a business, you’re not going to be an expert overnight! Here at BSC, we want to support you through the learning process, so you feel confident and prepared for your next chapter.

In this guide, we’ll cover the different types of business tax which may apply to you, so you’re clued up on the ins and outs of tax jargon. We’ll reveal the most asked questions around business tax, such as ‘How much is business tax in the UK?’. We’ve even asked experts to share their knowledge to clear up any confusion that you may have.

The UK tax gap

If you’ve asked the question ‘What is the tax gap?’ you’re well on your way to understanding the various areas of small business tax in the UK.

As the name suggests, the UK tax gap is the monetary difference between the amount of tax that should be paid to HMRC and the amount that they actually receive. So, the tax gap is essentially the unpaid tax. This measure of tax is used to understand the extent of non-compliance across the UK, to help HMRC address the causes of unpaid tax and try to reduce it. In the tax year 2021/22 alone, the amount of unpaid tax was 4.8% which equates to a significant £36 billion

When looking at those responsible for the tax gap, small businesses make up the largest proportion by customer group at 56%, which equates to £20.2 billion in unpaid tax. In fact, nearly one in eight SMEs have missed tax payment deadlines in the past year, risking fines of up to 15% of the amount owed. By understanding how business tax works and the small business tax rate in the UK, you can ensure you keep on top of your tax payments and are paying the right level of tax for your business’ earnings.

The most asked questions on business tax

There’s a lot to get your head around as a new business owner, particularly when it comes to tax and business finance. To clear up any confusion and help you brush up on your knowledge, we’re going to dive into the most asked business tax questions in the UK, while leaning on experts to share their insights too. You’ll be a small business tax expert in no time.

The top 5 questions we’ll answer are:

  1. How much is business tax in the UK?

  2. What is business tax?

  3. When does a small business have to pay tax in the UK?

  4. How does tax affect a business?

  5. If I sell my business, how much tax will I pay?

What is business tax?

Keeping on top of your taxes is an integral part of being a business owner, and can be detrimental to your business’ reputation and financial stability if you get wrong. In need of some support to manage your finances? Our guide to small business accountancy explains how an accountant can help you. 

Business tax is an umbrella term that refers to the different types of tax you may need to pay as a business. The tax your business will pay depends on how it’s set up, whether you have employees or not, and other factors such as how you pay yourself as a business owner. 

There are several types of business tax you’ll need to understand, so you know what you’re liable to pay, including: 

  • Corporation tax

  • Income tax

  • National insurance

  • VAT

  • Business rates

  • Capital gains tax

Let’s explore each of these types of business tax in greater detail below, so you feel equipped to deal with the tax responsibilities of being a business owner.

Corporation Tax

Regardless of your business’ size, as a limited company you are legally required to pay Corporation Tax. You pay Corporation Tax on your business’ profits and any gains from selling assets such as shares or property that have increased in value. 

It’s your responsibility to make sure you pay corporation tax, so it’s important you remember to register for it - you won’t receive a bill or a reminder. You’ll need to pay the tax annually to HMRC, usually within nine months of the end of your financial year. As Corporation Tax is self-assessed, you’ll need to calculate how much you owe and pay it before you file your company tax return (CT600). 

Currently, the UK Corporation Tax rate is 25% for all limited companies with taxable profits over £250,000. For companies with profits of £50,000 or below, you’ll be charged a small profits rate (SPR) of 19% instead.

Income tax

As the name suggests, income tax is the tax you pay on your income. So much of your income is tax-free, known as your Personal Allowance - you won’t pay tax on up to £12,570 of your income. From there, the more you earn, the more tax you pay. You pay 20% tax on £12,571 to £50,270, 40% tax on £50,271 to £125,140 and 45% tax on earnings over £125,140. 

If you work independently as a sole trader, freelancer or self-employed business owner, you’ll pay income tax on profits higher than your Personal Allowance. If you have employees, they will pay income tax on their salary over their Personal Allowance, which is deducted from their income.

National Insurance

As a business owner, you’ll pay National Insurance (NI) contributions on your salary, and your business will pay NI contributions as an employer, should you have employees. Your contributions provide, and entitle you to, certain benefits as well as the State Pension once you retire.

Paying National Insurance is a legal requirement, should you: 


Value Added Tax, otherwise known as VAT, will be added to most products or services you sell as a VAT-registered business. You’ll need to register for VAT if your VAT-taxable turnover is more than £85,000. Alternatively, you can choose to register if your turnover is under that threshold too. 

VAT is charged on ‘taxable supplies’ such as goods and services, selling business assets, hiring or loaning goods, and items sold to staff such as canteen meals. 

Take a look at the government’s guide to registering for VAT for more information. 

Business rates

Business rates are charged by the government on properties such as shops, pubs and offices to help fund services in your local authority. You’ll need to pay business rates to your local council. These rates are calculated by looking at the property’s ‘rateable value’ - its estimated value on the open market. The last revaluation came into effect in 2023, and the process usually happens every five years. The ‘rateable value’ is then multiplied by the tax rate.

Capital gains tax

Should you sell all or part of a business asset, you may need to pay Capital Gains Tax.

Some of the assets you may need to pay tax on include:

  • Buildings and land

  • Registered trademarks

  • Shares

  • Machinery

  • Fixtures and fittings

To establish whether you’ll need to pay tax, you’ll need to work out your gain from selling your assets. Your gain is usually the difference between what you paid for the asset and what you then sold it for. 

We’ll explore how much tax you’ll pay should you sell your business later on. 

How much is business tax?

How much tax you’ll pay as a business will ultimately depend on your profits. For example, Corporation Tax is paid on the profits you’ve made across the financial year. 

The rate of Corporation Tax you’ll pay depends on how much money you make as a business. Companies with profits under £50,000 will pay 19% Corporation Tax, whereas companies with profits over £250,000 will pay the main rate of 25%. 

Ben Chaplin, Managing Director at Croner-i, explains: ‘Corporation Tax rates start at 19% for small companies. Because companies are separate legal entities, the profits have to be taken out of the company before they can be enjoyed by their owner. This is usually done as a dividend or as a salary, and although different methods can offer tax efficiency, there is usually a tax cost attached to profit extraction.

When does a small business have to pay tax in the UK? 

Wrapping your head around the UK tax system can be confusing as a new business owner. Knowing how much tax you need to pay and when can ensure you feel on top of your business responsibilities and avoid hefty fines from HMRC. 

How much tax you need to pay, and when, will depend on your business’ performance and activities. Ben explains ‘Businesses only pay tax if they make a profit after deducting expenses. If tax-deductible expenses are greater than the business income, then the business is making a loss and so there’s no tax to pay. Note that not all expenses are tax-deductible - entertaining customers, for example, isn’t a deductible cost.


‘A small business can take a number of forms, the most common is a person working for themselves i.e. a sole trader. A sole trader’s profit forms part of their total income for the tax year. It is subject to income tax and National Insurance, generally payable in instalments on 31 January and 31 July each year. The rate of income tax depends on the individual’s total income – from 0% to 45% (46% in Scotland). National Insurance is payable at up to 9%.


‘Some small businesses are partnerships, rather than sole traders, and some are companies. The basic rules for partnerships are fairly similar to sole traders, in that each partner is taxed on their share of the business profits. The taxation of companies is different as they pay Corporation Tax, not income tax or National Insurance.’

How does tax affect a business?

Tax obligations can significantly affect your business’ cash flow. When you pay your taxes, the amount of cash available for other business activities will be affected which can lead to a decrease in your cash flow. Managing and keeping on top of your tax obligations can ensure you maintain financial stability. How tax will personally affect you as a business owner will depend on how much profit your company makes, as well as your business decisions such as choosing to sell a business asset. 

Taxation may affect your business should the government choose to raise the rate of Corporation Tax or income tax. For example, should income tax increase, workers will have to pay more tax on their income and will have less disposable income to spend on goods and services, leading to businesses expecting to sell less which may reduce the level of their investment. Equally, should VAT increase, consumers will have to pay more for products and services, which can lead to inflation and affect business costs.

If I sell my business, how much tax will I pay?

Should you decide to sell your business further down the line, you’ll likely need to pay Corporation Tax or Capital Gains Tax. If you’re self-employed, such as a sole trader, you’ll pay Capital Gains Tax. Whereas, if you’re the owner of a limited company, you’ll pay Corporation Tax instead. 

As we mentioned earlier, when selling or disposing of a business asset, such as land or property, you’ll pay tax on the chargeable gains. So, to work out whether you’ll need to pay tax on the sale of your assets, you’ll need to work out the difference between what you initially paid for it and what you sold it for. From there, you’ll need to report your gains to HMRC when filing your tax return. 


There’s no denying it - tax is a heavy subject and it can take time to get your head around the ins and outs of small business taxes in the UK. We hope this guide has answered any questions you had about business tax, and has left you feeling equipped to deal with any tax responsibilities that come your way. 

Here are some key takeaways to keep in mind when it comes to small business tax:

  • If your business is structured as a limited company, you’ll need to pay Corporation Tax. The tax rate you’re charged will depend on your profits.

  • If you’re a sole trader, you’ll pay income tax on profits over your Personal Allowance. As an employer, your employees will pay income tax on their salary over their Personal Allowance.

  • VAT is added to most goods and services and if your business has a turnover of £85,000 or more, you must be VAT-registered. 

  • If you’re a sole trader looking to sell or dispose of any business assets, you may need to pay Capital Gains Tax. This involves you paying tax on the gain you make, not the money you receive. This gain is usually the difference between the price you paid for the asset to begin with and the price you then sold it for.

Looking for some support with your business tax needs? Take a look at our tax and accountancy packages today. 

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