Disclaimer: This information is for informational purposes only and does not replace professional financial advice.

Navigating small business taxes can be complicated. Tax requirements depend on your type of business, your profit, the industry you operate in, and more. It is important to research how much tax you must pay as a business owner. This helps you meet your duties and pay the correct amount.

How do small business taxes work?

Most company taxes are calculated based on your business profit. The more profit you earn, the more tax you can expect to pay. Potential taxes you may need to pay include income tax, corporation tax, National Insurance, VAT (value added tax), business rates, capital gains tax, and dividend tax.

Income tax

Everyone earning an annual income of over £12,570 is required to pay income tax, which is deducted from their pay by their employer. As business profits make up their salary (minus allowable business expenses), sole traders and those in business partnerships will need to declare their earnings through a yearly self-assessment tax return. From April 2026, sole traders earning over £50,000 must keep digital profit records. They must also send a quarterly summary.

Those earning between £12,570 and £50,270 will pay 20% of their income. If you earn between £50,271 and £125,140, you will pay 40% of your income. You will pay 45% of your income if you earn over £125,140. You may also qualify for a trading allowance or property allowance, which will give you up to £1000 a year tax-free.

Corporation tax

Only limited companies are required to pay corporation tax. If you earn under £50,000 over a financial year, you pay 19% on profits, and if you earn over £50,000, you will pay 25%. However, if you earn between £50,000 and £250,000, you may be able to claim marginal relief to reduce the amount you pay.

Paying corporation tax requires filling out a CT600 form. You need to sign up for corporation tax within three months of beginning to trade.

National Insurance

National Insurance tax rates depend on the category you fall into. Sole traders typically fall into Class 4 and will be expected to pay 6% on annual profits between £12,570 and £50,270 and 2% for profits over £50,270. Employers are in Class 1 and will pay 15% on earnings above £5,000.

VAT

If your annual taxable turnover is over £90,000, then you must register for VAT. However, you can register voluntarily regardless of turnover. The standard VAT rate is 20%, but certain items are reduced to 5% or 0%.

Business rates

These are taxes on any non-domestic property, such as office space. This is calculated depending on the property’s ‘ratable value’. If you work in the retail, hospitality, or leisure industry, you may qualify for 40% relief on business rates.

Capital gains

These taxes apply to the profits on an asset that has increased in value. It is calculated based on your tax bracket; basic-rate taxpayers will pay 18% and higher-rate taxpayers will pay 24%.

Dividends

There is a £500 tax-free allowance for dividends, and they are tax-free from ISAs or SIPPs. Otherwise, you will pay 8.75% on the basic rate, 35.75% on the higher rate, and 39.35% on an additional rate.

How to pay small business taxes

Typically, taxes can be paid through HMRC’s Self-Assessment portal. At J Sweeney Accountants, we have accountancy professionals to help you understand your tax requirements. To learn more, please call us on 01604 950034 or email us at [email protected].