Small Business Tax UK: The Complete 2026/27 Guide

Every UK business owner eventually asks the same question: how much tax do I actually owe, and when? Small business tax isn’t one single charge — it’s a mix of Corporation Tax, Income Tax, National Insurance and VAT, and which of these apply to you depends entirely on how your business is structured. Get it wrong, and HMRC penalties start from £100 and climb quickly.

This guide breaks down small business tax in plain English for 2026/27: what sole traders and limited companies actually pay, the current rates and thresholds, the deadlines you can’t miss, and the legal reliefs most owners overlook. Whether you’re filing your first Self Assessment or weighing up switching from sole trader to limited company, you’ll find a clear, practical answer here.

Key Takeaways

• Sole traders pay Income Tax and Class 4 National Insurance on profits; limited companies pay Corporation Tax on profits, plus personal tax on any salary or dividends taken out.
• Corporation Tax is 19% on profits under £50,000 and 25% on profits over £250,000, with marginal relief tapering the rate in between.
• VAT registration becomes compulsory once your taxable turnover passes £90,000 in any rolling 12-month period.
• Self Assessment penalties start at £100 for late filing, even if no tax is owed — and interest is added on top of unpaid tax.
• Making Tax Digital for Income Tax applies from April 2026 to the self-employed and landlords earning over £50,000, widening to £30,000 in 2027 and £20,000 in 2028.
• Legitimate reliefs — the Trading Allowance, mileage, home office costs, pension contributions and capital allowances — can meaningfully reduce what you owe.

Table of Contents

1. What Is Small Business Tax?
2. Who Pays What: Sole Trader vs Limited Company
3. Corporation Tax on Small Business: Rates and Marginal Relief
4. VAT for Small Businesses
5. Income Tax, National Insurance and Dividends for Directors
6. Common Small Business Tax Challenges
7. Legal Ways to Reduce Your Tax Bill
8. Software and Making Tax Digital
9. Illustrative Examples
10. Common Mistakes to Avoid
11. Sole Trader or Limited Company? Decision Framework
12. What Does Professional Tax Support Cost?
13. Deadlines and Housekeeping Checklists
14. FAQs

What Is Small Business Tax?

Small business tax refers to the combined set of taxes a UK business and its owner pay on profits, sales and pay — mainly Corporation Tax, Income Tax, National Insurance and VAT. There’s no single “small business tax” bill; instead, your obligations are determined by your legal structure (sole trader, partnership or limited company), your turnover, and whether you employ staff.

A sole trader and a limited company doing exactly the same work can end up with very different tax bills, because the two structures are taxed through entirely separate systems — one through personal Income Tax, the other through Corporation Tax plus personal tax on what the director draws out. Understanding which system applies to you is the first step to planning accurately.

Who Pays What: Sole Trader vs Limited Company

Sole traders pay Income Tax and Class 4 National Insurance on their business profits through Self Assessment; limited companies pay Corporation Tax on company profits, and directors then pay personal tax separately on any salary or dividends they take. This split is the single biggest factor in how much tax a small business actually pays.

Corporation Tax on Small Business: Rates and Marginal Relief for 2026/27

Corporation Tax on small business is charged at 19% on profits up to £50,000 and 25% on profits above £250,000, with marginal relief applying a tapered rate to profits that fall between these two thresholds. Most genuinely small companies — those with profits under £50,000 — pay the lower 19% rate on their entire taxable profit.

Marginal relief exists so companies don’t jump straight from 19% to 25% the moment they cross £50,000 profit. Instead, the effective rate increases gradually as profit rises toward £250,000. HMRC provides an official marginal relief calculator on GOV.UK, and it’s worth running your numbers through it directly rather than estimating, since the calculation isn’t a simple straight-line taper.

VAT for Small Businesses: Registration, Threshold and Returns

You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period — not just your accounting year — and you can also register voluntarily below that threshold. Once registered, most businesses file VAT returns quarterly and must keep digital VAT records under Making Tax Digital rules.

Voluntary registration can make sense even below the threshold if most of your customers are VAT-registered businesses (so they can reclaim the VAT you charge) or if you want to reclaim VAT on significant start-up costs. It’s rarely worth it if you sell mainly to the public, since you’d be adding 20% to your prices with no ability for customers to claim it back.

Income Tax, National Insurance and Dividends for Directors

Sole traders pay Income Tax at 20%, 40% or 45% on profits above the £12,570 personal allowance, plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270 (2% above that); limited company directors typically combine a small salary with dividends, which are taxed separately at 10.75%, 35.75% or 39.35% after a £500 dividend allowance.

Many directors pay themselves a salary just below the National Insurance threshold, then take further income as dividends, because dividends aren’t subject to National Insurance at all. This “salary and dividend split” is one of the most common tax-planning conversations between directors and their accountants, and it needs revisiting whenever rates or thresholds change.

Common Small Business Tax Challenges

The most common small business tax challenges are irregular income making tax bills hard to predict, confusion over the VAT threshold, missed deadlines, and under-claiming legitimate expenses out of caution. These issues tend to compound each other — a business that doesn’t track turnover closely is also more likely to miss the VAT threshold and file late.

• Irregular or seasonal income making it hard to set aside the right amount for tax
• Not realising the VAT threshold applies to rolling 12 months, not the tax year
• Mixing personal and business spending, which makes expense claims harder to evidence
• Payments on account catching sole traders off guard in their second year of trading
• Under-claiming allowable expenses for fear of triggering an HMRC enquiry

Legal Ways to Reduce Your Small Business Tax Bill

You can legally reduce small business tax through the Trading Allowance, mileage claims, home office relief, pension contributions, capital allowances on equipment, and a carefully balanced salary and dividend structure for limited company directors. None of these require aggressive planning — they’re standard reliefs most businesses are entitled to but don’t always claim in full.

• Trading Allowance: up to £1,000 of trading income can be earned tax-free without claiming individual expenses.
• Mileage: 45p per business mile for the first 10,000 miles annually (25p after), instead of tracking individual fuel and running costs.
• Home office relief: a simplified flat rate based on hours worked from home, or a proportion of actual household costs.
• Capital allowances: claim the cost of equipment and machinery against profits, potentially in full in the year of purchase under the Annual Investment Allowance — check the current cap on GOV.UK, as it can change.
• Pension contributions: employer pension contributions from a limited company are an allowable business expense and reduce Corporation Tax.
• Trivial benefits: small, non-cash staff benefits (up to set limits) can be provided without triggering tax or National Insurance.

Software and Making Tax Digital: Staying Compliant in 2026/27

Making Tax Digital (MTD) requires many businesses to keep digital records and submit quarterly updates to HMRC via approved software, rather than one annual paper return. MTD for Income Tax applies from April 2026 to the self-employed and landlords with income over £50,000, dropping to £30,000 from April 2027 and £20,000 from April 2028.

Illustrative Examples

Illustrative Example — Sole Trader: A freelance photographer earning £35,000 profit pays Income Tax on everything above the £12,570 personal allowance, plus Class 4 National Insurance at 6% on profits above the same threshold, filed through one annual Self Assessment return.

Illustrative Example — Growing Limited Company: A two-person design consultancy crosses £90,000 turnover mid-year. They must register for VAT from that point, start charging VAT on invoices, and begin quarterly VAT returns — even though their accounting year doesn’t end for months.

Illustrative Example — Director Salary and Dividends: A limited company director takes a salary just below the NI threshold and the rest as dividends. Because dividends have their own tax bands and no National Insurance, this combination is often more tax-efficient than taking the same total purely as salary.

Common Mistakes to Avoid

Editor’s Insights

• The tax you owe is calculated on profit, not turnover — a common source of confusion for new sole traders budgeting for their first bill.
• Payments on account can catch second-year sole traders off guard, since they cover part of next year’s tax in advance.
• Switching from sole trader to limited company isn’t reversible in the same simple way — plan the timing around your accounting year-end, not mid-year.
• HMRC penalties are largely rules-based, not discretionary — “I forgot” rarely counts as a reasonable excuse.
• Reviewing your salary/dividend split annually matters more than choosing it once and forgetting it, since rates and allowances change most tax years.

Sole Trader or Limited Company? Decision Framework

1. Are your profits comfortably above your personal allowance and likely to stay there? If yes, a limited company may become more tax-efficient — get the numbers checked rather than assuming.
2. Do you need limited liability protection? A limited company separates personal and business liability; sole trader status doesn’t.
3. Can you take on more admin? Limited companies mean Companies House filings, statutory accounts and a CT600 — more than a sole trader’s single Self Assessment return.
4. Do you plan to reinvest profit in the business rather than draw it all out? Corporation Tax rates can make retained profit more efficient inside a company.

Using an Accountant vs DIY Filing

What Does Professional Tax Support Cost?

Typical UK accountancy fee ranges reported across the market in 2026 fall into three broad bands, depending on business structure:

Figures are typical UK market ranges for 2026 and will vary by turnover, VAT registration and payroll needs. For a full breakdown, see our accountant cost guide.

Small Business Tax Deadlines Checklist (2026/27)

• ☐ 31 October 2026 — paper Self Assessment deadline (2025/26 tax year)
• ☐ 31 January 2027 — online Self Assessment deadline and balancing payment (2025/26 tax year)
• ☐ 31 July — second payment on account (if applicable)
• ☐ 9 months + 1 day after your company year-end — Corporation Tax payment due
• ☐ 12 months after your company year-end — CT600 filing deadline
• ☐ Quarterly — VAT return deadlines if registered

Year-Round Tax Housekeeping Checklist

• ☐ Track rolling 12-month turnover monthly against the £90,000 VAT threshold
• ☐ Keep business and personal spending in separate accounts
• ☐ Log mileage and home-working hours as you go, not at year-end
• ☐ Set aside a fixed percentage of profit for tax each month
• ☐ Review your salary/dividend split whenever rates or thresholds change
• ☐ Keep digital records for at least 5–6 years, per HMRC requirements

Frequently Asked Questions

How much is business tax for a small business in the UK?
It depends on structure and profit. Sole traders pay Income Tax (20%–45%) plus Class 4 National Insurance; limited companies pay Corporation Tax at 19%–25% on profits, plus personal tax on anything the director draws out.

Do I need to register for VAT as a small business?
Only once your taxable turnover passes £90,000 in any rolling 12-month period, though you can register voluntarily below that if it suits your business.

What’s the Corporation Tax rate for a small limited company in 2026/27?
19% on profits up to £50,000, 25% above £250,000, with marginal relief tapering the rate for profits in between.

When is the Self Assessment deadline for 2025/26?
31 October 2026 for paper returns, 31 January 2027 for online returns and payment.

What happens if I file my tax return late?
An automatic £100 penalty applies immediately, even if no tax is owed, with further penalties and interest accruing the longer it remains unfiled.

Is a limited company more tax-efficient than a sole trader?
Often, once profits comfortably exceed your personal allowance — but it depends on your specific numbers, plans to reinvest, and appetite for extra admin.

What is Making Tax Digital and does it apply to me?
MTD requires digital record-keeping and quarterly HMRC submissions. For Income Tax, it applies from April 2026 to those earning over £50,000, widening to lower thresholds in 2027 and 2028.

Can I claim expenses without an accountant?
Yes — HMRC allows self-filing for both Self Assessment and Corporation Tax. An accountant typically helps most with catching reliefs you might miss and managing more complex situations like VAT or payroll.

Sources & References

• HMRC / GOV.UK — Corporation Tax rates and marginal relief
• HMRC / GOV.UK — VAT registration thresholds
• HMRC / GOV.UK — Income Tax rates, National Insurance and dividend tax rates 2026/27
• HMRC / GOV.UK — Making Tax Digital for Income Tax rollout
• ONS — small business and self-employment statistics

About the Author

Written and reviewed by the Epiclectic Editorial Team. Epiclectic is an independent UK publication owned by Eternity Accountants Limited, publishing practical, fact-checked guides across accounting, business, home & living, gardening, travel, sustainability and wellness.
Editorial standards: original research, fact-checking against official sources, and regular review.
Last reviewed: September 2026

Related Guides

• Accountant for Small Business Cost: Essential UK Guide 2026
• UK Tax Return Self Assessment Deadline: Key Dates, Penalties
• Small Business Accountant UK: Essential Accounting Services
• How to Find an Accountant: Expert UK Guide 2026
• Explore more Business guides
• Explore more Accounting guides

In Summary

Small business tax doesn’t have to feel overwhelming once you know which system applies to you. Sole traders work through Income Tax and Self Assessment; limited companies work through Corporation Tax plus personal tax on what’s drawn out — and VAT joins the picture for either once turnover passes £90,000. The reliefs covered here are available to most UK businesses; the businesses that benefit most are simply the ones that track their numbers as they go, rather than scrambling each January.

If you’d like a second opinion on your own numbers, our guide to finding an accountant is a good next step — or explore more Business guides on Epiclectic for related topics like VAT and Making Tax Digital.