A Comprehensive Guide to Small Business Taxes

How your business structure impacts the taxes you pay

The tax you pay is largely determined by your business setup. Under HMRC rules, your business will fall into one of the following categories, each with its own financial implications:

• Sole Trader: You and your business are legally the same. You pay Income Tax and National Insurance on all business profits. While this is the simplest structure to manage, you have unlimited personal liability for business debts.

• Partnership: Two or more people own the business and are considered self-employed. Partners pay tax on their individual share of the profits. Like sole traders, partners are personally liable for the business.

• Limited Company: The company is a separate legal entity from its owners. It pays Corporation Tax on its profits. As a director, you are technically an employee and pay tax on the salary and dividends you draw. This provides "limited liability," protecting your personal assets from business debts.

Essential taxes for small businesses

Every business owner handles a different mix of taxes depending on their structure and turnover. Here is a breakdown of who pays what for 2026.

Corporation Tax

If you operate as a limited company, you must pay Corporation Tax on your trading profits. For 2026, the rate is 19% for profits under £50,000 and 25% for those over £250,000. Profits falling in between are subject to a sliding scale known as "marginal relief."

See the full breakdown on the gov.uk website.

Income Tax

Sole traders pay Income Tax on their business profits, while limited company directors pay it on their salaries. The basic rate for 2026 is 20% for income between £12,571 and £50,270. Higher rates apply beyond that, so it's good to keep an eye on changes on the gov.uk website each year. If you are a director, you may also pay Dividend Tax (10.75% basic rate) on any profit distributions over £500. 

Corporation Tax vs Income Tax for directors

Many business owners choose to operate as a limited company to gain tax flexibility, but it changes how you pay yourself. While the company pays Corporation Tax on its total profits, you as the director pay personal tax on the income you take out.

If you take a salary, it is subject to the standard Income Tax rates. If you receive profit distributions, you may also pay Dividend Tax on any amounts over £500. For the 2026/27 tax year, the ordinary rate for dividends is 10.75%, while the upper rate is 35.75%.

National Insurance (NI)

National Insurance (NI) is paid by both the self-employed and employers to build entitlement to the State Pension and statutory benefits.

For the self-employed

• Class 4 NI: You pay 6% on profits between £12,570 and £50,270, and 2% on anything above that.

• Class 2 NI: Compulsory Class 2 payments were abolished in 2024. If your profits are above £7,105, you are treated as having "paid" NI to protect your record without actually having to pay a penny.

• Voluntary Contributions: If your profits are below £7,105, you can choose to pay voluntary Class 2 contributions at £3.65 per week to ensure you still qualify for the State Pension.

For employers

• Employer Contributions: You pay 15% on every employee’s earnings above the "Secondary Threshold" of £5,000 per year.

• Employment Allowance: Most small businesses can claim the Employment Allowance, which has risen to £10,500 for 2026. This allows you to reduce your total employer NI bill by up to £10,500 each year, often wiping out the cost entirely for smaller teams.

• Payroll Responsibilities: You are also responsible for deducting the employee’s share of NI (currently 8%) from their wages and sending it to HMRC on their behalf.

These rates can change mid-year, so always double-check the official NI rates or speak to your accountant.

The rules can be complex so it's worth getting professional advice if you are unsure. But essentially you'll end up paying NI in two capacities—for yourself and your business profits, as well as employer NI for staff.

Value Added Tax (VAT)

VAT is a tax added to most goods and services. You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. Once registered, you must charge VAT to your customers and can reclaim the VAT you pay on your own business purchases. Learn more about VAT on our blog.

Tax deductions and allowances for small businesses

Small businesses can reduce tax bills by claiming eligible tax deductions for allowable expenses, capital allowances for assets, and making use of tax relief schemes.

Common tax deductions and expenses small businesses can claim

Identifying common deductions and expenses you can claim is essential. Here are some areas where you can claim back:

• Office rent and utilities: You can claim back on payments related to rent and utilities like water and electricity.

• Wages: Record all employee wages, including salaries, bonuses, and benefits.

• Professional services: Document payments made for services such as legal, accounting, or consultant fees.

• Advertising costs: Save receipts for advertising expenses, whether online ads, print materials, or social media marketing.

• Home office deduction: If you use part of your home for business, you may be eligible for a home office deduction based on a fair proportion of your bills.

Overview of capital allowances and tax-saving strategies

Understanding capital allowances can be a game-changer for small businesses. Consider these strategies:

• Identify eligible assets: Make a list of equipment, machinery, or vehicles you own that qualify for tax breaks.

• Annual Investment Allowance (AIA): Use the AIA to claim 100% of the cost of most plant and machinery up to £1 million in the year of purchase.

• Writing Down Allowances (WDAs): For items outside AIA limits, WDAs let you claim tax relief on an asset's value over time.

• Lease vs. purchase: Weigh the tax pros and cons, as leasing can offer different capital allowance benefits and flexibility.

Key tax filing deadlines you cannot miss in 2026

Missing a deadline can result in automatic penalties. Keep these 2026 dates in your calendar to stay on the right side of HMRC:

• 31 January: Deadline for filing your online Self Assessment tax return and paying your tax bill.

• 6 April: The start of the new UK tax year.

• 6 July: Deadline for reporting employee benefits (P11D).

• 31 July: Second "payment on account" deadline for the self-employed.

• 9 months + 1 day: After your company's year-end, your Corporation Tax payment is due.

Master your business finances with smart planning

Staying on top of your taxes doesn’t have to be overwhelming. By implementing a few key habits, you can simplify your compliance and identify new ways to save:

• Prepare for Making Tax Digital (MTD): From April 2026, if your qualifying income exceeds £50,000, you must keep digital records and submit quarterly updates to HMRC using compatible software.

• Keep finances separate: Using a dedicated business account—like the Capital on Tap Business Credit Card—makes it much easier to track business-only expenses and simplifies your bookkeeping.

• Track expenses in real-time: Avoid the year-end rush by logging receipts and invoices as they happen. This ensures you never miss out on allowable deductions like office utilities or professional fees.

• Review your structure: As your business grows, the tax efficiency of being a Sole Trader versus a Limited Company can change. Regularly assess whether your current setup still serves your financial goals.

• Consult a professional: Tax laws for 2026, including the new Dividend Tax rates and Employer National Insurance changes, are complex. A qualified accountant can help you navigate these to maximise your tax relief.

The bottom line 

Understanding your tax obligations and planning efficiently are key to the success of any small business. By being aware of the different taxes you need to pay, keeping accurate records, claiming eligible deductions, allowances and reliefs, working with professionals, and staying up-to-date with the latest regulations, you can ensure compliance and make informed decisions to strengthen your bottom line. 

Though taxes may seem complex, taking the time to get organised, seek expert help when needed, and staying proactive can save you significant money while avoiding issues down the road. With the right knowledge and preparation, you can tackle your small business taxes effectively.

Frequently asked questions