Starting a business in the UK can feel like learning a new language. From Companies House to Corporation Tax, it’s easy to get caught off guard if you’re not clued in. When I first registered my own company a few years back, I remember being so focused on launching my product that I didn’t anticipate the sheer complexity of the tax stuff. Let’s just say I learned the hard way. If you’re just getting started, you’re probably juggling product development, branding, customer outreach… and taxes might feel like the last thing you want to deal with.
But here’s the truth: understanding UK business taxes from the outset is one of the smartest moves you can make.
Getting to Grips with the Basics
First things first. Your tax obligations depend on your business structure. Are you a sole trader? Running a partnership? Or have you set up a limited company? The rules shift depending on what box you tick.
- Sole traders are self-employed and pay Income Tax and National Insurance on profits via Self Assessment.
- Partnerships work similarly, with each partner declaring profits on their own Self Assessment returns.
- Limited companies are entirely separate legal entities. They pay Corporation Tax on profits, and directors usually get paid via salaries or dividends. Both taxed differently.
If you’re not sure which structure suits you, it’s worth speaking to an accountant. When I was switching from sole trader to a limited company, it completely changed how I paid myself. And what HMRC expected from me.
Registering with HMRC: Don’t Skip This
As a sole trader, you must register for Self Assessment with HMRC by 5 October following the end of the tax year in which you started trading. Miss the deadline? HMRC could issue penalties. And they’re not small.
Limited companies must register online with Companies House and also register for Corporation Tax within 3 months of starting to trade.
“I thought registering the business was enough. Didn’t realise I also had to register for Corporation Tax separately. Nearly missed the 3-month window. That was a wake-up call.”
. Liam, Founder of a tech consultancy, Manchester
That tripwire is far more common than people think.
The Big Three Taxes You Should Know
Let’s break down the core taxes most business owners encounter:
1. Corporation Tax
For limited companies, this is a key one. As of April 2023, the main rate is 25% unless your company has profits under £50,000. Then you qualify for a reduced rate due to the small profits rate structure. Always check the latest on gov.uk since rates can change.
You’ll submit a Company Tax Return and pay within 9 months and 1 day after the end of your accounting period.
Helpful tip? Use HMRC’s online filing service or accredited software to stay on top of deadlines. Late filings bring automatic penalties starting at £100. And those can snowball.
2. VAT (Value Added Tax)
You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period (as of the 2024/25 tax year). This isn’t a business renewal cycle. It’s a moving total. So even if sales spike one month, it could tip you over.
That said, you can voluntarily register before you hit that threshold. Why would you? It might boost your business credibility and allow you to reclaim VAT on expenses.
Once registered, you’ll charge VAT on most products/services and submit returns quarterly (or annually if opted). Digital filing through Making Tax Digital (MTD) software is now mandatory for VAT-registered businesses.
3. PAYE and National Insurance
Planning to employ staff. Or pay yourself a director’s salary? Then you need to register for PAYE (Pay As You Earn). This system handles Income Tax and National Insurance Contributions (NICs). Even if you’re the only employee (including yourself), PAYE rules still apply.
PAYE paperwork can get messy if you don’t automate it. I use payroll software that calculates deductions and files Real Time Information (RTI) to HMRC every month. Opting for manual methods is asking for an admin headache.
Other Tax Must-Knows
Here are some extra bits people often miss:
- Business Rates: If you operate from office or retail premises, you might owe business rates to your local council. Some small businesses qualify for relief.
- Dividends Tax: Taking money out of a limited company via dividends? You’ll pay Dividend Tax based on your personal earnings. As of 2024/25, the dividend allowance is just £500. A sharp drop from previous years.
- Expenses and Allowables: Knowing what you can claim as allowable business expenses cuts down your taxable profit. This can include office costs, travel for work, software subscriptions, even a portion of your home utility bills.
What HMRC Expects
Don’t treat record-keeping as optional. Whether you’re a sole trader or running a company, HMRC requires you to keep accurate financial records for at least 5 years after the 31 January submission deadline of the relevant tax year.
If you’re going digital (and let’s be honest, you should be), software like QuickBooks, Xero, or FreeAgent helps keep receipts, invoices, bank feeds, and tax returns in one place.
When to Call in the Experts
Honestly, hiring an accountant saved me. More than once. Not just for filing taxes but for cash flow planning, forecasting, claiming reliefs I hadn’t heard of. A good accountant is worth their fee ten times over.
They can help with:
- Structuring director’s pay vs dividends for tax efficiency
- Filing VAT returns without mistakes
- Understanding if you qualify for R&D tax credits or Annual Investment Allowance
If you’re bootstrapping, some online platforms like Coconut and Ember offer part-accounting, part-software solutions that don’t cost a fortune.
A Few Final Words of Hard-Earned Wisdom
The UK tax system isn’t set up to be intuitive. Especially not for people juggling ten things at once to grow a new business. But it is manageable once you know what’s expected.
Stay organised. Don’t bury your head if something feels confusing. Ask questions. Surround yourself with people who know the system (even better if they’ve been through it themselves). And above all: don’t leave it until the last minute.
You’re building something exciting. And getting a handle on tax from the start helps you protect it.
Frequently Asked QuestionsDo I need to register for VAT if I’m just freelancing?
Not necessarily. If your annual turnover is under £90,000, VAT registration isn’t compulsory. But you can opt in voluntarily if it benefits your business. For example, if your clients are VAT-registered and you want to reclaim input VAT on expenses.
How do I pay myself as a limited company director?
You can pay yourself a salary through PAYE and/or take dividends from company profits. A typical approach is to set a salary just above the lower earnings threshold to qualify for National Insurance credits, then top up with dividends for tax efficiency. An accountant can guide you based on your circumstances.
What counts as an allowable expense?
Allowable expenses are business costs that you can deduct before calculating your taxable profit. These include things like office supplies, travel for business, software tools, and even home office-related expenses if you work from home. HMRC provides clear guidelines on allowable expenses on their site.
I made a loss in my first year. Do I still need to file taxes?
Yes, even if your business didn’t make a profit, you still need to file your tax return. For limited companies, you must still submit accounts and a Corporation Tax Return. Even to show a loss. This loss may actually benefit you later by offsetting future profits.
Can I switch business structures later on?
Absolutely. Many businesses start as sole traders and incorporate as limited companies once they grow. There are tax and legal implications to consider when switching, so it’s wise to get advice beforehand.
Whether you’re just setting up your venture or already a few months into trading, sorting out your tax responsibilities early avoids big headaches later. Start smart, stay informed, and don’t be afraid to ask for help. Got a specific tax challenge weighing on your mind? Drop me a message. Let’s unravel it together.