1. Understanding Business Structures & Tax Responsibilities
UK small businesses must pay taxes based on how they are legally structured. The two most common setups are:
- Sole Trader – You and the business are one legal entity. Profits are taxed as personal income.
- Limited Company – A separate legal entity. Profits are subject to corporation tax.
The tax you pay, and when you start paying it, depends on your business type and profit levels.
2. Sole Traders: Income Tax Thresholds
As a sole trader, your tax responsibilities fall under personal income tax.
- Personal Allowance (2025/26): £12,570
You can earn up to £12,570 without paying income tax. - Basic Rate (20%): From £12,571 to £50,270
- Higher Rate (40%): From £50,271 to £125,140
- Additional Rate (45%): Over £125,140
So, as a sole trader, you start paying income tax once your profits exceed £12,570 per year.
3. Sole Trader National Insurance Limits
You may also pay National Insurance (NI) as a sole trader:
- Class 2 NI (Flat Rate): No longer payable as of April 2024.
- Class 4 NI (2025/26):
- 6% on profits between £12,570 and £50,270
- 2% on profits over £50,270
If your business makes under £12,570 profit per year, you pay no income tax or National Insurance.
4. Limited Companies: Corporation Tax Thresholds
A limited company pays corporation tax on profits, not income tax.
- Corporation Tax Rate (2025/26):
- 19% for profits under £50,000
- Marginal relief applies between £50,001 and £250,000
- 25% for profits above £250,000
So, if your limited company earns any taxable profit, you start paying corporation tax—even if profits are below the personal allowance.
However, if you do not withdraw profits as salary/dividends, your personal tax may be delayed.
5. Marginal Relief for Profits Between £50k–£250k
If your limited company earns between £50,000 and £250,000:
- A tapered tax rate applies, known as Marginal Relief.
- The exact percentage depends on your profit and the number of associated companies.
This creates a sliding scale between 19% and 25% corporation tax.
6. VAT Thresholds for Small Businesses
If your taxable turnover exceeds £90,000 in a 12-month rolling period (as of April 2024), you must register for VAT.
- Even if your income is below tax thresholds, hitting this VAT level triggers obligations.
- Voluntary registration is allowed below this amount.
VAT is not a tax on profit—it’s based on revenue, so monitor closely.
7. When Sole Traders Must Register for Tax
If your income exceeds £1,000 in a tax year from self-employment:
- You must register with HMRC for Self Assessment.
- Below £1,000, you qualify for the trading allowance—no need to register or file a return.
8. When Companies Must Register for Corporation Tax
All limited companies must:
- Register for Corporation Tax within 3 months of trading.
- File tax returns annually—even if no tax is due.
You start paying tax when any profit is earned.
9. Tax Timing: When Do You Pay?
- Sole Traders: Income tax and NI are due by 31 January following the end of the tax year (plus a possible payment on account by 31 July).
- Companies: Corporation tax is due 9 months and 1 day after your accounting period ends.
Late payments attract penalties and interest.
10. Tax Planning Tips for Small Businesses
- Keep accurate records of income and expenses.
- Consider using digital accounting software.
- Stay under tax-free thresholds where possible (e.g., split income with partners).
- Use your personal allowance wisely—through salary or dividend combinations.
- Claim all allowable expenses to reduce taxable profits.
Frequently Asked Questions
How much can I earn as a sole trader before paying tax?
You can earn up to £12,570 in profit tax-free under the personal allowance for 2025/26.
Do I pay tax if my business makes less than £1,000?
No. The trading allowance exempts you from tax and registration if your total income is under £1,000.
Does a limited company pay tax on all profits?
Yes. Even £1 of profit is taxed under corporation tax rules—usually starting at 19%.
When do I register for VAT?
When your taxable turnover exceeds £90,000 in any 12-month period.
What’s the corporation tax rate for 2025?
19% for profits under £50,000, with marginal relief up to £250,000, and 25% above that.
Do I need to file tax returns if I don’t owe tax?
Yes. You must still submit annual returns even if no tax is due.
Conclusion
Knowing how much a small business can make before paying taxes in the UK depends on your business structure. Sole traders enjoy tax-free profits up to £12,570, while limited companies pay tax on all profits. Stay informed on income tax, corporation tax, and VAT thresholds to ensure compliance and avoid surprises. Smart planning helps reduce liabilities and keeps your business financially healthy.