What taxes does a new business pay?

Tax is where most new founders feel out of their depth, and where a surprising amount of bad, oversimplified advice circulates. This guide covers, in plain English, exactly which taxes apply to a new UK business, how they differ between a sole trader and a limited company, and when each falls due. We don't earn a penny from this, tax is education, not a product we're selling.

The quick answer: a sole trader pays Income Tax and National Insurance on profit. A limited company pays Corporation Tax, and you're then taxed personally on the salary and dividends you take out. VAT applies to either once turnover crosses the threshold, and PAYE applies if you employ anyone (including yourself, through a company salary).

Which taxes apply depends on your structure

There's no single "business tax" in the UK. What you pay depends first on whether you're a sole trader or a limited company, and then on your turnover and whether you have employees. The sections below cover each tax in turn, so you can see which ones actually apply to you.

Sole trader: Income Tax and National Insurance

As a sole trader, your business profit is treated as your personal income. You pay Income Tax on it at your normal personal rates, and Class 4 National Insurance on profit above a set threshold. There's no separate company-level tax, the profit simply is your income, reported once a year through Self Assessment.

This is the simplest tax position there is: one return, one calculation, at your personal rates. The trade-off is that there's no flexibility, every pound of profit is taxed directly, with no equivalent of the salary-and-dividend planning a limited company allows. Our take-home calculator shows what you actually keep at different profit levels.

Limited company: Corporation Tax

A limited company pays Corporation Tax on its profits. This is a company-level tax, paid by the company itself, separate from your personal tax. The company files a Corporation Tax return with HMRC and pays the tax due after its financial year end.

Crucially, paying Corporation Tax is not the same as paying yourself. The money left in the company after Corporation Tax still belongs to the company until you extract it, at which point personal tax comes into play (see dividend tax below). This two-stage structure, company tax then personal tax on extraction, is the whole reason a limited company can be more tax-efficient at higher profit, and also why it's more complex.

Dividend tax

When you take profit out of a limited company as dividends (paid from profit after Corporation Tax), you pay dividend tax personally, at rates that sit below the equivalent Income Tax rates. Most limited company owners take a small salary plus dividends, because that combination is often more efficient than taking everything as salary.

Getting the salary/dividend split right genuinely affects your take-home, and it's one of the clearest reasons to have an accountant once you've incorporated. Our salary vs dividend calculator shows the difference for your specific profit.

VAT

VAT applies to both sole traders and limited companies, but only once your turnover crosses the VAT registration threshold (based on turnover, not profit, which catches a lot of growing businesses out). Below the threshold you can register voluntarily, above it you must. Once registered, you charge VAT on your sales, can reclaim VAT on eligible purchases, and file regular VAT returns.

Because VAT is turnover-based, faster-growing and higher-volume businesses, ecommerce in particular, tend to hit it sooner than they expect. Our dedicated VAT registration guide covers the threshold, the different VAT schemes, and Making Tax Digital, and the VAT calculator handles the sums.

PAYE (if you have employees)

If you employ anyone, you operate PAYE (Pay As You Earn), deducting Income Tax and National Insurance from their wages and paying it to HMRC, along with employer's National Insurance on top. This also applies to a limited company director paying themselves a salary, the salary goes through PAYE like any employee's.

Running payroll adds admin, but accounting software or an accountant handles the mechanics. The key point for a new business is simply to know that hiring, or paying yourself a company salary, brings PAYE obligations with it.

Making Tax Digital, and why software matters

The UK is progressively moving tax reporting into Making Tax Digital, which requires businesses to keep digital records and file through compatible software rather than on paper or a plain spreadsheet. VAT-registered businesses are already within it, and the requirements are widening over time to cover more Self Assessment taxpayers.

The practical upshot is that decent accounting software isn't just a convenience anymore, it's increasingly the compliant way to file. The good news is that it also makes the whole thing easier: bank feeds pull transactions in, the software calculates what's due, and filing goes directly to HMRC. Choosing software that's Making Tax Digital compatible from the start saves a migration later.

A quick note on how structure changes the tax

It's worth seeing the two structures side by side, because the difference is the whole reason the sole-trader-vs-limited-company decision matters so much. A sole trader has one tax event: profit is taxed as personal income, directly, at personal rates. A limited company has two: the company pays Corporation Tax on profit, then you pay personal tax on whatever you extract as salary or dividends.

That two-stage structure is more complex, but it's also what creates the potential for tax efficiency at higher profit, because the dividend portion is taxed at rates below Income Tax. At lower profit, the extra complexity and accountancy cost often outweigh any saving. Our sole trader vs limited company guide and calculator show exactly where the crossover falls for your numbers.

Key dates and deadlines

The exact dates depend on your structure and financial year, but the shape is worth knowing:

• Sole traders file a Self Assessment return annually and pay the tax due, sometimes with payments on account toward the following year.
• Limited companies file annual accounts and a Corporation Tax return, and pay Corporation Tax after their financial year end, on a different timeline to the filing deadline itself.
• VAT-registered businesses file VAT returns regularly (usually quarterly).
• Employers report payroll to HMRC each pay period.

Missing deadlines carries automatic penalties in most cases, so noting your specific dates somewhere you'll actually see them matters more than memorising the general rules.

What happens if you're late

Late filing and late payment generally trigger automatic penalties and interest, which escalate the longer they go unaddressed. The system isn't looking to catch you out on a genuine one-off, but it is automated, so the penalties apply regardless of intent. The practical defence is boring but effective: keep your bookkeeping current, know your dates, and set money aside for tax as you earn it rather than finding it when the bill lands.

FAQs

Do I pay tax in my first year if I make no profit? If there's no profit, there's generally no Income Tax or Corporation Tax to pay on it, though you still need to file the relevant returns. Other obligations (like VAT if you're registered, or PAYE if you have staff) can still apply regardless of profit.

What's the difference between Income Tax and Corporation Tax? Income Tax is a personal tax on a sole trader's profit (or on salary and other personal income). Corporation Tax is a company-level tax on a limited company's profits, separate from the owner's personal tax.

When do I pay my first tax bill? It depends on your structure and when you started, sole traders through Self Assessment after the tax year, limited companies after their first financial year end. The gap between starting and your first bill is often longer than people expect, which is exactly why setting money aside early matters.

Do sole traders pay VAT? Only once their turnover crosses the VAT registration threshold, or if they choose to register voluntarily below it. VAT status depends on turnover, not on whether you're a sole trader or a company.

How much should I set aside for tax? It varies with your profit and structure, but setting aside a rough percentage of each payment as it comes in, rather than spending it all, turns tax from a shock into a non-event. Our calculators help you estimate the right figure for your situation.