How Much Tax Does a Small Business Pay in the UK?

Why Small Business Tax Matters in 2025

Running a small business in the UK means dealing with several types of taxes. Understanding what you owe, when to pay it, and how to reduce your bill legally can make a big difference to your profits. The UK tax system has seen changes in 2025 that affect corporation tax rates, VAT thresholds, National Insurance, and allowances—so it’s important to stay up to date.

1. Corporation Tax

If you operate a limited company, your business pays corporation tax on its profits:

• Small Profits Rate (19%) – applies to profits up to £50,000.
• Main Rate (25%) – applies to profits over £250,000.
• Marginal Relief – reduces the rate gradually for profits between £50,001 and £250,000.

This tax is due nine months and one day after the end of your accounting period.

2. VAT (Value-Added Tax)

If your taxable turnover exceeds £90,000, you must register for VAT.

• Standard rate: 20%
• Reduced rate: 5% (e.g., home energy)
• Zero rate: 0% (e.g., most food)

You can reclaim VAT paid on business expenses if registered. VAT returns are normally filed quarterly.

3. National Insurance Contributions (NICs)

Employers (Class 1)

From April 2025:

• Rate: 15% on employee earnings above £5,000 per year.
• Employment Allowance: up to £10,500 per year to reduce your NIC bill.

Self-Employed (Class 2 & 4)

• Class 2 NICs abolished for most (voluntary payment at £3.50/week).
• Class 4 NICs: 6% on profits £12,570–£50,270; 2% above that.

4. Income Tax for Sole Traders

If you are a sole trader, you pay income tax on your profits:

• Personal allowance: £12,570 tax-free.
• Basic rate: 20% on income £12,571–£50,270.
• Higher rate: 40% on £50,271–£125,140.
• Additional rate: 45% on income above £125,140.

5. Dividend Tax

If you take money out of your limited company as dividends:

• Dividend allowance: £500 (from April 2025).
• Rates: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate).

6. Capital Gains Tax (CGT)

If you sell a business asset for more than you paid:

• Business Asset Disposal Relief rate: 14% from April 2025 (increasing to 18% in 2026).
• Annual exempt amount is £3,000 for individuals.

7. Business Rates

If you operate from commercial premises:

• Retail, hospitality, and leisure relief: 40% discount (capped at £110,000 per business).
• Small business rates multiplier frozen at 49.9p in 2025.

8. Tax Reliefs for Small Businesses

• Annual Investment Allowance (AIA) – Deduct up to £1m of qualifying capital expenditure.
• Full Expensing – Claim 100% relief on new plant and machinery in the year of purchase.
• R&D Tax Credits – For businesses developing innovative products or processes.
• Patent Box – Tax profits from patented inventions at 10%.

9. Compliance & Digital Filing

From 2025, Making Tax Digital (MTD) rules mean many small businesses must keep digital records and submit returns through HMRC-compatible software for VAT and Income Tax.

Quick Example

A limited company with profits of £60,000 in 2025 would:

• Pay 19% corporation tax on the first £50,000 (£9,500).
• Pay marginal relief on the remaining £10,000 (effective rate slightly under 25%).

A sole trader with £40,000 profit would:

• Pay 20% income tax on £27,430 (£5,486).
• Pay Class 4 NICs of 6% on the same amount (£1,645.80).

Conclusion

The exact amount of tax a small business pays in the UK depends on its legal structure, turnover, and profit level. By understanding the different taxes—corporation tax, VAT, NICs, income tax, dividend tax, and CGT—you can plan better and take advantage of reliefs. The 2025 changes mean keeping on top of allowances and thresholds is more important than ever.