Guide to the UK Business Tax System and Rates in 2025

Understanding taxes is one of the most important and often stressful parts of running a business. Whether you're a company paying corporation tax or self-employed navigating your own taxes, knowing what applies, how much to pay, and when to file can help you avoid costly mistakes.

This guide breaks down the current UK business tax system and rates, covering key tax types, filing requirements, and ways to reduce your tax liability. Let’s get straight to it.

The type of tax you need to pay when running a business in the UK depends on factors such as your business structure (whether you're a limited company or a sole trader), your income level, and its source. Here’s an overview of the main business taxes relevant to small businesses and self-employed individuals.

Other relevant tax liabilities include Pay As You Earn (PAYE), which you must register for if you employ staff, and National Insurance (NI), which applies if you are an employer or a sole trader. Shareholders receiving dividends may be required to pay dividend tax, while those selling assets at a profit are subject to capital gains tax.

Key tax information:

• Tax Authority: HM Revenue & Customs (HMRC)[1]
• Tax Year: 6 April to 5 April of the following year
• Deadline for Tax Return Filing: 31 October (paper form) or 31 January (online form)
• Deadline for Paying Tax: 31 January

If you are running a business as one of the following, you must pay corporation tax to the HMRC:

• Limited company
• A foreign company with a UK branch or office
• Club, co-operative or other unincorporated association, such as a sports club

The main corporation tax rate is 25%, but if your company’s profits are GBP 50,000 or less, you are qualified for the small profits rate of 19%.[2]

Corporation tax applies to profits from doing business activities, investments, and asset sales. UK tax-resident companies must pay tax on all profits, whether earned in the UK or abroad, with no offshore exemptions.

Your company must file a Company Tax Return (CT600) with HMRC, even if it makes a loss or owes no corporation tax. The return must be filed within 12 months after the end of your accounting period, and any tax owed must be paid within 9 months and 1 day after the period ends.

Follow these steps to complete the process:

1. Check your deadline: Your accounting period determines when you must pay corporation tax and submit your tax return.  
2. Prepare your Company Tax Return (CT600): You should have your company registration number, tax reference number, and details of income, deductions, and tax allowances ready.
3. Submit the form: File online via HMRC’s online service, where you can also submit accounts to Companies House. If filing by paper due to technical issues or if you prefer to file in Welsh, you must also submit form WT1 explaining why.[3]
4. Pay corporation tax: When filing the return, you will work out the profit or loss for corporation tax and your corporation tax bill. If you owe tax, make sure to pay before the deadline to avoid penalties. 

If you are running your own business as a sole trader or working for yourself, you will have to file a Self Assessment tax return and pay income tax. 

The UK follows a progressive income tax system, meaning that the rate increases as the taxable income rises:

• Tax-free: The first GBP 12,570 of taxable income (Personal Allowance)
• 20% (Basic Rate): Between GBP 12,571 and GBP 50,270
• 40% (Higher Rate): Between GBP 50,271 and GBP 125,140
• 45% (Additional Rate): Over 125,140

In addition to the Personal Allowance, there are other tax-free allowances, including allowances for savings interest and dividends if you own shares. If you are self-employed, the first GBP 1,000 of your income is covered by the trading allowance. Any income exceeding these allowances is subject to tax.

You can file your Self Assessment tax return online using HMRC’s online service or submit a paper SA100 form, which is available on HMRC’s website.[4] To complete the process, you’ll need a Unique Taxpayer Reference (UTR) number and well-organised accounting records.

Once you submit your tax return, you will receive a Self Assessment Tax Bill along with a tax calculation (or tax computation). Your Self Assessment statement will show the amount of tax you owe, payments made, and any outstanding balance. The deadline to pay is midnight on 31 January (following the tax year you’re paying for).

You can pay through various methods including bank transfers, CHAPS, online banking (Faster Payments), or Direct Debit. Each method has a different processing time, so ensure HMRC receives your payment on time.[5]

VAT (Value-Added Tax) is a tax on goods and services that only VAT-registered businesses can charge. Businesses must collect VAT from customers and report and pay it to HMRC, but they can also reclaim VAT on eligible business expenses.

The standard VAT rate is 20% for most goods and services, but some items qualify for reduced rates:[6]

• 5%: Goods such as children’s car seats, mobility aids for the elderly, and home energy
• 0%: Most food and children’s clothes

Businesses with a taxable turnover over GBP 90,000 in the last 12 months or expected to exceed this threshold in the next 30 days must register for VAT. You must submit a VAT Return to HMRC every 3 months if you’re registered for VAT, even if you have no VAT to pay or reclaim.

In addition to Corporation Tax, Income Tax, and VAT, small businesses may be subject to other taxes depending on their structure and activities. Here are some important ones to consider:

If you employ staff, you must deduct income tax and National Insurance (NI) from their wages under PAYE and make employer NI contributions. Self-employed individuals must also pay Class 2 and Class 4 NI based on their profits.[7]

If your business operates from a shop or other non-domestic property, you must pay business rates. If you work from home, you usually pay Council Tax, but if a dedicated space is used specifically for business, you may also need to pay business rates.

Business rates vary by location, with local councils typically sending a business rates bill in February or March for the following tax year. If your property is in Scotland or Northern Ireland, business rates are handled under different rules.

If you take dividends from your own limited company, you must pay dividend tax. However, you won’t have to pay tax on dividends within your Personal Allowance or the dividend allowance of that tax year, and dividends from ISA shares are always tax-free. 

The basic dividend tax rate is 8.75%.[8]

If you sell business assets such as property or shares for a profit, you may have to pay Capital Gains Tax. The rate varies depending on the type of asset and your tax band.

If you're a basic rate taxpayer, you'll pay 18% Capital Gains Tax on gains within the basic rate Income Tax band. Higher or additional rate taxpayers are subject to 28% on gains from carried interest (investment fund management) and 24% on gains from residential property and other chargeable assets.[9]

Understanding tax deductions, reliefs, and allowances is essential for small businesses and sole traders, as they help reduce tax liabilities and maximise savings. Here are the key schemes and tax deductions for which you may be eligible.

Corporation Tax Reliefs

Limited companies may be eligible for the following tax reliefs:

• Capital Allowances: Claimable when purchasing business assets such as machinery and equipment used in the business.
• Research & Development (R&D) Tax Relief: Available for companies working on projects that advance science or technology.
• The Patent Box: Reduces tax for companies earning profits from patented inventions.
• Creative Industry Tax Relief (CITR): Applicable to businesses in theatre, film, television, animation, or video games.
• Marginal Relief: This applies to companies with taxable profits between GBP 50,000 and GBP 250,000 (from 1 April 2023).

Sole Trader Tax Reliefs

The reliefs available for sole traders and self-employed individuals to deduct from taxable income include, but are not limited to:

• Trading Allowance: Up to GBP 1,000 per year for individuals with trading income from self-employment or casual services like babysitting.
• Allowable Expenses: Costs such as office expenses, travel, uniforms, stock or raw materials, advertising and marketing, training courses, and business premises costs. However, you cannot claim expenses if you’re using the GBP 1,000 tax-free trading allowance.
• Capital Allowances: These include equipment, machinery, and business vehicles purchased and used for business purposes.

It’s important to note that if you use something for both personal and business purposes, such as a phone bill, you can only claim the portion used for business.

Paying tax is a vital part of running a business, no matter where you are. Whether you're a sole trader or a limited company, understanding what taxes apply, when to file, and what reliefs you can claim helps you stay on top of your finances and run your business smoothly. 

Tax rules change, and mistakes can be costly. Keeping accurate records, meeting deadlines, and making use of allowances can make a big difference. If you're unsure, checking HMRC’s guidance or speaking to a tax professional can help you stay compliant and save money where possible.