Running a small business in the UK is rewarding, but tax can be challenging. Many owners pay more than they need to, or pick up penalties, simply because nobody explained the rules. In this guide we share the strategies we use with our own clients — whether you are a sole trader, a limited company or just starting out.
1. Choose the right business structure
How you set up your business makes a big difference to your tax bill. As a sole trader you pay Income Tax (20% to 45%) and Class 4 National Insurance on all of your profits. A limited company pays Corporation Tax on its profits (19% for profits up to £50,000, 25% above £250,000, with marginal relief in between), and you can then take money out as salary and dividends.
Dividends are taxed at 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate) from April 2026, after a £500 tax-free dividend allowance.
- For lower profits, staying a sole trader is usually simpler, with less paperwork and lower running costs.
- As profits grow, a limited company can become more tax-efficient — but the break-even point depends on how much you need to take out and your other income.
2. Claim every allowable expense
Every pound you claim as a legitimate business expense reduces your taxable profit. Commonly forgotten costs include:
- Working from home — a proportion of heating, electricity and internet, or HMRC’s flat-rate allowance for sole traders.
- Business mileage — 45p per mile for the first 10,000 miles in a tax year and 25p per mile after that.
- Mobile phone bills, if you use your phone for work.
- Training, professional subscriptions and software such as your accounting package.
For items used both personally and for business, such as a laptop or car, you can only claim the business proportion — and you need to keep receipts as evidence.
3. Check whether the VAT Flat Rate Scheme saves you money
If you are VAT-registered, the Flat Rate Scheme can simplify your VAT. You still charge your customers 20% VAT, but you pay HMRC a fixed percentage of your VAT-inclusive turnover instead of tracking the VAT on every purchase — for example 14% for management consultancy or 12.5% for restaurants and takeaways. You get a 1% discount in your first year of VAT registration.
Watch out for the “limited cost business” rule: if you spend very little on goods (less than 2% of turnover, or less than £1,000 a year), you must use a higher rate of 16.5%, which often makes the scheme poor value. Once you join, you usually stay on the scheme for at least 12 months, so it is worth checking the numbers first.
4. Pay yourself tax-efficiently from your company
If you run a limited company, the most common approach is a small salary plus dividends. A salary uses your £12,570 personal allowance and counts towards your State Pension, while dividends are not subject to National Insurance.
Since April 2025, employer National Insurance is 15% on salaries above £5,000 a year, and a company whose only employee is the director cannot claim the Employment Allowance. That means the best salary level now depends on your company’s set-up — for some directors it is around £12,570, for others it is lower.
5. Never miss a deadline
HMRC charges automatic penalties for late filing, even if you don’t owe any tax. Key dates:
- Self Assessment: file online and pay by 31 January after the end of the tax year (the late-filing penalty starts at £100).
- Making Tax Digital for Income Tax: from April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and send quarterly updates.
- Corporation Tax: payment is due 9 months and 1 day after your company’s year end; the return (CT600) is due 12 months after the year end.
- Company accounts: due at Companies House 9 months after the year end for private companies.
- VAT returns: usually due 1 month and 7 days after the end of each VAT period.
- Confirmation statement: at least once every 12 months.
Set reminders at least two weeks before each deadline — or let us manage them for you.
Bonus tip: company pension contributions
Employer pension contributions paid by your company are normally a deductible business expense, they are free of National Insurance, and the pension pot grows free of income and capital gains tax. When you retire you can usually take up to 25% tax-free (subject to the lump sum allowance).
For example, if your company makes £60,000 profit and pays £10,000 into your pension, its taxable profit falls to £50,000. Because profits between £50,000 and £250,000 fall in the marginal relief band, that contribution could save around £2,650 of Corporation Tax for a standalone company.
Contributions must be commercially justifiable and affordable for the company’s cash flow, and annual allowance limits apply — so take advice before making large payments.
Pay what you owe — and not a penny more
Paying tax is part of running a business, but there is no need to pay more than the law requires. At Ola Accountancy we help you pay only what you owe, stay on HMRC’s good side with accurate, on-time filings, and plan ahead so there are no surprises.
This article is general information based on the rules in force on 30 September 2026. It is not personal tax advice — tax rules change and the right answer depends on your circumstances, so please speak to us before acting on it.
