With the new tax year fast approaching, it is important to be aware of tax changes for small business owners from April 2026. Two significant tax changes will impact directors of limited companies, self-employed individuals (sole traders) and landlords. The tax rate on dividend income is increasing by 2%, which impacts company directors. Making Tax Digital (MTD) comes into effect for self-employed individuals and landlords with income above £50,000.
Increase in dividend tax from April 2026
From April 2026, limited company directors who pay themselves with a mix of a salary and dividends will pay more tax. Dividend tax is increasing by 2% on dividends falling within the basic and higher rate tax bands. The basic rate dividend tax rate is increasing to 10.75%, up from 8.75%, while the higher rate is increasing to 35.75%, up from 33.75%. The additional dividend tax band rate remains at 39.35%.
A director paying themselves £50,270 from their limited company, splitting this between a salary of £12,570 and dividends of £37,700, pays an extra £744 a year in dividend tax from April 2026. The first £500 of dividends is covered by the annual £500 dividend allowance and is tax-free. The remaining £37,200 of dividends are taxed at 10.75%, equating to tax of £3,999 (compared with £3,255 in 2025/26).
MTD – making tax digital for the self-employed and landlords
Self-employed individuals and landlords with annual income over £50,000 must register with HMRC for MTD. From April 2026 they will need to submit quarterly income and expense summaries to HMRC. If you are self-employed with turnover over £50,000, or a landlord with property income over £50,000, you will need to keep electronic records of your income and expenses. You can find details of MTD compliant accounting software HMRC’s website. MTD compliant software will allow you to track your income and expenses. Each quarter, you will submit a summary of your income and expenses to HMRC.
MTD is being rolled out over three years, applying to self-employed individuals and landlords as follows:
6 April 2026 – if your turnover or property income is over £50,000
6 April 2027 – if your turnover or property income is over £30,000
6 April 2028 – if your turnover or property income is over £20,000
Benefits of MTD submissions
Quarterly submissions may improve your business administration, helping you track your tax liability and improve your cash flow management. While there may be additional costs, many small business owners may find the administrative benefits outweigh them.
Missing submission deadlines
If you fall under MTD, it’s important to register and submit your business information by the quarterly deadlines. HMRC will issue you with penalty points for each late submission, and a fine once you reach a certain number of points.
OtherMTD resources
HMRC have put together a comprehensive resource about MTD on their website, which includes details of MTD compliant software:
There are numerous allowable and disallowable business expenses in the UK that business owners need to be familiar with. HMRC has clear rules about business expenses, and it is vital to have a clear understanding of these rules to minimise your tax liability and ensure your tax calculations are compliant.
What are allowable business expenses?
HMRC states that allowable business expenses must be ‘wholly and exclusively’ for business purposes. Allowable business expenses can be deducted from your profit, reducing your taxable profit and tax liability. Common allowable business expenses are:
Cost of goods purchased for resale or raw materials used in production
Marketing and advertising expenses.
Professional fees for accountants, lawyers and consultants.
Staff costs, including salaries, national insurance, pensions and training.
Office costs, such as stationery, phone bills and computer consumables.
Business premise costs, such as rent, rates, utilities and insurance.
Travel expenses for business purposes, like fuel, train fares, and hotel accommodation.
Financial costs, such as bank charges and interest on loans.
What are disallowable expenses?
Disallowable expenses are costs that have an element of personal use or are specifically disallowed by HMRC. These cannot be deducted from your profits. Some of the more common disallowable expenses are:
Entertainment costs for clients or suppliers.
Charitable giving – only donations to HMRC-approved charities are allowable.
Personal expenditure, such as your own clothing (unless it’s a business uniform or protective gear) and non-business travel.
Fines and penalties, such as parking fines and HMRC fines.
Capital expenditure and asset depreciation – capital tax allowances are available, which replace depreciation for tax purposes.
Personal use of mixed-use expenses.
The above highlights the most common business expenses but is not a comprehensive list of all deductions. For more information about business expenses, use the HMRC links below:
Capital expenditure is money spent on acquiring tangible assets or used to improve assets, such as equipment, vehicles and computers used in the business. Unlike day-to-day operating expenses, the cost of acquiring fixed assets is spread over the expected useful life of the asset. This is done by expensing the expected annual costs as depreciation in the profit and loss statement.
Instead of using depreciation, HMRC provides capital allowances, which serve a similar function but have specific tax rules. Of the allowances, the Annual Investment Allowance (AIA) allows businesses to claim 100% tax relief on qualifying assets up to a certain threshold in the first year of purchase. You can find out more about the other available tax allowances using the HMRC link below:
Annual staff parties up to a combined total of £150 (incl. VAT) per head are tax-deductible if they meet specific requirements, such as being open to all employees. If the total annual amount exceeds £150 per head, the full amount becomes taxable as a benefit in kind to employees.
The cost remains fully deductible for the business for corporation tax, regardless of whether the £150 per head threshold is exceeded. The business will, however, be liable for the employer’s national insurance on the full amount (currently 15%) if the £150 limit is exceeded. The staff benefit in kind will need to be declared on P11Ds, and employees will be taxed on the amount of the benefit.
Trivial benefits
Trivial benefits are small, non-cash gifts or perks worth £50 or less that can be given to employees tax-free, provided they aren’t cash or cash vouchers. Directors of closed limited companies are limited to £300 (6 x £50) worth of trivial benefits annually.
When individual trivial benefits exceed the £50 limit, the full amount becomes taxable as a benefit in kind to the employee. The business will be required to pay the employer’s national insurance on the benefit, but can claim the trivial benefit amount as an allowable deduction for business tax.
For more information about the staff benefits, use the HMRC links below:
Understanding your business expenses is essential for accurate tax reporting and maximising tax efficiency. While this guide covers the most common allowable and disallowable expenses, tax rules can be complex and subject to change. If you’re unsure about whether a particular expense qualifies or how to handle mixed-use costs, it’s always advisable to consult with a qualified accountant or tax advisor.
Proper record-keeping with receipts and invoices is crucial – not only does it make claiming expenses easier, but it also provides the evidence HMRC may request during an enquiry. By staying informed and maintaining accurate records, you can ensure your business remains compliant while taking advantage of all legitimate tax deductions available to you.
As your business expands, you will inevitably need to hire staff to help you manage the increasing workload. Becoming an employer means you will need to comply with various legal obligations, such as running a payroll, providing a workplace pension, and adhering to other employment legislation. Here are some of the basic key points you need to action once you decide to recruit staff and become an employer for the first time:
Register as an employer with HMRC and obtain a PAYE reference number
Deduct PAYE and national insurance from employee salary payments
Register with the Pensions Regulator for automatic enrolment
Set up a workplace pension scheme, such as NEST
Choose payroll software that is RTI (real-time information) compliant
Provide employees with details of the terms of employment
Make sure you have appropriate business insurance, i.e., employer’s liability insurance
Register as an employer with HMRC
Becoming a new employer may require you to register with HMRC. You can do this online and HMRC will issue your business with a PAYE reference number. To check whether you need to register, use the following link on HMRC’s website:
You need to register with HMRC as an employer before the first official payday. HMRC may take 5 to 10 days to issue the PAYE reference, and you can only register as an employer up to 2 months before the first pay date. HMRC will also provide an accounts office reference number, which is used for PAYE and national insurance contribution payments.
Payroll deductions
As an employer, you are legally required to make payroll deductions from your employees’ pay. The main deductions are income tax (PAYE) and employee national insurance contributions. Employers also pay employer national insurance contributions to HMRC. All deductions must be paid to HMRC by the 22nd of the following month or by the 19th if paying by cheque. You will need to quote your accounts office reference number when making PAYE and NI payments to HMRC.
Payroll software
Unless you outsource your payroll to a payroll bureau, you will need to use payroll software. All payroll returns must be submitted to HMRC electronically under RTI (real-time information). HMRC offers payroll software for up to 10 employees called Basic PAYE Tools, which can be downloaded using the following link:
Alternatively, numerous cloud-based accounting software packages include payroll or offer it as an add-on for a modest fee. Below are a few options to consider:
Employers have a legal duty to enrol all eligible employees into a workplace pension, also known as auto-enrolment. Once you have registered as an employer, the Pensions Regulator will contact you with details of auto-enrolment. Eligible employees are staff who are between 22 years old and state pension age, earning over £10,000 a year. Employers are legally required to contribute a minimum of 3% of employees’ eligible earnings to a workplace pension, while employees must contribute 5%. Non-eligible staff members can request to join the pension scheme. The link below will take you to the Pensions Regulator website:
Before recruiting new staff members, it is helpful to get an estimate of the employment costs. Take a look at our article that breaks down employment costs:
As an employer, you have numerous reporting obligations to both HMRC and your employees. These are some of the common forms and payroll returns you will encounter as an employer:
P60 – This is the form you are required to provide to your employees at the end of the tax year. The P60 details the amount of PAYE and national insurance that employees have paid during the tax year. It also includes their tax code. The tax year runs from the 6th of April to the 5th of April of the following year.
P45 – When a staff member leaves your employment, you need to issue them with a P45. New staff members should provide you with a copy of their P45, which details their tax code, income and tax paid cumulatively for the year to date. If they don’t have a P45, they will need to complete a new starter form.
P11D – Some employers offer additional benefits to employees, such as gym membership, private medical, company cars, etc. Some benefits are tax-free, and others are subject to PAYE for employees. Employers incur Class 1A national insurance contributions on certain benefits. Any taxable benefits must be reported on a P11D form, with both HMRC and the employee receiving a copy. P11D forms are completed and submitted electronically to HMRC. Benefits can be taxed through payroll, known as payrolling benefits, and in this instance, no P11D forms need to be completed.
P11D(b) – This is the form used to declare employer national insurance contributions due on staff benefits. Both P11D and P11D(b) forms must be submitted by the 6th of July following the end of the tax year in April.
P46 – When an employee is provided with a company car, HMRC must be advised by submitting a P46 form.
Employee benefits
You can learn more about employee benefits using the following link:
As an employer, it is vital to ensure your business is compliant, submitting payroll returns and payments on time to avoid fines from HMRC. Seeking professional advice from an accountant or payroll bureau when becoming an employer for the first time is highly recommended. The following link provides additional guidance about employing people:
What is the threshold to register your business for VAT
You must register with HMRC for VAT if your business turnover or sales have exceeded the VAT registration threshold of £90,000 in the last 12 months or you predict they will do so in the next 30 days. Under Making Tax Digital (MTD), HMRC requires VAT registered businesses to submit their quarterly VAT returns electronically. You’ll need MTD compliant accounting software to do this. The current VAT rate is 20%.
VAT types and rates
Input VAT
One of the benefits of a VAT registered business is the ability to reclaim the VAT on purchases made for running the business. VAT on purchases is termed input VAT, and a business declares and reclaims this on the VAT return.
Output VAT
A VAT registered business must charge VAT on the sale of goods and services, which is termed output VAT. The business declares and pays this tax to HMRC on the VAT return. Typically, the business deducts input VAT from output VAT and pays the balance to HMRC. Sometimes a business finds itself in a repayment position, when input VAT exceeds output VAT. This may occur if a business has cyclical sales and experiences periods where production input is high and sales are low. When HMRC owes a business VAT, they will reimburse the VAT to the business.
The following is a simple example of how VAT works:
The cost of raw materials is £100 plus VAT of £20, making a total of £120
Using the raw materials, a product is created which sells for £200 plus £40 VAT, and the customer pays a total of £240 for the item
On the VAT return the output VAT is £40 and the input VAT £20.
The input VAT of £20 is deducted from the output VAT of £20, leaving VAT of £20 owing to HMRC.
VAT rates
There are a number of different VAT percentage rates that apply to different goods and services. There is the standard VAT rate of 20%, a reduced rate of 5% and a zero rate. Exempt goods and services, and items outside the scope of VAT, do not incur VAT.
VAT Schemes
There are a number of VAT schemes that businesses can opt to use to help them manage their cash flow, administration etc. The most popular schemes for small businesses are the following:
Flat rate scheme
The flat rate scheme allows you to calculate your VAT owing as a percentage of your gross turnover. The scheme is available to small businesses with an annual taxable turnover of £150,00 or less. Under this scheme, you do not have to keep detailed records of your sales and invoices, as you pay a fixed rate of VAT that is lower than the standard VAT rate. You cannot reclaim the VAT on your purchases, except for certain capital assets over £2,000. You retain the difference between the VAT that you charge customers and the lower fixed rate that you pay to HMRC.
Cash accounting scheme
The cash accounting scheme is particularly helpful if cash flow is variable. The scheme is available when the annual VAT taxable turnover of a business is £1.35 million or less. You pay VAT to HMRC when your customer pays you, instead of paying VAT based on the date the customer is invoiced. You can only claim VAT on your purchases after you have paid the supplier who provided the goods to you.
Annual accounting scheme
Again, the annual accounting scheme is available if the VAT annual taxable turnover is £1.35 million or less. You only need to complete one VAT return a year, saving on administrative time. You pay instalments of the estimated annual VAT bill, avoiding a large bill at the end of the year. If you overpay, you can apply for a refund but only once a year.
UK side hustles have become increasingly popular among individuals looking to supplement their income. Whether you’re selling handmade crafts on Etsy, offering freelance services, or running a small online business, understanding your tax obligations is crucial, especially once your sales exceed the £1,000 trading allowance threshold. This article covers side hustles, the trading allowance and tax returns, detailing when you need to submit a self assessment tax return.
How does the UK trading allowance work?
UK individuals have a £1,000 tax-free trading allowance, which allows them to earn up to £1,000 tax-free running a small side business. This means if your annual sales turnover (not profit) is £1,000 or less, you don’t need to report it to HMRC or pay tax on this income.
However, once your sales exceed £1,000 for the financial tax year (April 6th to 5th of April of the subsequent year), you may have to pay tax. You will also be required to register as self-employed with HMRC and submit an annual self assessment tax return.
Your tax obligations once your sales exceed the £1,000 threshold
When your side hustle turnover or sales exceed the trading allowance, you’re legally required to:
Register as self-employed with HMRC
Complete a self assessment tax return annually
Pay income tax on your profits (sales minus expenses)
Pay national insurance contributions if your profits exceed the national insurance threshold
Failing to declare this income can result in penalties and interest charges, so it’s important to make sure you are compliant from the start. You can check if you need to register for self assessment using the link below:
Basic rate taxpayers pay 20% tax on side hustle profits that exceed the trading allowance and the personal allowance. You will pay national insurance of 6% on taxable profits between £12,570 and £50,270. Taxable profits over £50,270 incur national insurance of 2%. Higher-rate taxpayers pay 40% tax, while additional-rate taxpayers pay 45% tax on profits that fall within the higher and additional-rate tax bands.
Deducting the trading allowance or business expenses?
You can choose between deducting the trading allowance of £1,000 from your sales or deducting allowable business expenses, but not both. The balance remaining is your taxable profit, and it’s important to understand how these calculations are made to determine which option is the most tax-efficient.
Examples of the trading allowance
The examples below illustrate the different tax outcomes between deducting the trading allowance and deducting allowable business expenses.
Aidan has a side business walking dogs during his lunch hour. He’s earned £1,200 (sales) this year and his only business expense is £20 on poo bags. The table below shows the tax liability if Aidan deducts the trading allowance compared with deducting the business expenses of £20.
Trading allowance (TA)
Business expenses
Sales of £1,200
1,200
1,200
TA/business expenses
1,000
20
Taxable income
200
1,180
Tax due at 20%
40
236
In this example, it is far more tax-efficient for Aidan to deduct the trading allowance, resulting in a tax liability of £20 as opposed to £236 if he deducts his business expenses.
Laura makes earrings and sells them on Etsy. She made sales of £3,000 in the current tax year, and her business expenses are £1,250.
Trading allowance (TA)
Business expenses
Sales of £3,000
3,000
3,000
TA/business expenses
1,000
1,250
Taxable income
2000
1,750
Tax due at 20%
400
350
In this example, it is more tax-efficient for Laura to deduct her allowable business expenses rather than the trading allowance, as this saves her £50 in tax.
Track your side hustle finances
It’s vital to track your side hustle finances so you can accurately estimate any tax and national insurance obligations. Maintaining records of your sales and business expenses is a legal requirement of being self-employed. Keeping accurate records of the following information will help you analyse your business performance and keep track of your tax liability:
Income from all sales platforms
Allowable business expenses
Payment methods used
Product or service performance
Calculating your sales figures
You need to ensure you are calculating your sales figures correctly for tax records. If you are selling goods online, the amount you receive on individual sales may have online platform and bank fees deducted.
For tax purposes, your sales figure is the selling price, not the amount you receive after platform and bank fee deductions. These fees are business expenses. You must add back any deducted fees to the amount you’ve physically received when calculating your sales figures for tax.
Side hustle sales figure example
For example, Lucy sold ten paintings, each with a sales price of £105. After online platform fees, she received £95 per painting. Lucy’s side hustle net income for the year is £950, and she assumes she does not need to complete a tax return as her income is below the trading allowance of £1,000. This is incorrect, as Lucy’s gross sales are £1,050, meaning she must submit a self assessment tax return.
Lucy should deduct the trading allowance from her sales, as this delivers a lower taxable income of £50 and a tax liability of £10 (assuming Lucy is a basic rate taxpayer). Deducting the business expenses (fees) of £100 results in a much higher taxable income of £950 and tax of £190.
How we can help with your side hustle
In our shop, we have a Side Hustle Tax Calculator spreadsheet that helps you estimate your tax and national insurance liability, whilst tracking your sales and business expenses.
The Excel spreadsheet helps you:
Estimate your tax liability based on current UK tax rates
Track all income sources across different sales platforms (Etsy, eBay, Amazon, etc.)
Record business expenses
Analyse sales performance by product category
Monitor payment methods (PayPal, Stripe, bank transfers)
Prepare for self assessment with organised financial figures
During their term or by the end of 2029, the current parliament aims to increase the threshold for submitting self assessment returns on trading income to £3,000. Tax will still be due on income over the £1,000 trading allowance threshold and will be declared to HMRC using a simplified online platform, in place of a full tax return.
This article provides general information only and should not be considered professional tax advice. Tax regulations are subject to change, and individual circumstances vary. Please consult with a qualified tax professional for advice specific to your situation.
The UK has a marginal tax system and numerous tax allowances that allow individuals to earn certain types of income tax-free. In this article, we cover some of the main tax allowances available to UK individuals, together with details of the three income tax bands and rates. Below are some of the UK personal tax-free allowances that let you make money tax-free.
Allowance
Tax-free amount
Personal allowance
£12,570
Dividend allowance
£500
Capital gains allowance
£3,000
Personal savings allowance – basic rate taxpayers
£1,000
Personal savings allowance – higher rate taxpayers
£500
Trading allowance
£1,000
Personal allowance
The main tax-free allowance individuals in the UK benefit from is the annual personal allowance of £12,570, which lets individuals earn income up to this amount before paying any tax or PAYE.
Reducing personal allowance
The personal allowance reduces once taxable income exceeds £100,000. The allowance is reduced by £1 for every £2 earned over £100,000. You lose the personal allowance once your annual income exceeds £125,140.
Tax bands and rates
England, Wales, and Northern Ireland have three tax band thresholds and income tax rates. The first £12,570 of income is tax-free. Income between £12,570 and £50,270, or the next £37,700, falls in the basic rate tax band and is taxed at 20%. The higher rate tax band of 40% tax, applies to income over £50,270 and up to £125,140. And finally, the additional rate tax band of 45% applies to income over £125,140. Note that Scotland has different tax bands and rates than the rest of the UK.
Tax band
Taxable income
Tax rate
Personal allowance
Up to £12,570
0%
Basic rate
£12,571 to £50,270
20%
Higher rate
£50,271 to £125,140
40%
Additional rate
Over £125,140
45%
Reduced or enhanced personal allowance
If you have underpaid or overpaid tax during a tax year, HMRC may amend your tax code. This means you will have a different personal tax-free allowance to the standard £12,570 and different tax band thresholds. If you have underpaid tax you will have a reduced personal allowance. For example, if you have a tax code of 950L, you have a reduced tax-free allowance of £9,500 which means:
The first £9,500 of income is tax-free
You pay tax of 20% on the next £37,700 of income.
You pay 40% tax on income above £47,200 (£9,500 + £37,700) and up to £125,140.
If you’ve overpaid tax during a previous tax year, HMRC may reimburse this by increasing the amount of your personal allowance or tax code. For example, if your tax code is 1300L, you will have an enhanced personal allowance of £13,000 and your tax band thresholds will be:
The first £13,000 of income is tax-free.
You pay tax of 20% on the next £37,700 of income.
You pay tax of 40% on income above £50,700 (13,000 + 37,700) and up to £125,140.
Marginal tax
In a marginal tax system, higher tax rates only apply to that portion of income falling within the next tax band. For example, someone making £53,000 a year pays 20% tax on their earnings between £12,570 and £50,270. They pay 40% tax on their remaining pay of £2,730 (£53,000 less £50,270) which falls in the higher rate band.
Personal savings allowance
Basic rate taxpayers benefit from the full £1,000 annual personal savings allowance, letting them earn up to £1,000 of interest from savings tax-free. Higher-rate taxpayers have a reduced allowance of £500, while additional-rate taxpayers have a nil allowance.
Capital gains allowance
The current UK annual capital gains allowance is £3,000.
When you sell certain assets, profits up to £3,000 per annum are tax-free. Basic rate taxpayers pay 18% tax on any profits from the sale of assets over £3,000, while higher and additional rate taxpayers pay 24%.
Dividend allowance
The current dividend allowance is £500 per year, meaning you can earn up to £500 of dividend income tax-free annually from shareholdings.
Dividends falling within the basic tax rate band are taxed at 8.75%, whilst those falling within the higher rate band are taxed at 33.75%. Dividends falling in the additional tax rate band are taxed at 39.35%.
You can avoid dividend and capital gains tax on share income and disposals by investing in the stock market using tax-free stocks and shares ISAs.
Trading allowance
Individuals in the UK receive an annual tax-free trading allowance of £1,000. The allowance lets you earn up to £1,000 in trading income each tax year without having to report the income to HMRC or pay tax on the earnings. If your gross trading income exceeds £1,000, you must register for self assessment and submit an annual tax return. You can either deduct the £1,000 allowance from your income or deduct the allowable business expenses, whichever is more tax efficient, but you cannot deduct both.
Structure your income and allowances
Having an understanding of personal tax-free allowances can help you structure your income and allowances in a more tax-efficient way, potentially reducing your tax. Below are some examples of how tax strategies can save you money:
Only withdraw capital gains from stocks and shares investments up to the annual capital gains allowance of £3,000 spreading withdrawals over several years.
Invest in the stock market using a tax-free ISA.
If you save money in a regular savings account make sure the savings allowance covers the annual interest and save any extra money in a tax-free ISA savings account.
HMRC’s website provides information about other allowances, such as the property allowance and marriage allowance:
Are you a small business unsure about the legislative requirements of VAT and when you need to register? To ensure compliance with current UK VAT legislation, all small business owners need to understand the implications of VAT or value-added tax for their business. Business owners should be familiar with input and output tax, the scope of VAT and when a business must register for VAT.
VAT in the UK is a tax on goods and services sold in the United Kingdom. It is a tax paid by the consumer and is currently charged at 20%. Some goods and services are exempt from VAT or are subject to a lower VAT rate. The current threshold for VAT registration is an annual business turnover of £90,000.
Input and output tax
When a VAT registered business makes a taxable supply, it must charge VAT to its customers, which is output tax. The business can reclaim VAT that it has paid on its purchases, such as the VAT on goods purchased from other businesses. This is known as input tax.
The difference between the output tax and input tax is the amount of VAT the business owes to HM Revenue and Customs (HMRC). If the output tax exceeds the input tax, the business must pay the difference to HMRC. If the input tax is greater than the output tax, the business can reclaim the difference from HMRC.
Scope of VAT
UK VAT consists of taxable supplies and exempt supplies. Taxable supplies are subject to VAT at three rates, 20%, 5% and 0%. Exempt supplies are not taxable supplies. Businesses with exempt supplies are unable to register for VAT. They do not charge VAT on their outputs and can’t reclaim VAT on inputs or purchases.
Standard rated VAT supplies
These are supplies that are subject to the standard rate of VAT of 20%.
Reduced rated VAT supplies
These are supplies subject to a lower rate of VAT, which is currently 5%, for example, home energy.
Zero rate VAT supplies
These are supplies with a 0% VAT rate, such as books, children’s clothes and non-luxury food.
Exempt supplies
These are supplies not subject to VAT such as postage stamps, and education.
Outside the scope of VAT
Certain supplies, such as wages, are outside the scope of VAT.
Calculating VAT
The amount of VAT due on a taxable supply is calculated by multiplying the price of the supply by the VAT rate. For example, if a business sells a product for £100 and the standard rate of VAT is 20%, the VAT owing is £20.
Registering for VAT
Businesses with a taxable turnover exceeding £90,000 per year must register for VAT. Businesses with a taxable turnover of less than £90,000 per year may voluntarily register for VAT.
Once a business is VAT registered, it must charge VAT on all its taxable supplies. It must also keep records of its VAT transactions and submit VAT returns to HMRC every quarter.
To learn more about how VAT is calculated and the different VAT schemes that are available to small businesses, click below:
Before recruiting a new staff member, it is essential to understand the breakdown of the additional costs and the impact on the business overheads. Preparing an employee cost calculation lets the business ensure it has the necessary financial resources for an extra employee. The three main costs for the calculation are the annual salary, workplace pension, and employer national insurance contributions.
For example, assume you recruit a new employee with an annual salary of £35,000. From April 2025 the total cost of employment to the business will be £40,363, which breaks down as follows:
Salary
£35,000
Employer’s national insurance
£4,500
Workplace pension
£863
TOTAL
£40,363
Calculation of employer national insurance contributions
Understanding the calculation of employer national insurance and other payroll figures is important for small business owners. Employers pay national insurance contributions on individual employee earnings over £5,000 annually (or £416 monthly). In the above illustration, employer national insurance contributions of 15% are payable on £30,000 annually or £2,500 monthly (£2,916 less £416), which is £4,500 for the year or £375 a month.
Employer’s national insurance allowance
Most employers are eligible for the annual employer’s national insurance allowance of £10,500 (from April 2025). The national insurance allowance benefits small employers with just a few employees, significantly reducing the national insurance costs to the business. Limited companies with one director who is the only employee aren’t eligible for the NI allowance.
The calculation for workplace pension contribution is based on the legal minimum contribution of 3% on eligible employee earnings. Companies can contribute a higher percentage to their employees’ pensions if they wish. Not all employees are eligible for enrolment in a workplace pension. Eligible employees are those aged 22 years and above earning over £10,000 a year. There are instances where non-eligible employees can request to join a workplace pension scheme.
Employers contribute to workplace pensions based on employee earnings that fall between the current thresholds of £6,240 and £50,270. In the above example, the employer makes their 3% contribution on £28,760 (£35,000 minus £6,240). When employees earn above the upper threshold of £50,270, employers still contribute 3%, but only on £44,030 (£50,270 minus £6,240). Employers do not contribute on earnings that exceed the upper threshold.
The pensions regulator has a useful calculator that works out employer workplace pension contributions:
Any other earnings employees receive such as commission must be added to their base salary for the calculations. Commission and bonuses are subject to employer national insurance and pension contributions.
HMRC calculators
HMRC has a handy calculator to work out both employee and employer national insurance contributions:
Employee and employer NI contributions for company directors are paid at a slightly different rate to employees. The link below will take you to the HMRC calculator for the director’s NI:
We have a handy calculator to help you with the employee cost calculation, so you can be confident your business has the resources to cover the extra cost of a new employee.
Are you embarking on a new business venture as a self-employed individual or with a partner? Choosing a business structure is an important decision, as the different business types have varying administrative requirements and legal protections. We’ve compiled a comparison of the main differences between being self-employed and trading through a limited company, to help you choose the most suitable option for your business. The three main business structures are:
Self-employed or sole trader
Limited company
Partnership
Self-employed
If you plan to operate your business as a sole trader or self-employed individual, you must register with HMRC as self-employed. Anyone with trading income over £1,000 annually from self-employment must register with HMRC and submit annual self-assessment tax returns. You will need to keep records of your business income and expenses, as you will pay income tax and national insurance contributions on your net profit via your self-assessment tax return.
Self-employed individuals pay income tax on their annual net profits (sales less expenses) and pay Class 4 national insurance contributions. As a self-employed individual, you are personally liable for the liabilities and debts of the business, although you can take out insurance to mitigate against this. HMRC has a handy calculator for estimating your PAYE and NI liability:
Limited companies must be registered with Companies House and HMRC for corporation tax. There is additional administration to running a business as a limited company. Limited companies must submit an annual return and financial statements to Companies House plus submit a corporation tax return, together with any tax owing to HMRC. The annual financial statements and tax return must be filed 9 months after the end of the financial year.
Directors of limited companies have greater flexibility in how they withdraw earnings. They can pay themselves a salary through payroll and draw dividends from the business, paying dividend tax via their self assessment tax return. They can leave funds in the company to build reserves.
Limited companies with net profits of £50,000 or less are subject to 19% corporation tax. Companies with net profits between £50,000 and £250,000 will pay tax between 19% and 25%, depending on their profit. Finally, companies with net profits exceeding £250,000 pay 25% corporation tax. It is advisable to enlist the services of an accountant to prepare your financial accounts and calculate your tax liability.
Partnership
A partnership may be an appropriate business structure where two or more of you are working in the business. All partners share responsibility for the business, including all bills and any losses. Each partner receives a share of the profits and pays income tax on their share of the profits through a self assessment tax return. Furthermore, the partnership needs to designate a nominated partner who is responsible for submitting the partnership’s tax return and maintaining the business records. All partnerships must be registered with HMRC.
Alternatively, a partnership can be a limited partnership registered with Companies House. Limited partnerships must have at least one general partner and one limited partner, with all partners paying tax on their share of the profits. As with limited companies, limited partnerships are liable for the bills and debts of the partnership, protecting the partners’ personal assets. To learn more about partnerships, the link below takes you to the gov.uk website providing more information:
Less administration and easier to set up and close business
More administrative requirements and various annual returns to HMRC and Companies House. When the company closes it must be liquidated.
Register with HMRC for self assessment tax (SA) and submit an annual tax return online.
Register the company with Companies House. Articles and memorandum of association are required on registration. An annual confirmation statement and annual financial accounts must be submitted to Companies House. Register with HMRC for corporation tax and submit an annual tax return (CT600).
The individual is liable for the debts and liabilities of the business. Both business and personal assets are seen as one. Can take out insurance to protect personal assets.
The company is liable for the debts and liabilities of the business.
All earnings (income less expenses) for a tax year are subject to income tax and national insurance in that year.
Earnings can be taken via payroll and as dividends. Net profits can be left in the company as reserves and withdrawn at a later date and tax year.
Pay tax as PAYE and class 4 national insurance contributions.
Pay tax as an employee through payroll with deductions for PAYE and NI. Dividends withdrawn from the company are taxed via a self assessment return. The company pays employer NI and corporation tax is due on net profits.
Must keep records of income and expenditure.
Must prepare annual financial accounts that are submitted to Companies House.
Records are private and not publicly available.
Accounts and company information is publicly available on the Companies House website.
How does marginal corporation tax for business work?
Limited companies in the UK pay corporation tax on their net profits. UK marginal corporation tax consists of three different tax bands and rates. The tax rate is determined by the amount of a business’s net taxable profit. Companies with net profits of £50,000 and below pay 19% corporation tax. Those with net profits between £50,000 and £250,000 pay a corporation tax rate between 19% and 25% and companies with profits above £250,000 pay 25% tax. The marginal rate of tax is 26.5% and is paid on net profits between £50,000 and £250,000.
How does marginal rate relief work?
Marginal rate relief applies to profits between £50,000 and £250,000 and is calculated using a formula provided by HMRC. The formula is:
Standard fraction x (Upper limit – augmented profits) x amount of taxable profits ÷ augmented profits
As an illustration, assume a net profit of £60,000. The standard fraction is 3 ÷ 200. Applying this to the formula gives:
3 ÷ 200 x (250,000 – 60,000) x (60,000 ÷ 60,000) = £2,850 marginal relief
There are two options for calculating the corporation tax. You can multiply the net profit of £60,000 by 25%, which equals £15,000. Then deduct the marginal relief of £2,850, resulting in a tax liability of £12,150, or an effective tax rate of 20.25%.
Alternatively, you multiply £50,000 of the profit by 19%, which is £9,500. Multiplying the remaining profit of £10,000 by the marginal tax rate of 26.5%, results in marginal relief of £2,650. Adding both amounts gives a total tax of £12,150.
An easier way to calculate corporation tax is by using HMRC’s calculator which is available using the link below:
Small business owners often focus on day-to-day operations, but understanding a fundamental financial concept – the time value of money – can transform your approach to cash flow management and financial planning.
What is the Time Value of Money?
The time value of money (TVM) is based on a simple principle: a pound today is worth more than a pound tomorrow. This is due to three main factors:
Opportunity cost (what you could earn by investing that pound)
Inflation (which erodes purchasing power over time)
Risk (the uncertainty of receiving future payments)
Why It Matters for Your Small Business
1. Cash Flow Management
Understanding TVM helps you make better decisions about when to collect payments and pay expenses. For example:
Offering early payment discounts might make financial sense if the benefit exceeds what you’d earn by investing that money elsewhere
Delaying large payments when possible (without incurring penalties) can be advantageous if you can put that money to work in your business
2. Equipment Purchases and Financing
When deciding whether to buy equipment outright or finance it:
Financing may be preferable if your business can generate returns higher than the interest rate of finance
Leasing might make sense when technology changes rapidly, preserving capital for higher-return investments
3. Pricing Strategies
TVM should influence your pricing models:
Subscription models with upfront annual payments can provide immediate capital for growth
Payment plans may require higher total prices to account for the time value of foregone immediate payment
How TVM is applied in Planning and Forecasting
Practical Tools and Calculations
Several core TVM calculations can help in your business planning:
Future Value (FV) – What your money will be worth in the future
Present Value (PV) – What future money is worth today
Net Present Value (NPV) – The current value of all future cash flows
Internal Rate of Return (IRR) – The rate at which NPV equals zero
Practical Tips for Implementation
Use Financial Tools: Many accounting software packages include TVM calculators. Microsoft Excel also has built-in functions like NPV, IRR, and PV. Your accountant will be able to assist with TVM calculations and offer practical advice.
Consider Inflation: When forecasting, account for inflation’s impact on future expenses and revenues.
Review Financing Regularly: As interest rates change, reassess your debt structure and consider refinancing when advantageous.
Apply to Inventory Management: Calculate the true cost of holding inventory by factoring in the opportunity cost of tied-up capital.
Final Thoughts
In a small business, cash is king – but understanding when you receive or spend that cash matters tremendously. By incorporating time value of money principles into your financial planning, you’ll make more informed decisions that enhance your business’s long-term sustainability and growth.
Remember: financial success isn’t just about how much money you make, but when you make it and how effectively you put it to work.
With the Employer NI contribution changes from April 2025 fast approaching, it is vital to understand how these changes will impact your staff costs. Employer national insurance contributions are increasing by 1.2% from 13.8% to 15%, whilst the threshold above which employer contributions are paid is decreasing from £9,100 to £5,000. The national insurance allowance, is however, increasing from £5,000 to £10,500 which may benefit small employers with just a few staff members.
Financial Impact of the National Insurance Changes
The financial impact of the national insurance changes for an employee earning £35,000 a year, is an additional employment cost of £925. This breaks down as follows:
Reduction in Threshold
The threshold above which employers pay national insurance contributions (NIC) on an employee’s salary is decreasing from £9,100 to £5,000. The reduction in threshold means NIC is payable on an extra £4,100 a year. At 15%, this is an extra £615.
Increase in the Percentage Rate
The increase in the percentage from 13.8% to 15%, results in an extra £310in NIC. Together, these two changes increase the contributions by £925 a year.
Increase in the National Insurance Allowance
The increase in the National Insurance Allowance from £5,000 to £10,500 should benefit small employers with a few staff members earning the minimum wage. For large employers the increase will be insignificant when compared with the total increase in NIC resulting from the combined impact of the 1.2% increase and threshold reduction.
Illustrations
The charts below illustrate the impact of the employer NI contribution changes from April 2025, for small and medium size businesses.
In this example, there are 4 staff members each earning £24,000 a year. While the NIC changes increase the total NIC due, the increase to the NI allowance reduces the overall NI liability by £2,324 from £3,224 to £900.
Tax year 24/25
Tax year 25/26
NIC per employee
£2,056
£2,850
Total NI
£8,224
£11,400
Less NI Allowance
£5,000
£10,500
Total NIC due
£3,224
£900
In the following example, the employee salary is £35,000 (this is around the UK average) and the figures are based on a headcount of 25 employees. The additional cost to the employer in this example is £17,650 or £706 per staff member.
Tax year 24/25
Tax year 25/26
NIC per employee
£3,574
£4,500
Total NI
£89,350
£112,500
Less NI Allowance
£5,000
£10,500
Total NIC due
£84,350
£102,000
It is important to note that not all employers are eligible to receive the national insurance allowance. You can check your eligibility on HMRC’s website: Employment Allowance: What you’ll get – GOV.UK
With our national insurance calculator you can see the impact of the changes to your business staff costs
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