9 UK Tax Rules for Small Businesses and How to Pay Less While Staying Compliant in 2026

1. Corporation Tax

If your business is registered as a limited company, corporation tax is the starting point of your tax obligations. This is the fundamental tax that limited companies pay on their taxable profits.

The government has confirmed these rates will remain unchanged for the 2025/26 and 2026/27 financial years:

• 19% on profits up to £50,000
• 25% main rate on profits over £250,000 Marginal relief applies between these limits to smooth the rate increase.

Deadlines and compliance:

Corporation tax returns must be filed within 12 months of your accounting period end, with payment due within nine months and one day. Missing these deadlines will cost you, literally. Penalties for late filing are increasing from April 2026 as part of changes to corporation tax administration

How to reduce it legally:

• Timing expenses: Accelerate legitimate business purchases before year-end.
• Claim allowances: Use reliefs such as Annual Investment Allowance or R&D tax reliefs where eligible.
• Marginal relief planning: Keeping profits just below thresholds can reduce tax.

 

2. Value Added Tax (VAT)

As your business grows, VAT often becomes the next major tax consideration, particularly once turnover approaches the registration threshold. VAT registration becomes mandatory when your taxable turnover exceeds £90,000 in any rolling 12-month period.

What counts toward the threshold?

• All standard-rated, reduced-rated, and zero-rated sales
• Services and goods you sell

What doesn’t count:

• VAT‑exempt supplies such as certain financial services or education.

Once registered, you must charge VAT at the standard rate of 20% on most goods and services, submit quarterly VAT returns using Making Tax Digital (MTD)-compliant software, and maintain detailed digital records of all transactions.

Tax Saving Strategies for Small Businesses:

While mandatory registration can seem burdensome, it allows you to reclaim VAT on business purchases and expenses.

If you regularly buy from VAT-registered suppliers, voluntary registration might actually save you money, even below the threshold. Also, use efficient accounting tools to manage VAT and avoid late penalties.

 

3. Income Tax and National Insurance for Sole Traders/Partnerships

For sole traders and partnerships, tax works differently. Instead of corporation tax, profits are taxed directly through income tax and National Insurance. The personal allowance and income tax bands are expected to remain frozen through at least 2031, meaning thresholds stay at current levels.

Typical 2025/26 income tax rates include:

• Personal Allowance: £12,570 (tax-free)
• Basic Rate: 20%
• Higher Rate: 40%
• Additional Rate: 45%

National Insurance Contributions (NICs):

Class 2 and Class 4 NICs are payable by self‑employed individuals above certain profit levels, with thresholds aligned to income tax bands.

Making Tax Digital (MTD) impact:

From 6 April 2026, sole traders and landlords with qualifying income over £50,000 must keep digital records and submit quarterly updates via MTD‑compatible software.

Ways to reduce liability:

• Maximise allowable business expenses
• Use efficient timing of transactions
• Plan income streams to stay within lower bands where appropriate

 

4. Employer National Insurance Contributions

The moment you pay yourself a salary or hire staff, employer National Insurance becomes a compliance obligation that many small businesses underestimate. As of April 2025, the employer NIC rate is 15%, and the threshold at which you start paying has dropped to £5,000 annually.

Relief opportunity:

The Employment Allowance has increased to £10,500, and expanded eligibility means many small businesses can offset this amount against their employer NIC bill

 

5. Dividend Tax: For Company Directors and Shareholders

Many company directors use dividends to supplement their salary, but changes coming in 2026 mean dividend tax planning now matters more than ever. Here’s how the dividend tax rates will rise from April 2026 as part of the Finance Bill changes:

• Basic rate: 8.75% to 10.75%
• Upper rate: 33.75 to 35.75%
• Additional rate: 39.35% to 41.35%

The dividend allowance remains just £500, meaning you only get £500 in tax-free dividends before these rates kick in.

Tax-efficient strategy: The classic approach of taking a small salary (up to the personal allowance or NIC threshold) and topping up with dividends remains viable, but the savings margin is narrowing. Consider working with an accountant to model the optimal salary-dividend split for your specific circumstances, especially with the 2026 rate increases approaching.

 

6. Capital Gains Tax

Tax doesn’t only apply to day-to-day trading. If you sell business assets or your company itself, capital gains tax can significantly affect what you take home. For business asset disposals, rates are increasing significantly from the current rate of 14% to 18% from April 2026 under Business Asset Disposal Relief.

This applies to qualifying disposals under Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which provides preferential rates on the first £1 million of lifetime gains when selling all or part of your business. If you’re contemplating selling your business or significant business assets, timing matters.

 

7 Business Rates: The Property Tax

If your business operates from physical premises, business rates form another unavoidable tax, but one where reliefs are often overlooked. The 2026/27 tax year brings important changes:

• The small business multiplier will be approx 43.2p
• A retail, hospitality, and leisure (RHL) multiplier will be lower at around 38.2p
• A high‑value property multiplier will apply to properties over £500,000.

Relief opportunity: Transitional relief packages are available to protect businesses from sharp increases due to property revaluations. Check your eligibility using the government’s business rates calculator and ensure you’re claiming all applicable reliefs.

 

8. Allowable Expenses

Beyond understanding the taxes themselves, knowing what you can deduct legally is one of the most powerful ways to reduce how much tax you actually pay. Allowable expenses reduce your taxable profit, meaning less corporation tax, income tax, and National Insurance.

What Qualifies as an Allowable Expense?

To qualify, expenses must be “wholly and exclusively” for business purposes. Common allowable expenses include:

• Premises costs (rent, utilities)
• Office supplies & software
• Salaries & employer NICs
• Travel, accommodation (if business use)
• Professional fees (accountants, legal)
• Marketing & sales costs
• Interest on business loans

What You Cannot Claim

Understanding what doesn’t qualify is equally important:

• Personal expenses
• Commuting costs
• Fines and penalties
• Client entertainment, not strictly business‑related

 

9. Working from Home Expenses

For many modern small businesses, working from home is the norm, yet home-related tax relief remains one of the most underclaimed areas. You can claim a proportion of household costs like rent, mortgage interest, heating, electricity, and council tax based on usage. This is calculated based on the number of rooms, time spent working, or flat-rate simplified expenses.

 

Understanding taxes is only half the picture. In 2026, how you report and stay compliant is just as important as what you pay. The UK tax system is undergoing its biggest transformation in a generation. Making Tax Digital is expanding beyond VAT to encompass income tax, fundamentally changing how small businesses report their finances. This is why it is essential to leverage an all-in-one accounting tool like Account Swift to seamlessly meet MTD tax requirements.

In 2026, small businesses can stay compliant while paying less by clearly understanding which taxes apply to them, fully claiming all legal deductions and reliefs, and adopting digital systems that streamline reporting and prevent costly errors or missed deadlines.