Small Businesses and Tax: What UK Businesses Need to Know

Running a small business in the UK means wearing many hats – and one of the most important (but often confusing) areas is tax. Whether you’re a sole trader, limited company, or freelancer, understanding your tax obligations is essential to staying compliant and avoiding penalties.

In this guide, we’ll walk you through the key things UK small businesses need to know about tax, from VAT registration to completing your tax return.

Do You Need to Register for VAT?

Not every business in the UK needs to register for VAT. VAT (Value Added Tax) is a tax added to most goods and services sold by VAT-registered businesses. You only have to register for VAT if your turnover is more than £90,000 in a 12-month period (this is the current threshold as of 2025).

If your turnover is below this threshold, VAT registration is optional. However, there are some cases where registering voluntarily could benefit your business – more on that below.

You must also register if:

• You expect your turnover to go over the VAT threshold in the next 30 days alone.

• You buy goods for your business from outside the UK worth more than £90,000.

The Benefits of Registering for VAT (Even If You Don’t Have To)

While VAT registration does involve some additional admin work, it comes with several clear advantages that can benefit your business:

• Boost your business image: Being VAT-registered can make your business appear more established, professional, and credible to potential clients and partners. It signals that your business is growing and operating at a higher level.

• Reclaim VAT: You can reclaim the VAT you pay on eligible business purchases, which can help reduce your costs and improve cash flow. This is especially beneficial if your business makes significant purchases or investments.

• Work with other VAT-registered businesses: Some suppliers or clients may prefer working with VAT-registered companies, as it simplifies transactions and ensures compatibility in accounting processes. In some cases, larger clients may even expect it.

However, VAT registration also comes with responsibilities that you’ll need to manage:

• Add VAT to your prices: Once registered, you'll need to charge VAT on your goods or services, which may affect your pricing structure and competitiveness depending on your target customers.

• Submit VAT returns: VAT returns are typically submitted quarterly, requiring you to calculate and report the VAT you’ve charged and reclaimed. This adds regular bookkeeping tasks to your schedule.

• Keep VAT records and receipts: Accurate record-keeping is essential for VAT compliance. You’ll need to maintain detailed records of your sales, purchases, and VAT payments to meet HMRC requirements and avoid penalties.

By weighing the benefits against the additional admin, you can determine whether VAT registration is the right move for your business.

Voluntary registration works well for businesses that mainly sell to other VAT-registered businesses or make large business purchases.

How to Register for VAT

You can register for VAT online through the HMRC website, which is a relatively straightforward process. 

Once registered, you’ll receive a unique VAT number that identifies your business for VAT purposes. From that point on, you’ll need to start charging VAT on applicable sales, keeping detailed and accurate records of your transactions, and submitting regular VAT returns to HMRC. 

Additionally, you’ll be required to comply with Making Tax Digital (MTD) regulations, meaning you must use compatible accounting software to record and submit your VAT information digitally. This ensures your records are accurate and up-to-date, helping your business stay compliant with tax regulations.

Understanding and Completing Your Tax Return

All UK businesses are required to submit a tax return to HMRC annually. This process ensures that you report your income, claim allowable expenses, and pay the correct amount of tax owed to the government. It’s a key step in maintaining compliance and avoiding potential penalties.

If you operate as a sole trader or within a partnership, you’ll need to complete a Self Assessment tax return, which details your personal income and expenses related to your business. For limited companies, the process involves filing a Company Tax Return, which outlines the company’s profits, losses, and taxes owed on corporate income.

You can learn more about when and how to file your tax return in our guide: UK Self Assessment Tax Return Guide for the Self-Employed

Key steps:

1. Register for Self Assessment (if you haven’t already)

2. Track income and allowable expenses

3. Submit your tax return by the deadline (usually 31 January for online returns)

4. Pay your tax bill

Missing deadlines can result in automatic fines, regardless of whether you owe any tax or not. It’s important to register and submit your return on time to avoid unnecessary penalties, even if your tax liability is zero.

What Expenses Can You Claim?

Claiming allowable expenses is an important step in managing your finances, as it helps reduce your taxable income. By deducting these eligible costs from your income, you can lower the amount of profit subject to tax, ultimately resulting in a smaller tax bill.

Common expenses include:

• Office rent or home office costs

• Travel and fuel for business journeys

• Marketing and advertising

• Phone and internet bills

• Accounting fees

• Tools, stock, and equipment

To get the full list and understand the rules, see our full guide on What are allowable expenses?

Keep all receipts and maintain clear, detailed records of your spending, including dates, amounts, and the purpose of each expense. HMRC may request proof during an audit or review, so having organised documentation can save time and avoid potential issues.

Other Tax Considerations for Small Businesses

Here are a few other tax-related points UK businesses should be aware of:

1. Making Tax Digital (MTD)

If you're VAT registered, you must use digital software to keep records and submit returns. Eventually, MTD will apply to all tax returns.

2. PAYE and Employing Staff

If you take on employees (even just one), you’ll likely need to register for PAYE and operate payroll. This includes deducting tax and National Insurance from wages.

3. Corporation Tax

If you run a limited company, you must pay Corporation Tax on profits. The current main rate is 25% (as of 2025), though smaller businesses may pay less.

4. National Insurance

Sole traders pay Class 2 and Class 4 National Insurance based on profits. Companies pay employers’ NI for staff and may have other obligations.

Final Thoughts: Small Businesses and Tax

Sorting your taxes as a small business doesn’t need to be overwhelming if you stay on top of it.

Start by staying organised—keep clear records of all your income and expenses throughout the year. Use accounting software or even simple spreadsheets to track everything consistently. Make sure to understand key deadlines and avoid leaving everything until the last minute, as this can lead to unnecessary stress or missed opportunities for deductions.

Whether you choose to handle your taxes yourself or hire an accountant, having a basic understanding of tax obligations and deductible business expenses can empower you to make smarter financial decisions and stay compliant. Don’t forget that being proactive can save you both time and money in the long run.

Got more questions about handling tax as a small business? Let us know what topics you'd like us to cover next!

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Disclaimer: This guide is for general information only. Always seek professional advice tailored to your business situation.