Tax is often one of the most worrying parts of starting a business, especially if you have never dealt with it before. Many new business owners feel anxious simply because tax works very differently from employment, and it is not always explained clearly.
This guide is written for beginners and is designed to give you a calm, straightforward overview of how tax works for new UK businesses. It explains what taxes you may need to pay, when they are usually due, and what you need to be aware of early on. If you run a business in Farnborough or elsewhere in the UK, the same rules apply.
A Reassuring Starting Point
Before going any further, it is important to understand one key thing: you do not need to know everything about tax on day one.
Most tax responsibilities only apply once you start earning money, and payments are usually made later, not immediately. This article focuses on awareness and planning, not complex calculations or rules.
Why Tax Feels Different From Employment
When you are employed, tax and National Insurance are usually taken from your pay automatically before you receive it. When you run a business, this does not happen.
Instead:
- You receive your income first
- You are responsible for setting money aside for tax
- You pay your tax bill later, once it has been calculated
This change catches many new business owners out, but it becomes manageable once you understand how it works.
The Main Types of Tax New Businesses Encounter
The taxes you deal with depend on how your business is set up, but most new businesses will encounter some or all of the following.
Income Tax (Sole Traders)
If you are a sole trader, you pay income tax on your business profits. It’s important to remember that you only pay tax on your profit (your income minus your allowable business expenses), not on your total income.
Most people in the UK also have a Personal Allowance, which is an amount of income you can earn each year before you start paying any income tax. For the 2025/26 tax year, this is £12,570.
Corporation Tax (Limited Companies)
If you run a limited company, the company itself pays Corporation Tax on its profits. This is separate from any personal tax you may pay on money you take from the company. For most small companies, the Corporation Tax rate is 19%.
National Insurance Contributions
Most business owners will also pay National Insurance contributions. For sole traders, this is usually Class 2 and Class 4 National Insurance, depending on your profits. For directors of limited companies, it depends on how you take income from the company.
What About VAT?
VAT (Value Added Tax) is often mentioned early on, but it does not apply to every business straight away. You only become legally required to register for VAT once your turnover reaches the VAT registration threshold, which is currently £90,000 in a 12-month period. Some businesses choose to register voluntarily before this, but it is not required for everyone.
When Do You Actually Pay Tax?
One of the most important things for beginners to understand is timing. The UK tax year runs from 6th April to 5th April.
For Sole Traders (Self Assessment)
For sole traders, the key deadlines are:
- 31st January: This is the deadline to file your Self Assessment tax return online and pay the tax you owe for the previous tax year.
- 31st July: This is the deadline for your second Payment on Account.
What is a Payment on Account?
This is something that often surprises new sole traders. If your Self Assessment tax bill is over £1,000, HMRC will ask you to make advance payments towards your next year’s tax bill. These are Payments on Account. Each payment is usually 50% of your previous year’s bill and is due on 31st January and 31st July.
For Limited Companies (Corporation Tax)
For limited companies, the deadline to pay Corporation Tax is usually 9 months and 1 day after the end of your company’s accounting period.
Setting Money Aside for Tax
You will normally pay tax months after earning your income, so building a habit of setting aside a portion of that money can make things much easier later on.
Many new business owners find it reassuring to put 20-25% of their income into a separate savings account and treat that money as unavailable to spend.
You do not need to be precise at the beginning. The goal is to build the habit and avoid the shock of a large tax bill with no money saved to pay it.
A Note on Making Tax Digital (MTD)
It is also worth being aware of Making Tax Digital (MTD), which is the government’s plan to move tax reporting online. From April 2026, many sole traders and landlords will need to use MTD-compatible software to keep digital records and send updates to HMRC. This makes keeping digital records from the start a very sensible choice.
Common Early Tax Mistakes
Many early tax issues come from simple misunderstandings rather than wrongdoing.
Common mistakes include:
- Spending all income without considering the future tax bill
- Not knowing about Payments on Account and being surprised by the July payment
- Missing registration or payment deadlines
- Assuming tax works the same as it did in employment
Taking small steps to plan ahead can prevent a lot of stress later on.
When Getting Advice Can Help
You are not required to speak to an accountant to understand tax, but advice can be helpful when your income starts to increase, you are unsure which taxes apply to you, or you just want some reassurance that you are setting enough money aside.
If you would like calm, practical support as your business develops, Penney’s Accountancy works with UK small businesses in Farnborough and the surrounding areas, helping owners understand their tax responsibilities and plan with confidence.
Want to Learn More in Your Own Time?
For those who want to build their confidence and understand these topics in more detail, Penney’s Finance School offers an online, self-paced business and finance course. It covers everything from company setup to cash flow and tax, allowing you to learn at your own pace.
Important information
The information provided in this article is intended as general guidance for UK businesses only and reflects UK tax legislation and HMRC guidance as of February 2026.
Tax rules and business requirements can change, and individual circumstances vary. Before acting on any of the information above, we recommend speaking to a qualified accountant who can provide advice tailored to your specific situation.
If you would like calm, practical support as your business develops, Penney’s Accountancy works with UK small businesses in Farnborough and the surrounding areas, helping owners understand their tax responsibilities and plan with confidence.