Tax considerations for a small business 2025

Sole traders, or self-employed people, pay Income Tax on their profits at their marginal rate of tax.

The marginal rates of tax are 20%, 40% or 45%, depending on whether your level of income makes you a basic, higher or additional rate taxpayer. You pay 20% tax on your income up to £50,270, and the rate increases after this. On profits of over £12,570, you also pay Class 4 National Insurance contributions.

It’s important to accurately calculate your profits for the year to make sure you pay the correct amount of tax. There are specific rules about which expenses you can and can’t claim.

Sole traders must submit a tax return by 31 January following the tax year and pay any tax due by this date. If your tax liability is over £1,000, you need to make ‘payments on account’, which are payments towards next year’s tax liability. You pay these every six months – by 31 January and 31 July – and they’re credited on your tax return.

Some sole trade income, for example, from subcontractors working in the construction industry, will have already had tax deducted at source, and a credit is given for this on the tax return.

Private limited companies need to file accounts within nine months and pay the tax due within nine months and one day of their year-end. For example, a company with a 31 December year-end needs to pay the tax by 1 October.

Companies pay tax on their profits after deductible expenses as well, but it’s important to get this right, as there are differences in the expenses that sole traders and companies can claim.

Companies with profits under £50,000 pay tax of 19%. However, since April 2023, companies over £250k are subject to tax at 25%. If a company’s profits fall between the two, a marginal rate is used. The marginal rate equates to profits between £50-250k being taxed at 26.5%.

Undeclared drawings from the company are not tax-deductible, and neither are dividends. A Director’s salary, however, is tax deductible, but is subject to National Insurance. It’s vital to have a good remuneration strategy to ensure drawdown is happening in the most effective way, especially with changes to National Insurance rates and thresholds which came into effect in April 2025.

Dividends and salary declared are taxable on the tax return of the Director/Shareholder.

Businesses with vatable income over £90k will need to charge VAT on their invoices to customers.

Businesses with zero-rated income will still need to register, but do not charge VAT on their invoices.

They can then reclaim VAT on expenses incurred, and will pay or reclaim the difference with HMRC, usually quarterly.

If a Director draws income from a company that is not declared as a dividend or salary, it is treated as a loan. If this loan remains unpaid by the Corporation Tax deadline, the company is subject to dividend tax at the higher dividend tax rate of 33.75% on the balance. This is known as section 455 tax.

Transferring shares as part of succession planning can trigger Capital Gains Tax consequences, and with the rates of Capital Gains Tax increasing, including for gains which are eligible for Business Asset Disposal relief (formerly Entrepreneur’s Relief), this could be a big bill.

Incorporating and disincorporating a business (moving from or into a limited company) also has tax consequences. However, tax can be mitigated or reduced with careful planning, which is why it’s so important to get good, early advice.

Taxes are complex, but with the right advice, they don’t have to be a burden. At Old Mill, we help businesses with everything from compliance to strategic tax planning, get in touch.