Navigating the UK tax system can be complex—especially for entrepreneurs, small business owners, and freelancers who are managing accounting and compliance responsibilities on top of running a business. To help simplify the process, this blog post provides an up-to-date overview of how the UK tax system works as of July 2025. From VAT and corporation tax to PAYE and personal income tax, here’s everything you need to know to keep your UK company in good standing.
The difference between financial year and personal tax period in the UK
One of the first things to grasp is the difference between a financial year, an accounting period, and a personal tax year, terms that often cause confusion for new business owners.
The UK personal tax year runs from 6 April to 5 April each year. This applies to individuals, including sole traders, partners, and directors filing self-assessment tax returns.
The government’s financial year also aligns with the 6 April to 5 April timeline. This is used for most tax policy and budgeting decisions.
A company’s accounting period is defined by its Accounting Reference Date (ARD), which typically falls at the end of the month of incorporation. For example, if your company was incorporated on 14 July, your accounting period will usually end on 31 July each year. The first accounting period may be slightly longer than 12 months.
Keeping track of these timelines is essential, as different tax filings and payment obligations are linked to different periods.
Value-added tax (VAT) in the UK
The UK VAT system continues to play a major role in business taxation. VAT (Value-Added Tax) is a consumption tax charged on most goods and services sold in the UK.
As of 2025, the VAT registration threshold remains at £85,000. If your VAT-taxable turnover exceeds this figure within a 12-month rolling period, VAT registration with HM Revenue & Customs (HMRC) is mandatory. Businesses can also register voluntarily, even if their turnover is below the threshold—this can be advantageous for companies with significant VATable expenses.
Once registered, your business must apply the correct VAT rate when invoicing clients:
Standard rate: 20% (applies to most goods and services)
Reduced rate: 5% (e.g. for some home energy products)
Zero rate: 0% (e.g. for food and children’s clothing)
Some goods and services may also be exempt from VAT (like education or certain financial services).
Businesses are required to submit VAT returns quarterly, and the filing and payment deadline is 1 calendar month and 7 days after the end of each VAT accounting period.
All VAT-registered businesses must now use Making Tax Digital (MTD)-compatible software to keep digital records and file returns. This rule applies to all VAT-registered businesses, regardless of turnover, following the full rollout of MTD for VAT.
Non-UK businesses that make taxable supplies into the UK must also register for VAT, even if their turnover is below the £85,000 threshold. The threshold does not apply to businesses established outside the UK.
Corporation tax for UK companies
f you run a limited company in the UK, you must pay corporation tax on all profits, including income from trading, investments, and the sale of assets (capital gains).
The UK’s corporation tax system changed significantly from April 2023:
Companies with profits up to £50,000 are subject to the small profits rate of 19%.
Those with profits over £250,000 are taxed at the main rate of 25%.
Companies with profits between these thresholds are subject to a marginal relief, effectively creating a tapered rate.
Corporation tax is due nine months and one day after the end of your company’s accounting period. You also need to file a Company Tax Return (CT600) with HMRC within 12 months of the year-end.
Note that companies must also file annual accounts with Companies House, typically within 9 months of the accounting period end.
Employment taxes in the UK: PAYE & National Insurance
If your company has employees, or if you’re a director being paid via payroll, you’ll need to operate PAYE (Pay As You Earn)—HMRC’s system for collecting income tax and National Insurance contributions (NICs) from salaries.
As of 2025:
Employers must deduct income tax and employee NICs from gross pay and send these to HMRC.
Employers also pay employer NICs on top of the gross salary.
The current employer NIC rate is 13.8%, and employees pay between 8%–12%, depending on income.
You must submit a Full Payment Submission (FPS) to HMRC every time you pay an employee. PAYE payments must be made to HMRC by the 22nd of each month, covering the payroll period from the 6th of the previous month to the 5th of the current month.
If your company pays less than £1,500 per month in PAYE liabilities, you may apply to pay quarterly instead of monthly.
Small businesses may qualify for the Employment Allowance, which can reduce your employer NIC bill by up to £5,000 annually, provided your previous year’s NIC liability was under £100,000.
Personal Income Tax in the UK (2025)
If you are a director, sole trader, or partner, you’ll likely need to file a Self-Assessment tax return. Here’s how personal income tax works in the 2025–2026 tax year:
Personal Allowance: £12,570 (no tax paid on income up to this level)
Basic rate (20%) applies to income from £12,571 to £50,270
Higher rate (40%) applies to income from £50,271 to £125,140
Additional rate (45%) applies to income above £125,140
If your income exceeds £100,000, your personal allowance is reduced by £1 for every £2 over this threshold. This means that those earning over £125,140 receive no personal allowance.
Separate income tax rates apply to dividends, interest, and capital gains. Business owners often structure remuneration using a combination of salary and dividends for tax efficiency.
Do You Need to File a Tax Return?
You’ll need to register for Self Assessment and file a return if you:
Are self-employed
Are a director receiving untaxed income
Receive rental or overseas income
Earn more than £100,000 per year
Need to report capital gains or dividend income
The deadline for submitting your online tax return is 31 January following the end of the tax year (5 April). Paper returns must be submitted by 31 October.
Final Thoughts on the UK Tax System in 2025
The UK tax landscape continues to evolve, especially with the full implementation of Making Tax Digital, shifting corporation tax brackets, and updated PAYE rules. Understanding how your business fits into the broader tax framework can save you money and help you avoid costly penalties.
If you’re unsure how to handle your company’s tax obligations or need help with VAT registration, payroll setup, or annual filing, our experts at 1Office are here to support you. We make UK business management easy, whether you’re a local entrepreneur or operating remotely.
Need help staying compliant? Contact us for support with tax registrations, VAT, accounting, or payroll in the UK.
