When Do Small Businesses Have to Start Paying Tax

Introduction

Many small business owners are unsure of when their tax obligations actually begin. The timing depends on the business structure, income levels, and the types of taxes involved. Registering too late can result in fines, while registering too early can create unnecessary admin. This article breaks down the timelines for sole traders, partnerships, and limited companies. It also explains VAT and National Insurance obligations, deadlines, and practical steps to stay on top of your taxes from day one.

Understanding business structures

How and when you pay tax depends on how your business is structured. The three main forms for small UK businesses are sole trader, partnership, and limited company. Each has different tax responsibilities and registration rules.

Sole traders

A sole trader is someone who works for themselves and keeps all business profits after tax. You pay income tax on your profits once they exceed the tax-free Personal Allowance, which is £12,570 for 2025/26. Profits are your total income minus allowable business expenses such as equipment, tools, and travel costs.

Even if your profits are below that level, you must still register with HMRC for Self Assessment once you start trading. Registration must be completed by 5 October following the end of the tax year you began trading. For example, if you started in June 2024, you must register by 5 October 2025.

Your first tax return will cover the 2024/25 tax year and must be filed by 31 January 2026, with payment due the same day. You may also owe Class 2 and Class 4 National Insurance contributions if your profits exceed specific thresholds.

Partnerships

If you run a business with one or more people, you can form a partnership. The partnership must register with HMRC, and each partner must also register individually for Self Assessment. Each partner pays income tax and National Insurance on their share of the profits. Deadlines are identical to those for sole traders: register by 5 October, file by 31 January, and pay by the same date.

Limited companies

A limited company is a separate legal entity. This means the company pays corporation tax on its taxable profits rather than income tax. You must register for corporation tax within three months of starting business activity. Trading begins when the company starts doing business, such as buying, selling, or promoting services.

Corporation tax is charged at 25% on profits above £250,000, with a lower rate for small profits and a marginal rate for those in between. The company must file a corporation tax return even if no profit is made. Corporation tax is payable nine months and one day after the end of the accounting period, and the tax return must be filed within twelve months.

If you pay yourself a salary, it goes through PAYE and is subject to income tax and National Insurance. If you take dividends, they are taxed separately via your Self Assessment tax return.

VAT registration and payment

VAT applies once your business’s taxable turnover exceeds £90,000 in a rolling 12-month period. At that point, registration becomes mandatory. You can also register voluntarily before reaching the threshold if you want to reclaim VAT on purchases.

After registering, you must charge VAT on taxable sales, submit VAT returns (usually quarterly), and pay VAT owed to HMRC. VAT returns and payments are generally due one month and seven days after the end of each VAT quarter.

Failing to register on time or submit returns promptly can result in penalties, interest, and backdated VAT liability.

National Insurance contributions

Sole traders and partners pay Class 2 and Class 4 National Insurance contributions once their profits pass certain thresholds. Limited company directors pay Class 1 National Insurance through the PAYE system if they receive a salary. National Insurance builds entitlement to benefits like the State Pension, so maintaining payments is essential.

When to register for Self Assessment

Self-employed individuals must register by 5 October after the end of their first tax year. The tax year runs from 6 April to 5 April. You then file your return and pay any tax due by 31 January the following year.

For instance, if you started trading in September 2024, your first tax year ends on 5 April 2025. You must register by 5 October 2025, file your return by 31 January 2026, and pay any tax due by that date.

When companies must register for corporation tax

A newly formed company must register for corporation tax within three months of beginning trading. HMRC sends a Unique Taxpayer Reference (UTR) after incorporation, which is needed for registration. Even if your company makes no profit, HMRC still expects a tax return unless they confirm otherwise.

Corporation tax payment is due nine months and one day after the end of your company’s accounting period, while the return must be submitted within twelve months.

VAT deadlines and record keeping

Once VAT registered, you must keep digital records and submit returns through compatible software (Making Tax Digital). Payments are due one month and seven days after each period. Keeping good records avoids errors and supports VAT reclaims on business expenses.

Penalties for late action

HMRC penalties can be significant. Missing a Self Assessment deadline incurs a £100 automatic fine, with daily penalties for continued delay. Corporation tax late filing also attracts fines, while repeated VAT lateness results in escalating penalties.

To avoid this, keep clear accounting records, track deadlines, and use accounting software or a professional accountant to help manage compliance.

Practical advice for small business owners

Set up a separate business bank account to keep your finances organised.

Use accounting software like Xero, QuickBooks, or FreeAgent to record income and expenses automatically.

Put aside tax money regularly, typically 20 30% of your profits.

Check registration thresholds for VAT and National Insurance each year.

Seek professional advice early to make sure your setup, structure, and deadlines are correct.

Conclusion

Small businesses start paying tax as soon as they begin trading and generate profit. Sole traders and partnerships must register for Self Assessment by 5 October after their first tax year, while limited companies must register for corporation tax within three months of trading. VAT registration becomes mandatory once turnover reaches £90,000.

Understanding these obligations early ensures you stay compliant, avoid fines, and manage your cash flow effectively. Good record keeping and professional advice make meeting your tax responsibilities far easier and less stressful.