When Do Small Businesses Have to Start Paying Tax

At Towerstone Accountants we provide specialist small business accountancy services for owners, directors, and growing businesses across the UK. We created this webpage for small business owners who want clear guidance on managing finances, meeting tax obligations, and making informed decisions without jargon. Our aim is to help you stay compliant, improve cash flow, and build a more resilient business.

This is one of the first questions most people ask when they start a business, and it is also one of the most misunderstood. Many new business owners assume tax only becomes relevant once the business is making good money. Others worry they need to start paying tax almost immediately, even before they have earned anything meaningful. In my experience, confusion around tax timing causes unnecessary stress and often leads to mistakes that could easily have been avoided with clearer understanding.

The reality is that when a small business has to start paying tax depends on several factors, including how the business is structured, how much it earns, what type of income it generates and whether it has employees. Tax rarely arrives all at once, but it does arrive sooner than many people expect, especially if planning is poor.

In this article, I want to explain clearly and in depth when small businesses in the UK have to start paying tax, what types of tax apply, how the timelines work and how to prepare so tax does not come as a shock. This is written from a practical accountant’s perspective and based on real situations I see every year, not theory or scare stories.

What we mean by a small business

Before looking at tax, it is important to define what we mean by a small business. In the UK, this usually refers to sole traders, partnerships and small limited companies. These businesses can range from side hustles earning a few thousand pounds a year to companies turning over hundreds of thousands.

The structure you choose has a significant impact on when and how tax is paid. A sole trader is taxed very differently from a limited company, even if the underlying activity is the same. Understanding this distinction is essential.

The moment tax becomes relevant

Tax does not usually start the moment you begin trading, but it becomes relevant as soon as you start earning income. The key difference is between earning income and paying tax.

In most cases, small businesses start earning income first and pay tax later. However, the obligation to register, record and plan for tax begins as soon as trading starts.

This is where many people get caught out. They focus on whether they have to pay tax now, rather than whether they need to prepare for tax later.

When sole traders start paying tax

Sole traders are one of the most common forms of small business in the UK, particularly in the early stages.

Registering with HMRC

If you start trading as a sole trader, you must register with HMRC for Self Assessment. This usually needs to be done by 5 October following the end of the tax year in which you started trading.

For example, if you start trading in June, which falls in the tax year ending the following April, you have until the following 5 October to register.

Registration itself does not trigger a tax payment, but it starts the clock on reporting obligations.

When income tax becomes payable

As a sole trader, you pay income tax on your profits, not your turnover. Profit is your income minus allowable business expenses.

You only start paying income tax once your total taxable income exceeds the personal allowance. This includes business profits and any other income such as employment or rental income.

If your total income stays below the personal allowance, no income tax is due. However, you may still need to file a tax return.

National Insurance for sole traders

National Insurance is often overlooked, but it is a key part of when tax becomes payable.

Sole traders usually pay:

• Class 2 National Insurance once profits exceed a small threshold

• Class 4 National Insurance once profits exceed a higher threshold

These contributions are calculated through the Self Assessment tax return and paid alongside income tax.

This means a sole trader may have a tax bill even if income tax is minimal.

When the first tax bill is actually paid

One of the biggest surprises for new sole traders is timing.

If you start trading today, you do not usually pay tax immediately. Instead, you report your income after the end of the tax year and pay the tax later.

For most sole traders, the first tax payment is due by 31 January following the end of the tax year in which they started.

This delay can be helpful, but it can also create a false sense of security. The tax bill can feel large because it covers a long period.

Payments on account and why they matter

Once your tax bill reaches a certain level, HMRC usually requires payments on account.

This means you pay part of next year’s tax in advance. This often catches people out because the first year with payments on account can effectively involve paying more than one year’s tax at once.

Understanding this early helps avoid cash flow problems.

When limited companies start paying tax

Limited companies have a very different tax timeline.

Corporation tax

A limited company pays corporation tax on its profits. Corporation tax becomes relevant as soon as the company makes a profit.

However, like sole traders, the payment is not immediate.

Corporation tax is usually due nine months and one day after the end of the accounting period. This means there is still a delay, but it is shorter than for sole traders.

The company must also file a corporation tax return, usually within twelve months of the end of the accounting period.

Director tax and personal tax

Directors of limited companies also have personal tax considerations.

If you pay yourself a salary, income tax and National Insurance may apply through payroll as soon as the salary exceeds certain thresholds.

If you take dividends, these are taxed through your personal Self Assessment return, usually payable by the following January.

This means tax can arise at both company level and personal level.

When VAT becomes relevant

VAT is one of the most important tax thresholds for small businesses.

VAT registration threshold

You must register for VAT when your taxable turnover exceeds the VAT registration threshold in any rolling twelve month period.

This is not based on your financial year and not based on profit. It is based purely on turnover.

Once the threshold is exceeded, registration is compulsory and VAT must be charged from that point.

Voluntary VAT registration

Some small businesses choose to register for VAT voluntarily before reaching the threshold.

This can affect cash flow and pricing, so it should be considered carefully.

Once registered, VAT returns must be submitted regularly and VAT paid to HMRC, usually quarterly.

When VAT payments start

VAT payments usually start once you submit your first VAT return. This can be within a few months of registering.

Because VAT is collected from customers but belongs to HMRC, it should never be treated as business income. Failing to plan for VAT payments is a common cause of cash flow problems.

When businesses with employees start paying tax

Employing staff introduces additional tax obligations.

PAYE and payroll taxes

If you employ anyone, you must operate PAYE. This means deducting income tax and National Insurance from employees’ wages and paying employer National Insurance where applicable.

PAYE payments are usually due monthly, which means tax obligations can begin very quickly once staff are hired.

This is one of the earliest points at which some businesses start making regular tax payments.

When business owners misunderstand tax timing

In my experience, there are several recurring misunderstandings.

Some business owners believe tax only applies once profits are high. Others assume that because HMRC has not asked for money yet, no tax is due.

Tax is largely self assessed. HMRC expects you to understand your obligations and plan accordingly.

Ignoring tax timing does not make it go away, it just concentrates the problem later.

How different types of income affect tax timing

Not all income is treated the same way.

Cash based businesses, online platforms, contract work and mixed income streams can all affect when tax becomes payable.

For example, businesses with large upfront payments may generate cash early but tax later. Businesses with slow paying clients may face tax bills before cash is received.

Understanding this distinction is critical for planning.

Why profit matters more than turnover

Tax is usually based on profit, not turnover, except for VAT.

This means expenses play a key role in when tax becomes payable. Legitimate business expenses reduce taxable profit.

Failing to record expenses properly can lead to paying tax earlier or at higher levels than necessary.

How allowances and reliefs affect when tax starts

There are various allowances and reliefs that affect when tax becomes payable.

These include:

• Personal allowance for income tax

• Trading allowance for small amounts of income

• Capital allowances for equipment purchases

• VAT schemes that affect payment timing

Understanding these can delay or reduce tax, but they must be used correctly.

Why planning matters from day one

One of the biggest mistakes I see is leaving tax planning too late.

Even if you are not paying tax yet, you should be setting money aside from the beginning. This avoids the shock of a large bill later.

A simple rule many businesses follow is to set aside a percentage of income into a separate savings account for tax.

The exact percentage depends on the business structure and income level.

How accountants help with tax timing

An accountant helps by explaining not just how much tax you owe, but when you owe it.

They can help you:

• Register correctly

• Understand thresholds

• Forecast tax liabilities

• Set aside the right amounts

• Avoid penalties and interest

This support often pays for itself by preventing costly mistakes.

Common tax deadlines small businesses should know

While the details vary, some key deadlines include:

• Self Assessment registration by 5 October

• Self Assessment payment by 31 January

• Corporation tax payment nine months after year end

• VAT returns quarterly

• PAYE payments monthly

Missing deadlines leads to penalties even if no tax is due.

What happens if you do not pay tax on time

HMRC charges penalties and interest for late payment and late filing.

More importantly, problems can escalate if ignored. HMRC has significant powers and prefers early communication over silence.

Understanding when tax starts helps avoid these situations entirely.

Tax does not mean the business is successful yet

One emotional aspect worth addressing is that paying tax does not always feel like success.

Many businesses pay tax before they feel stable. This is normal. Tax is based on rules, not comfort.

Planning helps align cash flow with tax obligations so the business can grow sustainably.

Using the first tax year wisely

The first year of trading is often unusual. Income may be irregular and expenses may be higher.

Understanding how this affects tax allows you to use the year wisely and avoid surprises.

When tax becomes a regular part of business life

For most businesses, tax starts as an occasional obligation and becomes a regular part of operations.

Once you reach this stage, systems and routines matter far more than reactive responses.

Final thoughts

So, when do small businesses have to start paying tax. The honest answer is sooner than many expect, but rarely immediately.

Tax usually follows income with a delay, but that delay can be misleading if you are not planning ahead. Different taxes apply at different times, depending on structure, income level and activity.

In my experience, the businesses that cope best with tax are not the ones earning the most, but the ones that understand the timing early and plan for it from day one.

Tax is not something to fear, but it is something to respect. Understanding when it starts gives you control, confidence and the ability to grow your business without unpleasant surprises.

You may also find our guidance on Do I need to do a Self Assessment as a small business owner and How much should I put aside for tax each month useful when exploring related small business questions. For a broader range of practical advice, you can visit our small business guidance hub.