For individuals, sole traders, and businesses alike, it is essential to keep on top of tax. At first glance, however, the various types of tax and financial obligations can seem overwhelming. You might even ask yourself “What applies to me?”. In this article, we dive into three common forms of UK tax: Corporation Tax, VAT, and Income Tax. Read on to explore the definitions and differences between them!
Corporation Tax
Corporation Tax is a type of business tax applied to profits from doing business. As outlined by HMRC, Corporation Tax must be paid by:
- Limited companies
- Foreign companies with a UK-based branch or office
- Unincorporated associations (such as voluntary/community groups or sports clubs – if making a profit)
As an applicable business or association, you should not expect to receive a bill from HMRC for your Corporation Tax: it is your responsibility to calculate, report and pay the appropriate tax on your profits as part of your regular Company Tax Return process. Step-by-step details are provided by HMRC here.
The deadline for paying your corporation tax is typically 9 months and 1 day following the end of the accounting period. Even if you have nothing to pay, you might be required to report to HMRC by submitting a “nil to pay” form (check here for details).
If you’re self-employed as a sole trader[LINK], however, you don’t need to submit a Company Tax Return – although you most likely need to file a Self Assessment tax return. (For a handy overview of common Self Assessment hurdles, see our article here!)
VAT
Value Added Tax (VAT) is a type of indirect tax added to products and services sold in business. It has surprisingly deep origins in the UK, and its name refers to the “value added” to goods and services during production and distribution.
All UK-based businesses with a “taxable turnover” exceeding £85,000 must register for VAT and file regular VAT Returns. According to HMRC, taxable turnover equates to the “total value of taxable supplies made by a person in the course or furtherance of business, excluding VAT”.
If applicable, there are three VAT rates which you must factor into your business, depending on the type(s) of product/service you sell. Currently, these are standard rate (20%), reduced rate (5%) and zero rate (0%). Standard rate applies to most goods and services, although it is important to identify the VAT rate(s) applicable specifically for your business. HMRC provides a comprehensive overview of rates and eligible products/services here.
Following the Making Tax Digital (MTD) initiative, most businesses must now file VAT Returns online every 3 months. This involves storing your VAT-related records digitally and using HMRC-recognised, MTD-compatible software such as AbraTax.
Please note: if you and your business are both based outside the UK, then you must also register for VAT – regardless of taxable turnover – if you plan to (or already do) supply goods and/or services to the UK. For UK-based businesses with turnover below the threshold, registering for VAT is optional but not necessary (“voluntary registration”).
Income Tax
In contrast to Corporation Tax or VAT, Income Tax applies specifically to your personal income (rather than to company profits or taxable products/services). Typical taxable income includes:
- Earnings from employment
- Profits from self-employment (e.g., if you are a sole trader)
- Interest on your savings (beyond the savings allowance)
However, you do not need to pay Income Tax on the first £1,000 of income from self-employment (your ‘”trading allowance”) or from property you rent (unless you use the Rent a Room Scheme). Premium bonds and National Lottery wins are also exempt.
In most instances, Income Tax is paid through PAYE by your employer or pension provider. However, if you are self-employed, then you likely need to file an annual Income Tax Self Assessment – assuming you have earned more than £1,000 through self-employment.
It is essential to meet the registration and submission deadlines (see here). One way to streamline your Self Assessment is to prepare for Making Tax Digital (which is already in force for VAT). Set to begin in 2026, MTD will make it mandatory to file your Income Tax online (“Making Tax Digital for Income Tax”). Register with AbraTax now and get ready!
Conclusion
In this article, we have outlined and differentiated three common types of tax applied to businesses, sole traders, and individuals. While tax can sometimes feel overwhelming, understanding its nuances is empowering. By leveraging available resources and embracing digital solutions like AbraTax, individuals and businesses can navigate tax obligations with more confidence.