Corporation Tax, VAT, and PAYE Essentials

Corporation Tax, VAT, and PAYE are three pillars of UK business tax compliance that trip up thousands of small business owners every year. Getting them right is essential—not just to avoid HMRC penalties, but to keep your business running smoothly and legally. This guide cuts through the jargon to give you the practical, up-to-date essentials on each area: who needs to register, how calculations work, key deadlines, and the most common pitfalls. Whether you’re just starting out or want to double-check your current approach, you’ll find clear, actionable answers here.

Corporation Tax is a tax on the profits of limited companies and certain other organisations in the UK. If you’ve set up a limited company (Ltd), this tax is unavoidable—profit means any money left after deducting allowable business expenses and costs. Unlike sole traders who pay Income Tax, company profits are subject to Corporation Tax, currently at 25% for profits over £250,000 and a marginal relief system for profits between £50,000 and £250,000.

All UK-registered limited companies must pay Corporation Tax on their taxable profits, whether the profits come from trading, investments, or chargeable gains (like selling company assets). You must register for Corporation Tax with HMRC within three months of starting to trade, even if you make a loss or no profit in your first year. Failing to register is a common mistake that can lead to penalties.

Charities, clubs, and some associations may also be liable if they make profits from trading activities, but the rules here can be more complex. If you’re unsure whether your business structure triggers Corporation Tax, consult an accountant or check directly with HMRC. Remember, unincorporated businesses (sole traders and ordinary partnerships) do not pay Corporation Tax—they’re taxed through Self Assessment instead.

From 1 April 2023, the main rate of Corporation Tax increased to 25% for companies with taxable profits over £250,000. Companies with profits under £50,000 continue to pay the small profits rate of 19%. For those in between, marginal relief applies—a sliding scale that effectively increases the tax rate as profits rise. This means accurate profit calculation is more important than ever.

You cannot deduct dividends paid to shareholders, but you can claim a wide range of allowable expenses, such as staff salaries, employer’s National Insurance, business premises costs, and equipment depreciation. Capital allowances are especially valuable for investments in plant and machinery. Get your claims right—HMRC regularly checks for over-claimed expenses.

The deadline for paying Corporation Tax is nine months and one day after the end of your company’s accounting period. Your Corporation Tax return (CT600) is due 12 months after your year-end, but don’t leave it that long—late filing or late payment both attract penalties and interest. Set reminders and don’t rely solely on your accountant to manage deadlines.

• Register for Corporation Tax within 3 months of starting to trade
• Know your company’s accounting period—typically the anniversary of incorporation
• Pay Corporation Tax 9 months and 1 day after year-end
• File your CT600 Corporation Tax return within 12 months of year-end
• Keep detailed records of all income, costs, and expenses to support your return

Value Added Tax (VAT) is a tax charged on most goods and services provided by VAT-registered businesses in the UK. You must register for VAT if your VAT-taxable turnover exceeds the registration threshold, which is £85,000 (as of 2026/27) in any 12-month rolling period. This isn’t just your financial year: it’s any consecutive 12 months. If you expect to go above this threshold in the next 30 days alone, you must register immediately.

Some businesses voluntarily register for VAT even if their turnover is below the threshold. This can be beneficial if you have significant VATable expenses or want to appear more established to clients. However, registering for VAT brings extra paperwork, regular returns, and the responsibility to charge the correct rates. It’s not always a benefit—think carefully before opting in.

Once registered, you must charge VAT (usually at 20%) on your sales, submit VAT returns (normally quarterly), and pay any VAT due to HMRC. You can also reclaim VAT on eligible business purchases. Failing to register on time or charging VAT incorrectly are two of the most common VAT errors. VAT registration is done online via GOV.UK, and you’ll receive a VAT number and certificate once approved.

There are several VAT accounting schemes available to UK small businesses, each with its own pros and cons. The standard scheme requires you to account for VAT on every invoice and claim back VAT on purchases. The Flat Rate Scheme is popular among small businesses with low costs, as you pay a fixed percentage of your gross turnover to HMRC and keep the difference. There’s also the Cash Accounting Scheme, which lets you pay VAT only when you receive payment, not when you invoice.

Choosing the right scheme can save both time and money, but it’s vital to understand eligibility criteria and how each scheme affects your VAT recovery. For instance, the Flat Rate Scheme can be less beneficial if you have high VATable expenses, as you can’t reclaim VAT on most purchases. Meanwhile, cash accounting helps with cash flow, but you must leave the scheme if your turnover exceeds £1.35 million.

A frequent VAT mistake is incorrect record-keeping—VAT-registered businesses must keep digital records and submit returns using Making Tax Digital (MTD)-compatible software unless exempt. Another pitfall is misunderstanding what counts as VATable turnover—some income may be outside the scope, exempt, or zero-rated, which affects your registration requirements and what VAT you can reclaim. Always check HMRC guidance or ask an adviser if in doubt.

• Standard VAT Scheme: account for VAT on invoices and purchases
• Flat Rate Scheme: pay a fixed percentage, less admin for small businesses
• Cash Accounting Scheme: pay VAT only when you’re paid, not when you invoice
• Annual Accounting Scheme: one VAT return per year, eligible if turnover under £1.35m

If you employ staff (including directors), you’ll almost certainly need to operate PAYE (Pay As You Earn)—HMRC’s system for collecting Income Tax and National Insurance from employees’ wages. PAYE is mandatory if your employees earn at or above the Lower Earnings Limit (£123 per week for 2026/27) or if you provide benefits, expenses, or have another job.

As an employer, you must register for PAYE with HMRC before the first payday. You’ll deduct Income Tax, employee’s National Insurance, and repay student loans or pensions contributions if relevant. You also have to pay employer’s National Insurance (currently 13.8% above the secondary threshold of £175 per week for 2026/27). These deductions must be reported to HMRC every payday under Real Time Information (RTI).

Payroll is a complex area, especially with statutory payments such as sick pay, maternity pay, and auto-enrolment pensions. Many small businesses outsource payroll to a specialist provider, but you remain legally responsible for correct deductions and timely submissions. Keep all payroll records (payslips, P60s, P45s, RTI reports) for at least 3 years in case of HMRC inspection.

• Register as an employer with HMRC before your first payday
• Calculate and deduct Income Tax and National Insurance each pay period
• Report payroll details to HMRC on or before payday (RTI)
• Provide payslips to employees and keep records for 3 years
• Pay employer’s National Insurance contributions on top of gross salaries

Keeping on top of tax and payroll deadlines is critical. HMRC is unforgiving with late submissions—penalties can quickly escalate and interest is charged on late payments. Each tax has its own timeline, and mixing them up is a classic small business error.

For Corporation Tax, your payment deadline is nine months and one day after your accounting period ends, but your CT600 return is due 12 months after. VAT returns and payments are usually due one calendar month and seven days after the end of the VAT quarter. PAYE and National Insurance must be paid to HMRC by the 22nd of the month following payroll (if paying electronically) or 19th if paying by post.

Don’t forget annual requirements: P60s must be given to employees by 31 May after tax year-end, and P11D forms for benefits and expenses are due by 6 July. Missing these can trigger automatic penalties. It’s wise to set up a tax calendar and use payroll or accounting software that tracks due dates and sends you reminders.

• Create a calendar of all tax and payroll deadlines for your business
• Use reminders and software notifications—never rely on memory alone
• Check for bank holidays that may affect payment processing dates
• Plan for busy periods (year-end, Christmas) when admin might slip

Good record-keeping is the backbone of tax compliance. HMRC requires you to keep detailed, accurate records of all income, expenses, payroll, and VAT transactions. For Corporation Tax, this includes bank statements, invoices, receipts, contracts, and calculations—keep these for at least six years. VAT records must be kept digitally under Making Tax Digital (MTD) rules, unless you have a formal exemption.

For VAT, using MTD-compatible software is now mandatory for almost all VAT-registered businesses. Failing to comply can result in penalties, even if your VAT calculations are correct. The same digital push is coming for Income Tax Self Assessment (ITSA) and will likely extend to Corporation Tax in the future—plan for it now to avoid a last-minute scramble.

Penalties for incorrect returns, careless record-keeping, or late payments can quickly escalate. HMRC distinguishes between careless, deliberate, and concealed errors—deliberate misstatements attract the toughest penalties. If you spot a mistake, tell HMRC as soon as possible—‘unprompted disclosures’ generally attract lower fines than waiting for an investigation.

While the basics of Corporation Tax, VAT, and PAYE are manageable for many small businesses, the devil is in the detail. Common pitfalls include missing registration deadlines, misunderstanding what counts as taxable turnover, claiming non-allowable expenses, or failing to file returns when dormant. HMRC can and does audit small businesses, especially where patterns of late filing or errors arise.

It’s wise to seek professional advice—especially as your business grows, takes on staff, or starts trading internationally. The cost of a good accountant is often outweighed by savings on tax, time, and stress. If you use software, make sure it’s set up correctly and you understand how to use it. Remember, responsibility for compliance always sits with the business owner, not your bookkeeper or accountant.

Stay up to date: tax rules and rates change regularly. Subscribe to HMRC’s email updates, join a business group like the Federation of Small Businesses (FSB), and check GOV.UK for updates. Don’t rely on advice from business forums or friends unless they’re current and UK-specific—out-of-date information is a major source of mistakes for small business owners.

• Engage a qualified accountant for at least an annual review
• Double-check deadlines and use calendar reminders
• Don’t claim personal or non-business expenses—HMRC audits these closely
• File even if your company is dormant or not trading
• Keep up with changes to tax rates, thresholds, and digital requirements