How Much Tax Will I Pay as a New Business Owner?

One of the first questions new business owners ask is: "How much tax will I pay?"

The answer depends on your business structure, profit level, and how you extract income — but understanding the basics will help you plan ahead and avoid surprises.

At Brightson Accounting in Wolverhampton, we help business owners across the West Midlands minimize tax legally and stay compliant.

This guide explains exactly how much tax you'll pay as a sole trader or limited company owner in 2026.

Tax for Sole Traders

As a sole trader, you pay two types of tax on your business profits:

• Income Tax
• National Insurance

Income Tax Rates (2026/27):

• £0 – £12,570: 0% (Personal Allowance)
• £12,571 – £50,270: 20% (Basic rate)
• £50,271 – £125,140: 40% (Higher rate)
• £125,140+: 45% (Additional rate)

National Insurance (2026/27):

• Class 2 NI: £3.45/week (if profits exceed £12,570)
• Class 4 NI: 9% on profits between £12,570–£50,270, then 2% above

Example: £30,000 Profit

• Income Tax: (£30,000 – £12,570) × 20% = £3,486
• Class 2 NI: £3.45 × 52 weeks = £179
• Class 4 NI: (£30,000 – £12,570) × 9% = £1,569
• Total tax: £5,234
• Effective rate: 17.4%

From what we see with clients in Wolverhampton, most sole traders earning £30,000–£50,000 pay around 20-30% of their profit in total tax.

Not sure how to calculate your tax? Speak to an accountant.

Tax for Limited Companies

Limited company owners pay tax twice:

1. The company pays Corporation Tax on profits
2. You pay Income Tax and NI on salary and dividends

Corporation Tax Rates (2026/27):

• £0 – £50,000: 19%
• £50,001 – £250,000: 26.5% (marginal relief applies)
• £250,000+: 25%

Optimal Salary + Dividend Strategy:

Most directors take:

• Salary: £12,570 (tax-free up to Personal Allowance)
• Dividends: Remainder of profits (after Corporation Tax)

Dividend Tax Rates (2026/27):

• £0 – £500: 0% (Dividend Allowance)
• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

Example: £50,000 Profit

• Salary: £12,570 (no tax or NI)
• Remaining profit: £37,430
• Corporation Tax (19%): £7,112
• After-tax profit: £30,318
• Dividends taken: £30,318
• Dividend tax (£30,318 – £500 allowance × 8.75%): £2,609
• Total tax: £9,721
• Effective rate: 19.4%

Compare this to a sole trader earning £50,000 (effective rate ~25%) — the limited company saves around £2,500/year.

When Does Limited Company Make Sense?

From £30,000+ profit, limited companies become more tax-efficient.

But you also need to consider:

• Admin and compliance costs (£800–£1,500/year for an accountant)
• More paperwork (accounts, CT600, confirmation statement)
• Limited liability protection

Full comparison: Sole Trader vs Limited Company

How to Reduce Your Tax Bill

1. Claim All Allowable Expenses

Every business expense reduces your taxable profit.

Common deductions:

• Equipment and software
• Travel and mileage
• Home office costs
• Marketing and advertising
• Professional fees (accountant, solicitor)
• Training and courses

Full guide: Business Startup Costs You Can Claim

2. Use Capital Allowances

Claim 100% of equipment costs in year 1 (up to £1 million via Annual Investment Allowance).

3. Contribute to a Pension

Employer pension contributions are tax-deductible and reduce Corporation Tax.

4. Time Your Income and Expenses

Delay income or bring forward expenses to reduce profit in high-tax years.

5. Use Tax-Efficient Structures

Limited companies offer more flexibility for tax planning.

When Do You Pay Tax?

Sole Traders:

Tax is due via Self Assessment:

• 31 January: Payment for the previous tax year + first payment on account for current year
• 31 July: Second payment on account

Limited Companies:

Corporation Tax is due 9 months + 1 day after your accounting year-end.

Example:

• Year-end: 31 March 2026
• CT due: 1 January 2027

How Much Should You Set Aside?

As a rough guide:

• Sole traders: 25-35% of profit
• Limited companies: 20-25% of profit

Open a separate savings account and transfer money monthly.

Many small businesses we work with in Birmingham and Wolverhampton set up automatic transfers to a "tax pot" — it prevents cash flow surprises in January.

What Happens If You Don't Pay?

Late payment results in:

• Interest on unpaid tax (currently ~7-8%)
• Penalties (5% after 30 days, 5% after 6 months, 5% after 12 months)
• Enforcement action (debt collection, court proceedings)

If you can't pay on time, contact HMRC immediately to arrange a Time to Pay plan.

Common Tax Mistakes

We see the same errors with new business owners:

• Not keeping receipts for expenses
• Underestimating tax liabilities
• Missing Self Assessment deadlines
• Not setting aside money for tax
• Mixing personal and business finances

Avoid them all: Common Mistakes New Business Owners Make