Doing business in the UK — tax building blocks (2026)
This page complements our UK tax load estimator : how a sole trader, a limited company (Ltd), and typical PAYE employment differ in Income Tax, National Insurance, Corporation Tax, and cash extraction — at a conceptual level for England & Wales / Northern Ireland bands (Scotland has different income tax rates). Figures in GBP where it helps intuition; always confirm thresholds on GOV.UK / HMRC.
At-a-glance (UK structures)
| Structure | Profit / pay base | Main taxes & NIC | Company layer | Typical trade-off |
|---|---|---|---|---|
| Sole trader (self-employed) | Taxable profit after allowable expenses | Income Tax (IT) bands; Class 2 (flat, if in scope) and Class 4 NIC on profits | None — you and the business are the same taxpayer | Simplest admin; unlimited liability; NIC + IT on profits |
| Limited company + director | Company accounts; your salary and/or dividends | Employer + employee NIC on salary; dividend tax on distributions above allowances | Corporation Tax (CT) on company profits (after salary deduction) | Limited liability; more compliance; salary vs dividends shapes personal vs company tax |
| PAYE employee | Salary / taxable benefits | IT via PAYE; Class 1 employee NIC; employer NIC borne by employer | N/A | Least entrepreneurial risk; little control over expense recognition |
VAT, IR35, and “gross vs net” in the UK
VAT: if your VAT-taxable turnover crosses the registration threshold (check the current £ figure on GOV.UK — it has been raised in recent years), you normally must register, charge VAT on eligible supplies, and reclaim input VAT subject to rules. Below-threshold traders may remain unregistered unless they opt in.
IR35 (off-payroll working): where you provide services like an employee but through a company, HMRC may look through to employment-like taxation. This is a specialist area for contractors and engagers; seek advice if your Ltd invoices a small number of clients long-term.
Dividends vs salary: salaries reduce company profit (CT) but attract employer/employee NIC; dividends are paid from post-tax profits and carry dividend tax rates in the shareholder’s hands, without NIC — the “best” mix depends on profit level, other income, pensions, and benefit needs.