Tax is the single most common reason a healthy-looking UK micro-business runs into trouble. Not because the rules are unfair, but because directors miss filings, mis-classify income, or set their own pay without thinking about the tax tail. Here is a plain-English overview of the five taxes every director should be able to explain off the top of their head.
1. Corporation tax
The company pays this on its profits. For 2026 the main rate is 25% on profits over £250,000, with a small-profits rate of 19% under £50,000 and marginal relief in between. The deadline is 9 months and 1 day after your year-end. Set up direct debit with HMRC the moment your accounting period closes so the payment leaves your account automatically.
2. VAT
If your taxable turnover crosses £90,000 in any rolling 12 months you must register. Once registered you charge VAT on sales (the “output”), reclaim VAT on purchases (the “input”) and pay the difference to HMRC every quarter. Making Tax Digital means you must use compatible software (Xero, FreeAgent, QuickBooks, Sage all qualify) and file electronically. Voluntary registration is sometimes useful — for example if your customers are VAT-registered businesses who can reclaim it anyway.
3. PAYE
If you employ anyone — including yourself as a director on a salary — you operate PAYE. Income tax and National Insurance are deducted at source and paid to HMRC monthly. Even a one-person company often runs a small director’s salary at the National Insurance secondary threshold (around £9,100 for 2026) because it builds state-pension credits and is tax-efficient.
4. Self-assessment
As a director you must file a personal self-assessment by 31 January each year for the prior tax year. This reports your director’s salary, dividends, savings interest and any other income — and works out personal tax due on top of what PAYE already collected. Set up a separate bank pot called “my tax” and put 30% of every dividend into it as it lands. Future-you will be grateful.
5. Dividend tax
Most directors take a small salary plus dividends from retained profits. The 2026 dividend allowance is £500; above that, dividends are taxed at 8.75% (basic rate), 33.75% (higher) or 39.35% (additional). The company must have distributable reserves — you cannot pay a dividend out of borrowed money. Document every dividend with a board minute and a counterfoil; HMRC asks for both during enquiries.
Penalties — and how to avoid them
HMRC penalties stack fast. £100 immediately for a late return, £100 more after three months, and percentage-based penalties on late payments. The fix is not heroics — it is a calendar. Block out the deadlines for the next 12 months in your personal diary today.
When you do not have to do it alone
A good UK chartered accountant typically charges between £900 and £2,500 a year for a micro-business and pays for themselves in the first year through avoiding mistakes. ICAEW and ACCA both have searchable member directories. The HMRC business support helpline (0300 200 3700) is free if you want to ask a direct question.
