Expanding your startup or establishing a branch in the United Kingdom comes with important tax obligations. Navigating the UK tax system may seem daunting at first, but understanding the key types of taxes will help your company remain compliant and operate smoothly.
This guide explains the major taxes that limited companies and foreign branches face when operating in the UK, including clear explanations of Corporation Tax, VAT, PAYE, National Insurance, Business Rates, and other relevant taxes. The aim is to provide an accessible overview so you know what to expect and how to meet your responsibilities.
Corporation Tax on Profits
Corporation Tax is the tax on company profits. If you run a UK limited company, you must pay Corporation Tax on all profits your business makes (including trading profits, investment income, and any capital gains from selling assets). For foreign companies operating in the UK through a branch or office, you are also liable for UK Corporation Tax – but only on the profits attributable to your UK activities. In other words, a UK branch of an overseas company pays tax on its UK profits, while a UK-incorporated company pays tax on its worldwide profits (with relief to avoid double taxation on foreign income, if applicable).
The amount of Corporation Tax you pay depends on your taxable profits. The UK currently has a tiered rate system. As of the mid-2020s, the main Corporation Tax rate is 25% for companies with higher profits (for example, annual profits above £250,000). Smaller companies with modest profits (under £50,000) benefit from a small profits rate of 19%. If your profits fall between those thresholds, a marginal relief system effectively gives you a gradual increase in the tax rate from 19% up toward 25%. These rates can be adjusted by the government over time, so it’s important to check the current rate for your company’s financial year.
Key points to remember about Corporation Tax:
Unlike individual income tax, it is not automatically deducted – your company is responsible for calculating and paying it.
Companies must register for Corporation Tax with HM Revenue & Customs (HMRC) when they start doing business.
Each year, you will prepare a Company Tax Return reporting your profits and tax calculations. Corporation Tax is typically due for payment within nine months and one day after the end of your company’s accounting period, and the tax return filing is due within twelve months after the period.
Even if your company has no profit (or is running at a loss), you still need to file the return to inform HMRC.
Diligent record-keeping and accounting are essential, as you may be eligible for certain allowances and reliefs (for example, on research and development or capital investments) that can reduce your taxable profit.
Both UK companies and foreign branches should ensure they account for all UK-related income and expenses accurately to calculate the correct profit subject to UK tax.
Value Added Tax (VAT)
Value Added Tax (VAT) is a tax on most goods and services sold in the UK. It’s a type of consumption tax that businesses charge on their sales and then remit to the government, minus any VAT they have paid on their own purchases. The standard VAT rate in the UK is 20%. Some specific items have reduced rates (such as domestic energy or children’s car seats, which might be 5%) or are zero-rated (for example, most basic foods, books, or children’s clothing are charged 0% VAT). However, the majority of goods and services that a typical business provides will fall under the standard 20% rate.
Not every business is required to charge VAT. VAT registration becomes mandatory only once your business’s taxable turnover (sales that are subject to VAT) exceeds a certain threshold. As of recent years, if your UK sales in the last 12 months are more than £90,000, you must register your company for VAT. This threshold can change over time (it is often updated by the government), so new businesses should check the current registration limit. If you’re below the threshold, you can choose to register voluntarily (some businesses do this so they can reclaim VAT on their costs), but it isn’t compulsory until you hit the limit.
PAYE (Pay As You Earn) and Employee Income Tax
If your business has employees (and this includes directors on the payroll), you will encounter the UK’s system of PAYE, which stands for Pay As You Earn. PAYE is not a separate tax, but rather the mechanism that HMRC uses to collect Income Tax (and National Insurance) from wages and salaries in real time. As an employer, your company is responsible for operating PAYE on behalf of your employees. This means each time you run your payroll, you must deduct income tax from your employees’ gross pay before paying them, and send that tax amount to HMRC.
National Insurance Contributions (NICs)
National Insurance Contributions (NICs) are another key part of the UK payroll tax system. National Insurance is a social security system in the UK, and contributions fund state benefits such as the State Pension, unemployment and disability benefits, and healthcare. Both employees and employers are required to pay NICs on earnings, and as a company operating in the UK, you must manage these contributions through the payroll much like income tax.
There are different classes of National Insurance, but for a company with employees, the main ones to know are Class 1 contributions. These are split into two portions:
- Employee’s NIC: This is deducted from the employee’s wages (similar to how income tax is deducted). Employees start paying National Insurance once their earnings exceed a certain threshold (the “primary threshold”). Above that, a percentage of their wage is taken as NIC. For example, an employee might pay around 12% on their earnings above the threshold up to a higher limit, and a smaller percentage (around 2%) on earnings above an upper band – the exact rates can change each tax year.
- Employer’s NIC: This is an additional contribution that the employer must pay out of its own funds on top of the employee’s gross salary. Employer NICs are calculated as a percentage of each employee’s earnings above the “secondary threshold” (a level lower than or roughly similar to the personal threshold). The standard employer NIC rate is around 13–15% of the employee’s earnings above the threshold. This is essentially an extra payroll tax on the business for having staff.
Business Rates
If your company operates from a commercial property in the UK – such as an office, shop, warehouse, or even a factory – you will likely encounter Business Rates. Business rates are a local tax on business premises, collected by local authorities (municipal councils) to help fund local services. In essence, it’s the business equivalent of property taxes.
The amount of business rates you pay is based on the rateable value of your property, which is an assessment of the property’s open market rental value by the government’s Valuation Office. This rateable value is then multiplied by a tax rate (known as the “multiplier” or “poundage”). The multiplier is set by the central government (and can differ in England, Scotland, Wales, and Northern Ireland). For example, if your office has a rateable value of £20,000 and the multiplier is, say, 50 pence in the pound, the annual business rates bill would be roughly £10,000 (20,000 × £0.50). There are two multipliers in England – a standard one and a slightly lower one for small businesses – other regions have their own formulas.
Importantly, many startups and small businesses can benefit from Business Rates Relief programs. One common relief is the Small Business Rates Relief (SBRR), which can reduce or even eliminate the rates for properties under a certain value. For instance, if your business property’s value is below a threshold (e.g. under £12,000 in England for full relief, with tapered relief up to around £15,000), you may not have to pay any business rates at all. Other reliefs exist for certain sectors (like retail or hospitality businesses may get a discount) or for rural businesses, etc. It’s worth checking with the local council or the government guidance on what reliefs apply to you.
Successfully expanding or operating in the UK means understanding the various taxes that will impact your business. By planning for Corporation Tax on profits, registering for VAT when required, handling PAYE and National Insurance for your team, and budgeting for any business rates or other taxes, you can avoid surprises and stay compliant. Navigating these obligations may seem complex, but you don’t have to do it alone.
ERB supports startups throughout the process of understanding and managing UK tax compliance, helping them navigate the system efficiently. With the right knowledge and support, you can focus on growing your business while staying on top of your UK tax responsibilities.