Paying Taxes as a Small Business: What You Need to Know?

Paying taxes as a small business in the UK includes reporting income, tracking expenses, and submitting returns to HMRC on time.

If you’re self-employed or have a small business in the UK, understanding how taxes work is essential. The good news is that once you know the basics and have the right tools in place, it becomes far more manageable than it might seem at first.

This guide walks you through everything you need to know about paying taxes as a small business – from what you need to pay to how to stay compliant without getting overwhelmed.

Key points

• Your business structure determines which taxes you pay 🏢
  Limited companies and sole traders face different obligations. Understanding your structure helps you plan accurately and stay compliant.
• Making Tax Digital for ITSA changes reporting for sole traders 💻
  From April 2026, self-employed individuals and landlords above certain thresholds must keep digital records and submit quarterly updates to HMRC, instead of a single annual Self Assessment.
• Deadlines are now spread across the year 📅
  Under MTD, sole traders must submit quarterly updates, final declarations, and make payments on account. Limited companies must manage VAT returns, Corporation Tax payments, CT600 returns, and payroll reporting.
• Penalties are based on a points system ⚠️
  Each missed submission earns a penalty point. Accumulating points leads to financial penalties starting at £200, with additional fines for repeated missed deadlines.

What taxes do small businesses pay?

The taxes you pay depend on how your business is set up. The two most common structures are sole trader and limited company, and each comes with different tax obligations.

Here are the basics:

Taxes for limited companies

A limited company is a separate legal entity from the individuals who run it.

You’ll usually pay:

• Corporation Tax on company profits
• Income Tax on any salary or dividends you take
• National Insurance, depending on your salary
• VAT, if registered

While limited companies can be more tax-efficient in some cases, they also come with more admin and reporting requirements.

Taxes for sole traders

As a sole trader, you and your business are legally the same entity. This means your profits are treated as personal income.

In this case, you’ll typically pay:

• Income Tax on your profits
• National Insurance contributions (NICs)
• VAT, if you’re registered

Your profits are calculated by subtracting allowable business expenses from your total income. You then report that number through a Self Assessment tax return.

With the introduction of Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) in April 2026, rules changed for sole traders and landlords earning over £50,000.

What is Making Tax Digital for Income Tax?

MTD for ITSA is a UK tax system that requires self-employed individuals and landlords to keep digital records and submit updates to HMRC throughout the year, instead of filing a single annual Self Assessment tax return.

If you’re affected, you’ll need to:

• Keep digital records of income and expenses
• Send quarterly updates to HMRC
• Submit a final end-of-year declaration

MTD for ITSA is being introduced in phases:

• From April 2026: for self-employed individuals and landlords earning over £50,000
• From April 2027: for self-employed individuals and landlords earning over £30,000
• From April 2028: for self-employed individuals and landlords earning over £20,000

Even if you’re below these thresholds now, it’s worth preparing early. The direction is clear – digital, real-time tax reporting is becoming the standard.

Key deadlines you need to know

MTD’s system comes with more deadlines – but also with more visibility and control if you stay on top of them.

Here are the key deadlines:

For sole traders under MTD (MTD for ITSA)

Sole traders and landlords will need to manage four types of deadlines:

• Quarterly updates (every 3 months): You’ll send a summary of your income and expenses to HMRC four times a year. These updates don’t finalise your tax bill, but they keep your records current and give HMRC a snapshot of your activity.
• End-of-year declaration: After the tax year ends, you’ll submit a final declaration to confirm your total income, claim any reliefs or adjustments, and finalise your tax position. This replaces the traditional Self Assessment return.
• Final payment deadline (31 January): This is when you pay any remaining tax you owe for the previous tax year. Even under MTD, this date remains one of the most important ones in the tax calendar.
• Payments on account (31 January and 31 July): If applicable, you’ll make advance payments towards your next tax bill. Each payment is usually 50% of your previous year’s tax, which can impact your cash flow if you’re not prepared.

These are the key MTD for ITSA deadlines:

For limited companies (MTD for VAT)

If you run a limited company, you’ll also have several key deadlines throughout the year:

• VAT returns (usually every 3 months): If you’re VAT-registered, you must submit your VAT returns digitally under MTD for VAT. These reports summarise the VAT you’ve charged and paid, and any balance owed must usually be paid at the same time.
• Annual accounts (Companies House): You’re required to file statutory accounts that show your company’s financial position. These must usually be submitted within 9 months of your accounting period end, and failing to do so can result in automatic penalties.
• Corporation Tax payment (9 months + 1 day): Your Corporation Tax bill must be paid within 9 months and 1 day after the end of your accounting period. This deadline comes before your tax return is due, so you’ll need accurate records to estimate what you owe in advance.
• Corporation Tax return (CT600 – within 12 months): You must submit your CT600 return to HMRC within 12 months of your accounting period end. This finalises your Corporation Tax position and includes full details of your company’s income and expenses.
• PAYE deadlines (if you employ staff): If you run payroll, you’ll need to submit Real Time Information (RTI) reports to HMRC on or before each payday. You’ll also need to make PAYE and National Insurance payments either monthly or quarterly, depending on your setup.

Here are the main deadlines for MTD for VAT:

Why these deadlines matter

Because reporting is now spread across the year for both sole traders and limited companies, missing deadlines isn’t just a one-off problem. HMRC uses a points-based penalty system, where each missed submission adds a point.

Here’s how it works:

• You get 1 penalty point every time you miss a submission deadline.
• This applies to quarterly updates (ITSA) and VAT returns.
• Points accumulate over time until you reach a threshold.

Once you reach a threshold, a financial penalty applies.

The threshold depends on how often you submit:

• Annual submissions: 2 points
• Quarterly submissions: 4 points
• Monthly submissions: 5 points

Most small businesses that submit quarterly (for both ITSA and VAT) will incur a penalty after 4 missed deadlines.

The penalty is £200 the first time you reach a threshold. Once you’re there, every additional missed deadline triggers another £200 fine. This means penalties can build quickly if deadlines are repeatedly missed.

Record-keeping under MTD

One of the biggest changes MTD brings is how you keep records.

With MTD for ITSA, digital records are mandatory. This means you need:

• Digital tracking of income and expenses: Every sale, every purchase, and any allowable expense must be stored in a digital format.
• Software that can submit updates to HMRC: HMRC no longer accepts manual filing of quarterly updates; submissions have to come from MTD-compatible software.
• Consistent, up-to-date bookkeeping: You can’t leave your records until the last minute. Quarterly updates and final declarations require accurate, up-to-date numbers.

At first glance, this might feel overwhelming. But the reality is that spreading the workload across the year often makes it easier to manage your finances – as long as you have the right system in place.

Why MTD software is essential

MTD-compatible software is the tool that makes continuous reporting as stress-free as possible. Here’s what it does for you:

• Automatic transaction tracking: It can pull in your bank data, categorise income and expenses, and keep everything organised without manual entry.
• Real-time tax calculations: Many tools estimate your tax bill continuously, so you always know how much you owe and when.
• Seamless quarterly submissions: Software prepares and sends your MTD updates directly to HMRC, reducing human error and saving time.
• Audit-ready records: Everything is stored digitally, making it easy to review past quarters or respond to HMRC queries.
• Integration with invoices, payments, and receipts: Some tools automatically link your invoices, expenses, and bank transactions, keeping your accounts accurate and compliant.

For small business owners, this transforms MTD from a complex burden into something that happens largely in the background.

Choosing the right software for MTD ITSA

Not all accounting software is MTD-compatible. When choosing a tool, look for:

• HMRC-recognised MTD software: Ensures your quarterly updates will be accepted
• Automatic bank feeds: Minimise manual entry and reduce mistakes
• Built-in tax calculations: Allow you to see your estimated liability in real time
• Simple reporting for quarterly updates and final declarations: Makes submissions quick and painless
• Ease of use for non-accountants: Allows you to use the software without extensive bookkeeping experience

Using the right software doesn’t just make compliance easier – it can improve cash flow awareness, reduce errors, and save hours of admin each month.

Paying taxes as a small business is easy and seamless with ANNA

For small business owners, staying on top of taxes isn’t just about paying what you owe – it’s about keeping accurate records, tracking deadlines, and submitting updates on time. With MTD for ITSA, this has become more important than ever.

That’s where ANNA comes in.

Instead of relying on spreadsheets, manual tracking, or juggling multiple tools, ANNA automates your bookkeeping and tax compliance in the background. There’s no setup, no learning curve, and no need to become an expert in accounting.

Here’s how ANNA helps small businesses stay on top of their taxes:

• Automated bookkeeping: Every payment and expense is recorded and categorised automatically, so your records are always accurate and up to date.
• Built-in UK business account: Your cash flow and accounting are in one place, keeping everything aligned and reducing admin.
• Automatic MTD submissions: Quarterly updates and filings go directly to HMRC without any manual effort.
• Free 2025/26 Self Assessment submission: Once you’re connected to HMRC, ANNA prepares and files your Self Assessment at no extra cost. If you’ve already filed elsewhere, ANNA can even refund your filing fee when you switch.
• Real-time tax estimates: ANNA continuously calculates your tax bill, helping you plan ahead and avoid surprises at year-end.
• Smart reminders and alerts: Deadlines are tracked automatically, so you never miss a submission or payment.
• 24/7 support: Help is always available if you need it, without relying on an accountant.

So get started with ANNA today and let your bookkeeping and tax compliance take care of themselves, so you can focus on growing your business.