Small business tax: what do you have to pay HMRC? (2026/27 Guide)

Understanding exactly what your business owes HMRC requires navigating a shifting landscape of rates, thresholds, and mandatory digital reporting. With the 2026/27 tax year introducing significant changes to dividend taxes, Capital Gains Tax, and employer contributions, small business owners and their advisors must carefully assess their structures.

Below is an exhaustive breakdown answering the core question: small business tax: what do you have to pay HMRC?

Sole Traders and Partnerships

If you operate as a sole trader or partnership, you pay Income Tax and National Insurance Contributions (NICs) on your trading profits.

Income Tax Rates and Thresholds

For the 2026-27 tax year, the government has frozen the Personal Allowance at £12,570 and the basic rate limit at £37,700 (resulting in a higher rate threshold of £50,270) until 5 April 2031.  The main rates of income tax for 2026/27 remain at:

• Basic rate: 20%
• Higher rate: 40%
• Additional rate: 45%

National Insurance Contributions (NICs)

The government has reduced the NIC burden for self-employed individuals. The main rate of Class 4 NICs is 6% on profits between £12,570 and £50,270.  Furthermore, the government has effectively abolished the liability to pay flat-rate Class 2 NICs for individuals with profits exceeding £12,570, simplifying the tax system for working people.

Accounting Methods and MTD Reporting

When calculating taxable profits, the cash basis is now the default accounting method for self-employed individuals and partnerships.  Businesses must actively elect to use the accruals basis.

Crucially, starting 6 April 2026, Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) becomes mandatory for sole traders and landlords with qualifying income over £50,000.  You must use compatible software to keep digital records and submit quarterly summary updates of your income and expenses to HMRC.

Limited Companies

Companies pay Corporation Tax on their profits. To stimulate investment, the government provides permanent full expensing—a 100% first-year capital allowance for main rate plant and machinery expenditure.

Corporation Tax Rates

For the financial year starting 1 April 2027, the main rate of corporation tax is 25%.  However, small companies benefit from a lower rate:

• Small Profits Rate: 19% applies to companies with augmented profits not exceeding £50,000.
• Marginal Relief: If your profits fall between £50,000 and £250,000, you pay the main 25% rate but deduct marginal relief, calculated using a standard marginal relief fraction of 3/200ths.

Shareholders and Business Owners

How you extract money from your company or sell its assets dictates your personal tax liability.

Dividend Tax Increases

If you extract profits via dividends, note that dividend tax rates increase from 6 April 2026. The new rates for the 2026/27 tax year are:

• Ordinary rate: 10.75%
• Upper rate: 35.75%
• Additional rate: 39.35% (remaining unchanged).

The tax-free Dividend Allowance remains fixed at £500 for the year.

Capital Gains Tax (CGT) and Incorporation

If you sell business assets or shares, the CGT annual exempt amount (AEA) remains permanently fixed at £3,000 for individuals.  The main CGT rates are 18% and 24%.

If you qualify for Business Asset Disposal Relief (BADR) or Investors’ Relief, the rate applying to qualifying gains increases to 18% for disposals made on or after 6 April 2026.

Additionally, if you decide to transfer your sole trader business to a limited company on or after 6 April 2026, you must formally claim incorporation relief (under section 162 of the TCGA 1992) by providing details of the transaction and computations within your Self Assessment tax return for the year of transfer.

Employers (Payroll Taxes)

If your small business employs staff, you must pay secondary Class 1 NICs on their earnings.

The employer NIC rate is 15%.  Employers must pay this rate on employee earnings exceeding the Secondary Threshold, which has been lowered to £5,000 a year.

To offset this substantial cost, the government provides the Employment Allowance, which gives eligible employers a deduction against their secondary Class 1 NICs liability. The allowance is set at £10,500.  The government has also removed the previous £100,000 liability cap, meaning all eligible small businesses can claim the full £10,500 reduction regardless of their prior year’s NIC bill.

Value Added Tax (VAT)

Regardless of your legal structure, you must monitor your turnover for VAT purposes. You are legally required to register for VAT if your total taxable turnover in a rolling 12-month period exceeds £90,000.  You may optionally cancel your VAT registration if your taxable turnover falls below the £88,000 deregistration threshold.

Summary Table: Small Business Tax Rates (2026/27)

Next steps for research: Audit existing client profit-extraction strategies (salary vs dividend) to account for the incoming 10.75% ordinary dividend rate and the 15% employer NIC rate, and verify that any unincorporated clients nearing the £50,000 turnover threshold are onboarded onto compatible MTD software before April 2026.