UK business owners are taxed differently depending on how their business is structured. Sole traders and individual partners generally pay Income Tax on their taxable business profits through Self Assessment, while limited companies pay Corporation Tax on their taxable profits. Company owners may also have personal tax liabilities when taking money from the company through salary, dividends or other payments.
Income Tax and Corporation Tax have different rates, allowances, reliefs and reporting requirements. Understanding these differences can help business owners manage their tax obligations and choose a structure that supports their profit levels, growth plans and long-term business goals.
How Your Business Structure Affects Your Tax
Two businesses generating the same profit can result in very different tax calculations, simply because of how the business is set up. A sole trader and a limited company generating ยฃ60,000 of profit fall under two separate tax systems, with different rules and tax calculations. This distinction is important for UK business owners, particularly those who start as sole traders and later incorporate as a limited company. Moving from sole trader to limited company status changes how business profits are taxed, with Corporation Tax applying to company profits and separate tax rules applying when directors or shareholders withdraw income from the business.
This corporation tax vs income tax guide walks through both taxes straightforwardly, showing what each covers and what UK business owners need to track.
Income Tax and Corporation Tax Explained
Income tax and corporation tax are both collected by HMRC, but they apply to different taxpayers: income tax is paid by individuals on their personal income, while corporation tax is paid by limited companies on their profits.
What Income Tax Covers
Income tax applies to an individualโs taxable income, including profits from self-employment, partnership income, and employment income. Taxable income above the ยฃ12,570 personal allowance is generally subject to Income Tax, with rates in England, Wales, and Northern Ireland ranging from 20% to 45% based on taxable income.
What Corporation Tax Covers
Corporation tax applies to a limited company’s profits before any money reaches the director personally. Companies generally pay 19% on profits up to ยฃ50,000 and 25% above ยฃ250,000, with marginal relief smoothing the gap.
Who Needs to Pay Each Tax
Sole traders and individual partners generally pay Income Tax through Self-Assessment, while employees usually pay it through PAYE. Limited companies pay corporation tax separately, while directors may also pay personal tax on salary and dividends.
Knowing which tax applies to your business is important, but getting the calculations and filings right matters just as much. Everest Accountants Ltd provides reliable corporate tax services in the UK to help businesses manage their Corporation Tax responsibilities with confidence. Connect with us today for practical tax support tailored to your business needs.
Difference Between Income and Corporation Tax
Income tax and corporation tax differ in more than just their rates. The way each tax is calculated, reported, and reduced through allowances also varies, and these practical differences can have a real impact on how much tax a business owner ultimately pays.
How the Tax Rates Compare
Income tax uses a banded system, so the more an individual earns, the higher the rate they pay on each portion of their income: 20%, 40%, and 45%. Corporation tax works differently, sitting at 19% or 25% depending on company profit, with a gradual rise through marginal relief.
How the Tax Base Is Calculated?
Income tax looks at what an individual earns across employment and self-employment. Corporation tax applies to a company’s taxable profits, calculated after accounting for allowable expenses, capital allowances, and relevant reliefs.
How Reporting and Deadlines Differ
Income tax gets reported through an annual Self Assessment return, due by 31 January following the tax year. However, Making Tax Digital for Income Tax (MTD IT) is changing how some sole traders and landlords report their income to HMRC. From 6 April 2026, those with qualifying self-employment and property income of more than ยฃ50,000 are generally required to keep digital records and submit quarterly updates using compatible software. The threshold reduces to more than ยฃ30,000 from April 2027 and more than ยฃ20,000 from April 2028. Taxpayers within MTD IT must still submit their tax return and pay the tax due by the usual 31 January deadline. Corporation tax requires a CT600 return filed within twelve months of the company year-end.
How Allowances and Reliefs Differ
Income tax offers a personal allowance plus reliefs like marriage allowance and pension contributions. Corporation tax offers business-specific reliefs such as capital allowances and research and development credits, plus the small profits rate.
Income Tax vs Corporation Tax in the UK: Key Differences at a Glance
A quick comparison shows how the two taxes differ in who pays them, what is taxed, and how business profits are treated.
| Factor | Income Tax | Corporation Tax |
| Applies to | Individual’s taxable income | Company’s taxable profits |
| Who is legally responsible | The individual | The limited company |
| Tax period | Individual’s tax year | Company’s accounting period |
| How profits are treated | Business profits are personally taxable | Profits belong to the company until extracted |
| Personal tax after business tax | Not applicable separately | May apply to salary and dividends |
| Main planning consideration | Managing personal taxable income | Managing company profits and how funds are extracted |
How These Taxes Affect Your Business Structure
Your legal structure decides which rules apply and how much control you keep.
- Sole traders and partnerships: Business profits are subject to Income Tax and applicable National Insurance, with the business and its owners legally treated as one.
- Limited companies: Operate as separate legal entities and pay Corporation Tax on their taxable profits.
- Directors: May have personal tax obligations on salary and dividends they receive from the company.
- Salary and dividends: Many directors use a combination of salary and dividends, but the most tax-efficient approach depends on company profits and the individual’s tax position.
- VAT registration: Businesses generally need to register for VAT if their taxable turnover has exceeded ยฃ90,000 over the past 12 months or is expected to exceed ยฃ90,000 within the next 30 days.
- Choosing a structure: The right option depends on profit levels, growth plans and how much money you need to take from the business personally.
Frequently Asked Questions
What is the main difference between income tax and corporation tax?
The core difference is who is taxed. Individuals pay income tax on taxable income, while limited companies pay corporation tax on profits before money reaches the director.
Do sole traders pay corporation tax?
No, sole traders pay income tax through Self Assessment, since a sole trader is not a separate legal entity from the business itself.
What is the current corporation tax rate in the UK?
Companies generally pay 19% on profits up to ยฃ50,000 and 25% above ยฃ250,000, with marginal relief applying to profits in between.
When should a business register for VAT?
Businesses generally must register for VAT when their taxable turnover has gone above ยฃ90,000 in the past 12 months or is likely to exceed ยฃ90,000 within the next 30 days.
Conclusion
Understanding how these two taxes work shapes how you plan finances and structure a business. This corporation tax vs income tax guide shows that income tax follows personal taxable income, while corporation tax follows company profits, each with separate rates and reliefs. Getting this right early saves confusion as a business grows and takes on duties such as VAT registration.
Understanding your tax obligations is only the first step; taking action at the right time keeps your business on track. Everest Accountants Ltd makes it easier to register for VAT in the UK while helping you stay on top of your wider accounting needs. Visit us today for tax compliance support built around your business needs!
