Starting a Business in the UK

Step 1: Choose Legal Structure

• Sole trader: simplest. £0 setup. Personal liability. Profits taxed as income (20/40/45% + Class 4 NI).
• Limited company: £12 Companies House. Limited liability. Corporation Tax 19-25%. Worth incorporating typically above £40-50k profit.
• Partnership / LLP: for multiple owners. Sole trader rules for general partnership; limited liability for LLP.

Full comparison: Sole Trader vs Limited Company.

Sole Trader vs Limited Company — The Crossover

The most common practical question is when to incorporate. For 2025/26, the rough crossover at which a limited company saves tax over sole trader sits around £40,000-£50,000 of annual profit. Below that, the extra accountancy cost (£600-£1,500/year for a Ltd vs £200-£600 for sole trader) plus Companies House admin usually outweighs the tax saving.

Above £50k profit the picture flips. A Ltd company pays Corporation Tax at 19% on the first £50k of profit (small profits rate), with the director drawing a tax-efficient salary of around £12,570 plus dividends taxed at 8.75% (basic), 33.75% (higher), 39.35% (additional). The combination saves both employee NI (8%) and employer NI (15% from April 2025) compared to PAYE — typically £2,000-£4,000/year at the £50k profit point and more as profits grow. Retained profits stay in the company at 19-25% rather than being taxed immediately at 40/45% personal rates.

Step 2: Register with HMRC

• Sole trader: register for Self Assessment at gov.uk/register-for-self-assessment by 5 October following the tax year you started
• Limited company: incorporate at Companies House (£12, ~24h). Register for Corporation Tax within 3 months of trading
• VAT: mandatory if turnover exceeds £90,000 in any 12-month rolling period (April 2024+). Voluntary at any turnover.
• PAYE: register if you'll have employees (or pay yourself as Ltd director)
• Get UTR (Unique Taxpayer Reference) within 10 working days

Corporation Tax 2025/26 — Bands and Marginal Relief

Since April 2023 UK Corporation Tax has had two rates with marginal relief in between:

• Small profits rate: 19% on profits up to £50,000
• Marginal relief band: £50,001 to £250,000 — effective rate around 26.5% on the marginal band
• Main rate: 25% on profits above £250,000

Crucially, the £50k and £250k thresholds are DIVIDED by the number of associated companies. If you control three companies, each gets thresholds of £16,667 and £83,333 — small profits rate disappears fast. Watch for this with serial-entrepreneur structures, holding-company groups, and connected-party ownership of more than one trading entity. Bona-fide passive holdings and group relief structures can mitigate, but advice from a chartered tax adviser is essential before second-company incorporation.

VAT Registration Threshold — £90,000 from April 2024

The compulsory VAT registration threshold rose from £85,000 to £90,000 on 1 April 2024 — the first increase since 2017. You must register if your taxable turnover exceeds £90,000 in any rolling 12-month period (not just the calendar/accounting year), or if you reasonably expect to exceed £90k in the next single 30-day period. Registration must happen within 30 days of crossing the threshold; the effective date is the first of the month after you crossed.

Voluntary registration below the threshold is available and often worthwhile if (a) your customers are themselves VAT-registered businesses that reclaim VAT, and (b) you have material input VAT on expenses, stock or equipment to recover. The Flat Rate Scheme (turnover up to £150k) simplifies VAT accounting but rarely beats standard VAT for service businesses post-2017 limited-cost-trader changes.

Employment Allowance and R&D Tax Credits

The Employment Allowance rose from £5,000 to £10,500 in April 2025, helping small employers offset employer NI. It applies to eligible employers' Class 1 employer NI (15% from April 2025 on earnings above £5,000) up to the £10,500 cap per tax year. Single-director companies with no other employees are excluded; companies with 2+ employees usually qualify.

R&D tax credits restructured from April 2024 into the Merged Scheme — a single above-the-line 20% R&D Expenditure Credit (RDEC) replacing the old separate SME and RDEC schemes. Loss-making R&D-intensive SMEs (spending 30%+ of total expenditure on R&D, threshold lowered from 40% in April 2024) can instead claim Enhanced R&D Intensive Support (ERIS) at a 27% effective cash credit. HMRC has dramatically tightened R&D claim controls since 2023 — claims under £50k receive much closer scrutiny and bogus consultancy "R&D specialists" have triggered widespread enquiry letters. Use a chartered accountant with genuine R&D experience.

Step 3: Business Banking

• Ltd companies REQUIRED to have separate business account (legal entity is distinct)
• Sole traders not legally required but strongly recommended (cleaner accounts)
• Free business accounts: Starling, Monzo, Mettle (NatWest), Tide
• Traditional banks: HSBC, Lloyds, Barclays, NatWest (often free for first 12-18 months)

Step 4: Accounting Software

Get MTD-compatible software from day 1 (MTD for ITSA mandatory from April 2026 for income above £50k):

• FreeAgent: free with NatWest business account, excellent for freelancers/Ltd
• Xero: ~£15-£40/month, very popular, best for growing businesses
• QuickBooks: ~£10-£30/month, established
• FreshBooks: good for service-based businesses
• Free options: Wave Accounting (good for very small)

MTD ITSA — Quarterly Filing from April 2026

Making Tax Digital for Income Tax Self Assessment starts on 6 April 2026 for self-employed individuals and landlords with gross income above £50,000. The £30,000 threshold follows in April 2027, and £20,000 in April 2028 — eventually capturing most freelancers and small landlords. Limited companies are NOT in MTD ITSA (separate MTD for Corporation Tax roadmap from 2026+).

Affected taxpayers must keep digital records using MTD-compatible software and submit four quarterly updates per year plus a year-end final declaration — five submissions instead of one. The deadlines are 7 August, 7 November, 7 February and 7 May for the quarter ending the previous month, plus the final declaration by 31 January. Penalties operate on a new points-based system. Start the migration well before April 2026: bedding in software, bookkeeping habits and the new cadence takes 6-12 months.

Step 5: First-Year Cash Planning

• Save 25-30% of every invoice for tax (Self Assessment, Class 4 NI, VAT)
• Prepare for Payments on Account: from year 2, you pay 150% of tax in January (£1k+ trigger)
• Budget for accountant: £600-£1,500/year for Ltd, £200-£600 for sole trader
• Public Liability Insurance (£100-£300/yr) often required for client work
• Professional Indemnity Insurance for consultancy/advisory roles

Common First-Year Mistakes

• Not separating personal and business finances (especially sole traders)
• Not tracking VAT-able sales as you approach £90k threshold
• Forgetting to register for Corporation Tax within 3 months
• Not paying yourself a tax-efficient salary as director (typically NIC threshold ~£12,570)
• Mixing IR35 contracts (inside) and pure freelance (outside) without proper status determination

References

• gov.uk: Set up a business
• gov.uk: Corporation Tax rates
• gov.uk: VAT registration
• gov.uk: R&D tax relief
• gov.uk: Making Tax Digital for Income Tax