The UK tax system is structured around a number of national taxes that provide the foundation for government revenue. For individuals and businesses, understanding how these taxes operate is central to meeting compliance obligations and managing financial affairs efficiently. Four of the most significant taxes are income tax, national insurance, value added tax (VAT), and corporation tax. Each applies in different ways, to different taxpayers, and under different rules.
What this article is about
This guide provides a detailed overview of the UK’s four core national taxes. It explains what each tax is, who it applies to, how the rules and rates work, and the key compliance considerations. Each section gives a summary of the tax, while linking to more in-depth guides on individual taxes. The aim is to equip employers, finance directors, business owners, and HR leaders with a clear understanding of how the UK’s main taxes interact with business operations and personal finances.
Section A: Income Tax
1. What is Income Tax?
Income tax is a direct tax levied on money earned by individuals, whether through employment, self-employment, pensions, rental income, or savings and investments. It is assessed on an annual basis in line with the tax year, which runs from 6 April to 5 April. HMRC is responsible for the collection and enforcement of the tax.
Employers are central to the collection of income tax through PAYE, where tax is deducted at source from employee wages and salaries. For self-employed individuals and company directors, income tax liabilities are generally settled through the Self Assessment system.
2. Current Rates and Thresholds
Income tax is charged at graduated rates depending on the level of taxable income. For the 2025/26 tax year, the principal thresholds are:
- Personal allowance: £12,570 tax-free (subject to tapering for incomes above £100,000)
- Basic rate: 20% on income between £12,571 and £50,270
- Higher rate: 40% on income between £50,271 and £125,140
- Additional rate: 45% on income over £125,140
Different rates apply in Scotland, where income tax is partially devolved. Scottish rates apply only to non-savings, non-dividend income. Employers still operate PAYE using tax codes issued by HMRC, which reflect whether the individual is subject to UK or Scottish rates. Employers operating across the UK must be aware of the regional differences when processing payroll.
3. Allowances and Reliefs
The system provides for a number of allowances and reliefs to reduce overall liability, including:
- Personal allowance – as noted, a set amount of income is tax-free.
- Marriage allowance – allows one spouse or civil partner to transfer part of their personal allowance to the other, if eligible.
- Dividend allowance – a tax-free allowance for dividend income, although reduced in recent years.
- Savings allowance – a limited tax-free allowance for interest income.
- Pension contributions and gift aid donations – can extend the basic rate band, reducing higher rate exposure.
Employers may also offer tax-efficient benefits such as pension contributions through salary sacrifice schemes.
4. Compliance and Reporting
For employees, income tax is deducted and reported under PAYE. Employers must calculate and remit tax correctly, supported by real-time information (RTI) submissions to HMRC.
Self-employed individuals, landlords, and company directors must complete annual Self Assessment returns, declaring income and claiming reliefs. HMRC imposes penalties and interest for late filing or underpayment.
Employers face compliance risk if payroll systems are inaccurate or records are not properly maintained. Ensuring correct treatment of benefits-in-kind, expenses, and employee share schemes is a recurring challenge for HR and finance teams.
Section Summary
Income tax is the most direct touchpoint with the UK tax system for individuals and the area of most responsibility for employers through PAYE. With multiple bands, devolved differences, and a range of allowances, it is critical that businesses operate accurate payroll systems and employees remain aware of their annual obligations.
You can read our extensive guide to Income Tax here >>
Section B: National Insurance
1. What is National Insurance?
National Insurance (NI) is a system of contributions paid by employees, employers, and the self-employed to fund state pensions and certain contributory benefits. Unlike income tax, NI is assessed by pay period rather than annually. Liability depends on employment status, earnings level, and the class of contribution.
Employers must operate NI through payroll, deducting employee contributions and paying employer contributions to HMRC alongside Real Time Information (RTI) submissions. The self-employed account for NI via Self Assessment.
2. Contributions for Employees and Employers
The classes most relevant to employment are:
- Class 1 (employees): Payable by employees on earnings above the primary threshold, deducted via PAYE.
- Class 1 (employers): A direct payroll cost on earnings above the secondary threshold. Reliefs may apply for employees under 21, apprentices under 25, and qualifying armed forces veterans.
- Class 1A: Employer-only NICs on most taxable benefits-in-kind, reported via P11D or payrolled benefits and settled after year end.
- Class 1B: Employer-only NICs under a PAYE Settlement Agreement (PSA) covering certain minor, irregular, or impracticable benefits.
Many small employers can claim the Employment Allowance (subject to eligibility) to reduce their annual employer NICs liability.
3. Self-Employed National Insurance
From April 2024 reforms, compulsory Class 2 NICs for the self-employed were abolished for those with profits at or above the Small Profits Threshold, although individuals can still pay Class 2 voluntarily to protect entitlement to state pension and other contributory benefits. Class 4 NICs remain payable as a percentage on annual profits between the lower and upper profits limits, calculated and paid through Self Assessment.
4. National Insurance and State Benefits
NI records determine eligibility for contributory benefits, most notably the state pension. Missing contribution years can reduce entitlement. Employers must provide payslips showing NI deductions and maintain accurate payroll records. Individuals should review their NI record via their HMRC Personal Tax Account and consider voluntary contributions to fill gaps where appropriate.
Section Summary
National Insurance is central to payroll compliance and total reward costs. For employers it is a material on-cost requiring accurate operation of Class 1, 1A, and 1B liabilities and awareness of available reliefs. For the self-employed, Class 4 applies on profits, with voluntary Class 2 available to protect benefit entitlements. Accurate records safeguard both compliance and access to state benefits.
You can read our extensive guide to National Insurance here >>
Section C: Value Added Tax (VAT)
1. What is VAT?
Value Added Tax (VAT) is the UK’s primary indirect tax, charged on most goods and services supplied domestically and on imports. It is a consumption tax borne by the end consumer, but businesses registered for VAT act as intermediaries, collecting VAT on sales (output tax) and reclaiming VAT incurred on purchases (input tax). Some goods and services are exempt or zero-rated, requiring correct treatment to ensure compliance.
2. Registration and Thresholds
Businesses must register for VAT when their taxable turnover exceeds the compulsory threshold of £90,000 (2025/26). Voluntary registration is permitted for businesses below the threshold, often to enable input tax recovery. Registration creates obligations to issue VAT invoices, file returns, and comply with Making Tax Digital (MTD) by keeping and submitting digital records.
3. VAT Rates and Schemes
The main VAT rates are:
- Standard rate: 20% on most goods and services
- Reduced rate: 5% on specific supplies such as domestic fuel and children’s car seats
- Zero rate: 0% on qualifying supplies such as most food, children’s clothing, and printed books
Some supplies are exempt (for example, financial services, education, healthcare) and others are outside the scope (such as statutory fees). Correct categorisation is critical to compliance and input tax recovery.
HMRC also offers simplified schemes, including the Flat Rate Scheme, Cash Accounting Scheme, and Annual Accounting Scheme, which can reduce administrative burdens but affect how VAT is calculated and recovered.
4. Compliance and Record-Keeping
VAT-registered businesses must:
- Submit VAT returns on time (usually quarterly, though annual accounting is possible)
- Pay VAT liabilities by the relevant deadlines
- Maintain accurate digital records under MTD requirements
- Apply correct VAT rates to all supplies and imports/exports
Common areas of HMRC scrutiny include treatment of cross-border transactions, partial exemption calculations, and VAT recovery on employee expenses. Errors can lead to assessments, penalties, and interest charges.
Section Summary
VAT is one of the most complex UK taxes, applying broadly across the economy but with multiple rates, exemptions, and compliance rules. While not a direct cost to most businesses, VAT represents a cashflow and administrative burden. Robust record-keeping, accurate classification of supplies, and adherence to digital reporting obligations are essential to compliance.
You can read our extensive guide to VAT here >>
Section D: Corporation Tax
1. What is Corporation Tax?
Corporation tax is a direct tax on the taxable profits of UK resident companies and certain non-UK companies with UK permanent establishments. Profits subject to corporation tax include trading income, investment income, and chargeable gains. Responsibility for calculating, reporting, and paying corporation tax lies with the company, with directors carrying statutory duties to ensure compliance.
2. Current Rates and Rules
From April 2023, corporation tax is charged on a tiered basis:
- Small profits rate: 19% on profits up to £50,000
- Main rate: 25% on profits above £250,000
- Marginal relief: Provides a tapered rate for profits between £50,001 and £250,000
Where companies are under common control, associated company rules apply and thresholds are divided among them to prevent fragmentation of profits.
3. Allowable Deductions and Reliefs
Companies can reduce taxable profits through various deductions and reliefs, including:
- Capital allowances on qualifying expenditure such as plant and machinery
- Research and Development (R&D) tax relief for qualifying innovation activities
- Patent Box relief for profits derived from patented inventions
- Loss relief allowing offset against other profits or carry forward to future years
Certain expenses, such as client entertaining, are disallowed. HMRC also applies transfer pricing and connected party transaction rules to ensure profits are reported on an arm’s length basis.
4. Compliance and Filing Deadlines
Companies must file a CT600 return with HMRC and pay any tax due within strict deadlines:
- Filing: Within 12 months of the end of the accounting period
- Payment: Within 9 months and 1 day after the end of the accounting period for most companies
Larger companies may be required to pay corporation tax in quarterly instalments. This applies where annual profits exceed £1.5 million, adjusted for associated companies and accounting periods. Very large companies with profits exceeding £20 million must pay under an accelerated quarterly timetable. Failure to meet these obligations can result in penalties and interest.
Section Summary
Corporation tax is central to the UK’s business tax regime. With banded rates, associated company rules, and complex reliefs, companies must manage their compliance carefully. Directors are personally responsible for ensuring filings and payments are accurate and timely, making strong governance and professional advice essential.
You can read our extensive guide to Corporation Tax here >>
FAQs
What are the main UK taxes?
The four core national taxes are income tax, national insurance, value added tax (VAT), and corporation tax. Together they account for the majority of government revenue and are central to compliance for individuals and businesses.
How do income tax and national insurance differ?
Income tax is a tax on personal earnings and other income, while national insurance contributions are payments that fund state benefits and pensions. Although both are deducted from employee pay, they are distinct in purpose and calculation.
Who needs to register for VAT?
Any business with taxable turnover above the compulsory registration threshold (£90,000 for 2025/26) must register for VAT. Businesses below the threshold may register voluntarily to reclaim input VAT.
What is the current corporation tax rate?
Corporation tax is charged at 19% for companies with profits up to £50,000, 25% for companies with profits above £250,000, and a tapered marginal relief rate for profits between these limits.
Conclusion
The UK’s tax system is built on four core national taxes: income tax, national insurance, VAT, and corporation tax. Each operates differently, but together they form the foundation of government revenue and the framework within which individuals and businesses must operate.
For employers and business owners, these taxes bring specific responsibilities. Income tax and national insurance require accurate payroll management under PAYE. VAT demands careful record-keeping and timely submissions in line with Making Tax Digital. Corporation tax obligations place a direct duty on directors to calculate, report, and pay correctly.
Understanding how these taxes interact is essential for effective compliance and financial planning. Failure to meet obligations risks HMRC penalties, reputational damage, and financial strain. By contrast, proactive management, awareness of reliefs, and accurate systems support both compliance and efficiency.
This gateway guide outlines the fundamentals of each tax. For more detailed rules, rates, and reliefs, refer to the dedicated guides linked from each section.
Glossary
| Term | Definition |
|---|---|
| Income Tax | A direct tax charged on the earnings and income of individuals, collected via PAYE or Self Assessment. |
| National Insurance (NI) | Contributions paid by employees, employers, and the self-employed to fund the state pension and certain benefits. |
| VAT (Value Added Tax) | An indirect consumption tax on most goods and services, charged and collected by VAT-registered businesses. |
| Corporation Tax | A direct tax on company profits, payable by UK companies and some non-UK entities with UK activities. |
| PAYE (Pay As You Earn) | HMRC system under which employers deduct income tax and NI from employee wages at source. |
| CT600 | The corporation tax return form that companies must file with HMRC to report taxable profits. |
| Personal Allowance | The amount of income an individual can earn each year before paying income tax. |
| Marginal Relief | A tapered reduction in corporation tax for companies with profits between the small profits and main rate thresholds. |
Useful Links
| Resource | Link |
|---|---|
| GOV.UK – Income Tax | Visit |
| GOV.UK – National Insurance | Visit |
| GOV.UK – VAT | Visit |
| GOV.UK – Corporation Tax | Visit |
| GOV.UK – Self Assessment | Visit |
| GOV.UK – CT600 Filing | Visit |
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
