Money and tax

This is the chapter people worry about most. It does not need to be scary. Tax is really just a few rules and a few dates. Let’s take them one at a time.

First, three words that trip everyone up

Many money mistakes come from mixing up these three words.

• Turnover is all the money coming in from sales, before any costs.
• Taxable profit is what is left after you take off your business costs. Your tax is worked out on this, not on turnover.
• Drawings are what you, as a sole trader, take out for yourself. You are taxed on your profit, not on what you take out.

Keep records from day one

Good records make tax easy and protect you if HMRC ever asks questions.

There are two ways to do your books:

• Cash basis — record money when it actually comes in or goes out. This is simpler, and it is the normal method for sole traders. You do not pay tax on a bill until it is actually paid.
• Accruals accounting — record money on the date you send or receive a bill. Limited companies must use this method.

Full detail on what counts as an allowable expense is in Running it properly.

Which taxes are Scottish, which are UK-wide?

This matters. Getting it wrong is the most common mistake in Scotland.

Scottish Income Tax bands

Sole traders pay Income Tax on their profit at these Scottish rates. Everyone gets a tax-free Personal Allowance first (this is set for the whole UK).

Self Assessment — for sole traders and partners

This is how you tell HMRC your income and pay your tax. There are only a few dates to remember.

• Register by 5 October after the end of your first tax year of trading.
• File your return and pay online by 31 January after the tax year ends.
• Keep your records for 5 years after that January.

National Insurance

National Insurance is a second tax on what you earn. It also builds up your right to the State Pension. It is the same across the whole UK.

• If you are self-employed, you pay Class 4 through your Self Assessment: about 6% of profit between £12,570 and £50,270, then 2% above that.
• Class 2 no longer has to be paid once your profit is roughly £7,100 or more — but you still get the credit that protects your State Pension.
• If your profit is low (below about £6,725), you can choose to pay Class 2 voluntarily — just a few pounds a week — to keep your pension record going. This is cheap and often missed.

Corporation Tax — for limited companies

A limited company pays Corporation Tax on its profits.

• The rate is 19% on profits up to £50,000, and 25% on profits over £250,000, with a sliding scale in between.
• Pay your Corporation Tax 9 months and 1 day after your company’s year-end.
• File the Corporation Tax return 12 months after the year-end. (Yes — you pay before you file.)
• Your first accounts to Companies House are due 21 months after you set the company up, and a confirmation statement is due every year.

VAT — only once you are big enough

VAT is a tax (usually 20%) added to most sales. You do not deal with it at all until your sales get large.

A few things people get wrong:

• Check monthly. Miss the point where you cross £90,000 and you may have to pay the VAT out of your own pocket, plus a penalty.
• Zero-rated still counts. Sales that are taxed at 0% — like most cold food — still count towards the £90,000. This catches out food businesses. See zero-rated vs exempt.
• You can register early on purpose. If your customers are mostly other VAT-registered businesses, registering can let you claim back VAT with no downside. If you sell to the public, it usually means a 20% price rise or a smaller margin — so think hard.
• There are simpler schemes for smaller businesses, like the Flat Rate Scheme (for turnover up to £150,000) and cash accounting.

Making Tax Digital

Making Tax Digital (MTD) is HMRC’s move to computer records and software filing.

• It already covers all VAT-registered businesses.
• For sole traders, it is coming in stages: from April 2026 for income over £50,000, and from April 2027 for income over £30,000. Those in scope must keep digital records and send updates every three months.
• Most people in their first year will not hit these limits yet — but it is the direction of travel, so pick software early.

Your money year at a glance

You will find the full month-by-month plan in Your first year.