Corporation Tax and Income Tax are both major UK taxes, but they apply to different taxpayers and different types of income. For a business owner, understanding the difference can help you avoid confusion when deciding how to structure your business, pay yourself and plan for your tax liabilities.
A sole trader generally pays Income Tax on taxable profits from their business. A limited company is a separate legal entity and normally pays Corporation Tax on its taxable profits, while the owner may then have personal tax obligations when taking money from the company.
This distinction is important because a limited company does not simply pay Income Tax on its business profits in the same way as a sole trader. Instead, the company and its owner can have separate tax responsibilities.
For the 2026 to 2027 tax year, the standard Personal Allowance is £12,570 for eligible individuals, while Corporation Tax for companies is generally 19% on profits up to £50,000 and 25% on profits above £250,000, with Marginal Relief available between those thresholds.
The actual tax position can be more complicated because business owners may also have National Insurance, dividend tax, VAT, pension considerations and other obligations. The right approach therefore depends on the business structure, profit level and how the owner takes money from the business.
What Is Corporation Tax?
Corporation Tax is a tax paid by a company on its taxable profits.
For UK resident companies, Corporation Tax can apply to profits from trading, investments and certain gains from selling assets.
The important point is that the company is responsible for the Corporation Tax. The tax is not automatically the personal tax bill of the company director.
For example, imagine a limited company generates £100,000 of sales during its accounting period and has £60,000 of allowable business costs. Its accounting profit before relevant tax adjustments might be £40,000.
The company may then have a Corporation Tax liability based on its taxable profits.
The director does not simply report the company’s entire £40,000 profit as personal employment income.
The company and the director are separate taxpayers.
This distinction is one of the most important things new limited company owners need to understand.
What Is Income Tax?
Income Tax is a tax paid by individuals on taxable income.
It can apply to income from employment, self employment, pensions, property and other sources depending on the circumstances.
For the 2026 to 2027 tax year, the standard Personal Allowance is £12,570. For taxpayers in England, Wales and Northern Ireland, the basic Income Tax rate is 20%, the higher rate is 40% and the additional rate is 45%, subject to the applicable thresholds and circumstances. Scotland has different Income Tax bands and rates.
If you run a business as a sole trader, your business is not a separate legal entity from you in the same way that a limited company is.
Instead, your taxable business profit generally forms part of your personal taxable income.
That means the business owner can have an Income Tax liability on the profits of the business after the relevant deductions and allowances.
Corporation Tax vs Income Tax at a Glance
| Feature | Corporation Tax | Income Tax |
| Who normally pays it? | A company | An individual |
| Common business structure | Limited company | Sole trader or individual |
| What is taxed? | Company taxable profits | Individual taxable income |
| Tax period | Company accounting period | Tax year |
| Personal Allowance | Not applicable to the company | May apply to the individual |
| Dividend tax | Separate issue for shareholders | Dividends can be taxable personally |
| Salary | Company may deduct qualifying salary costs subject to the relevant rules | Salary is normally taxable employment income for the individual |
| Main authority | HMRC | HMRC |
| Filing | Company Tax Return and related company reporting | Self Assessment where required |
| The table is a simplified comparison. Your actual position depends on your business structure, income, expenses, allowances, associated companies and other circumstances. |
Who Pays Corporation Tax?
A limited company generally pays Corporation Tax on its taxable profits.
The company must calculate its taxable profits and meet its Corporation Tax reporting and payment responsibilities.
GOV.UK confirms that Corporation Tax applies to companies and that the amount payable depends on the company’s taxable profits.
This means a director of a limited company should not automatically think of the company’s profit as their personal income.
Suppose your company makes £80,000 of taxable profit.
The company may have a Corporation Tax liability.
If the remaining money stays in the company, it remains company money. If you later take money out as salary, dividends or another permitted form of payment, your personal tax position may then need to be considered separately.
This two level structure is one of the main differences between operating through a limited company and operating as a sole trader.
Who Pays Income Tax?
Individuals pay Income Tax on taxable income.
For business owners, this can happen in several different ways.
A sole trader may pay Income Tax on taxable trading profits.
A director may pay Income Tax on salary received from their company.
A shareholder may potentially pay dividend tax on dividends received above the relevant dividend allowance.
Someone may also have Income Tax on employment income, pension income, property income or other taxable sources.
This is why simply asking, “How much tax does my business pay?” is often not enough.
You also need to ask how the business is structured and how money reaches the individual owner.
How Is a Sole Trader Taxed?
A sole trader and the business are closely connected for tax purposes.
You normally calculate the taxable profit from the business and report it through Self Assessment where required.
For example, suppose a sole trader has:
- £90,000 business income
- £30,000 allowable business expenses
- £60,000 taxable business profit before considering relevant personal tax adjustments
The £60,000 is not automatically taxed at one flat rate.
Instead, the owner’s taxable income is considered against the applicable Income Tax rules, allowances and tax bands.
For the 2026 to 2027 tax year, the standard Personal Allowance is £12,570, although it can be reduced for individuals with adjusted net income above £100,000.
The business owner may also have National Insurance obligations depending on their circumstances.
This is why comparing a sole trader’s profit directly with a limited company’s Corporation Tax bill can produce a misleading result.
They are different tax systems applied to different taxpayers.
How Is a Limited Company Taxed?
A limited company normally pays Corporation Tax on its taxable profits.
The company may then pay money to its owners in different ways.
Common methods include:
- Salary
- Dividends
- Reimbursement of legitimate business expenses
- Other payments that have a valid accounting and tax treatment
Salary and dividends are not interchangeable.
A salary is generally employment income for the individual and can have Income Tax and National Insurance implications. For the company, qualifying salary and employer costs can generally affect taxable profit, subject to the relevant rules.
Dividends are distributions from company profits and are not treated in exactly the same way as salary.
This means the tax calculation for a company director can involve both Corporation Tax at company level and personal tax at shareholder level.
How Does Corporation Tax Work in 2026?
For Corporation Tax financial years beginning in 2026, the small profits rate is 19% for companies with profits of £50,000 or less.
The main Corporation Tax rate is 25% for companies with profits above £250,000.
Companies with profits between £50,000 and £250,000 may qualify for Marginal Relief, which creates a gradual increase in the effective Corporation Tax rate between the two thresholds.
These thresholds can be affected by factors such as the number of associated companies and the length of the accounting period.
Therefore, you should not simply look at your annual turnover and assume that a particular Corporation Tax rate applies.
Corporation Tax is based on taxable profits, not simply the amount of money entering the business bank account.
How Does Income Tax Work in 2026?
For the 2026 to 2027 tax year, the standard Personal Allowance is £12,570.
For England, Wales and Northern Ireland, the basic Income Tax rate is 20% on taxable income within the basic rate band, the higher rate is 40% and the additional rate is 45%.
The relevant thresholds are:
| Income Tax band | 2026 to 2027 rate |
| Personal Allowance | 0% up to £12,570 |
| Basic rate | 20% |
| Higher rate | 40% |
| Additional rate | 45% |
| These figures relate to the standard Income Tax bands for England, Wales and Northern Ireland. Scottish taxpayers have different Income Tax bands and rates. | |
| The Personal Allowance can also be reduced when adjusted net income exceeds £100,000 and can reach zero at sufficiently high income levels. |
What About Dividend Tax?
Dividends are one of the reasons the difference between Corporation Tax and Income Tax can become confusing for limited company owners.
A company pays Corporation Tax on its taxable profits.
If it subsequently distributes some of its available profits to shareholders as dividends, the shareholder may have a personal tax liability on those dividends.
For 2026 to 2027, the dividend allowance is £500. Dividend tax rates above the allowance are 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers and 39.35% for additional rate taxpayers.
The dividend tax rate that applies depends on the individual’s tax position.
This means you cannot calculate the total personal tax cost of taking company profits simply by applying a dividend rate to the company’s profit.
The Corporation Tax position needs to be considered first, followed by the shareholder’s personal tax position.
Corporation Tax and Salary: How Do They Work Together?
A limited company director may receive a salary from the company.
The salary is generally taxable employment income for the director.
From the company’s perspective, qualifying salary costs can normally be considered when calculating taxable company profits, subject to the relevant tax rules.
This creates a different tax treatment from dividends.
For example, imagine a company has £70,000 available before considering the owner’s remuneration.
The director might receive a salary, while some remaining profits may be retained in the company or distributed as dividends.
The company and the director therefore need to consider different taxes and reporting requirements.
The most tax efficient arrangement is not automatically the same for every business owner.
It can depend on profit levels, other personal income, pension contributions, available allowances, company circumstances and future plans.
This is one area where professional accounting advice can be particularly useful.
Does a Limited Company Pay Income Tax?
The company itself normally pays Corporation Tax rather than Income Tax on its company profits.
However, the people connected with the company may have personal Income Tax liabilities.
For example, a director may pay Income Tax on salary.
A shareholder may pay tax on dividends above the relevant allowance.
An individual can therefore have both a connection to a company paying Corporation Tax and their own personal tax obligations.
It is important not to describe these as one single tax bill.
They arise at different levels.
Does a Sole Trader Pay Corporation Tax?
Normally, no.
A sole trader does not operate through a separate limited company for tax purposes.
Instead, the business owner’s taxable profits are generally subject to personal taxation through the Income Tax system.
The owner may also have National Insurance obligations.
This is why business structure matters so much when discussing Corporation Tax versus Income Tax.
A sole trader can have a substantial Income Tax bill without ever having a Corporation Tax liability.
What Is the Difference Between Tax on Profit and Tax on Income?
One of the easiest ways to understand the distinction is to look at who earns the profit.
For a limited company, the company earns the profit.
The company then has its own Corporation Tax responsibility.
For a sole trader, the individual carries on the business.
The business profit is therefore generally part of the individual’s taxable income.
Consider two businesses that each make £50,000 of profit.
One is operated by a sole trader.
The other is operated through a limited company.
You cannot assume that both owners will pay the same amount of tax.
The legal structure, personal income, allowances and the way money is extracted can all change the calculation.
Example: Sole Trader With £50,000 Profit
Imagine a sole trader makes £50,000 of taxable business profit during the tax year and has no other taxable income.
The owner does not pay Corporation Tax.
Instead, the taxable profit is considered under the individual’s Income Tax rules.
The standard Personal Allowance may apply, subject to the owner’s circumstances.
The calculation then moves through the applicable tax bands.
The business owner may also need to consider National Insurance.
This is a personal tax calculation rather than a Corporation Tax calculation.
Example: Limited Company With £50,000 Profit
Now imagine a limited company makes £50,000 of taxable profit.
The company is a separate taxpayer and may fall within the small profits Corporation Tax rate of 19%, subject to the applicable rules and thresholds.
The calculation does not end there if the owner wants to take money out.
If the company pays a salary, the director’s personal Income Tax position and applicable National Insurance need to be considered.
If the company pays dividends, the shareholder’s dividend tax position may need to be considered.
If some of the profit remains inside the company, there may be no immediate personal tax on that retained amount simply because the company made a profit.
This example shows why comparing the 19% Corporation Tax rate directly with the 20% Income Tax rate is not a complete tax comparison.
They apply to different taxpayers and different circumstances.
Does Corporation Tax Replace Income Tax for Limited Company Owners?
No.
A limited company paying Corporation Tax does not mean the owner is automatically free from personal taxation.
The company is taxed on its taxable profits.
The owner may then have personal tax obligations depending on what they receive.
For example:
Company earns profit → Company calculates Corporation Tax → Remaining funds stay in the company or are distributed → Owner considers personal tax on relevant income.
This is a simplified illustration rather than a complete tax calculation.
The exact treatment depends on the payment method and circumstances.
What Happens If You Leave Profits in the Company?
A company does not necessarily have to distribute all of its post tax profits to its shareholders.
It can retain funds for legitimate business purposes such as:
- Working capital
- Equipment
- Staff
- Marketing
- Expansion
- Stock
- Future investment
- Cash reserves
If profits remain in the company, the company has already considered Corporation Tax on its taxable profits.
The shareholder does not automatically pay dividend tax simply because the company has retained its profits.
This can make retained profits relevant when planning for future business investment.
However, retaining profits does not mean the money becomes permanently tax free.
If funds are distributed later, the tax position at that time needs to be considered.
Corporation Tax vs Income Tax: Which One Applies to You?
The answer usually starts with your business structure.
If You Are a Sole Trader
Your business profit is generally reported through your personal tax position.
Income Tax and potentially National Insurance are relevant.
If You Are a Partnership
The partnership itself generally does not operate like a limited company paying Corporation Tax on its trading profit.
Instead, partners are generally taxed personally on their share of the partnership profits.
If You Operate a Limited Company
The company normally pays Corporation Tax on its taxable profits.
The director or shareholder can then have personal tax obligations on salary, dividends or other taxable income.
If You Own Several Businesses
The position can become more complicated.
For Corporation Tax purposes, associated companies can affect the thresholds used for the small profits rate and Marginal Relief.
This is an area where professional advice is particularly valuable because the structure of the businesses can affect the calculation.
Why Business Owners Should Not Choose a Structure Based Only on Tax Rates
It can be tempting to look at Corporation Tax and Income Tax rates and decide that one business structure must always be cheaper.
That approach can be misleading.
Tax is only one part of the decision.
You should also consider:
- Legal structure
- Administration
- Accounting costs
- Companies House responsibilities
- Payroll
- VAT
- National Insurance
- Dividend rules
- Personal income
- Business risk
- Investment plans
- Whether profits will remain in the business
- Whether you expect the business to grow
- Whether you need to bring in investors
A limited company can be useful for some businesses, while a sole trader structure can be appropriate for others.
The right decision depends on the complete circumstances rather than one tax rate.
Accountancy Net explains that operating through a limited company is different from operating as self employed and that business owners should consider the relevant factors before choosing a structure.
How Your Accounting Records Affect Corporation Tax
Accurate bookkeeping is essential when calculating Corporation Tax.
Your company needs reliable information about:
- Sales
- Expenses
- Bank transactions
- Assets
- Liabilities
- Payroll
- VAT
- Loans
- Director transactions
- Stock where applicable
Incomplete records can make it difficult to calculate taxable profits accurately.
A company may also miss legitimate deductions or incorrectly include costs that do not receive the expected tax treatment.
This is why regular bookkeeping should not be treated as something that only needs attention before the annual accounts deadline.
Accountancy Net provides bookkeeping support using accounting software and bank connections, with options for capturing documents and transaction information.
How Your Personal Records Affect Income Tax
Income Tax calculations can also be affected by poor records.
A sole trader may need records showing business income and allowable expenses.
A company director may need information about salary, benefits, dividends and other personal income.
Someone with more than one source of income may need to consider all relevant sources when completing Self Assessment.
Accountancy Net provides Self Assessment support for sole traders and company directors.
If you are starting a self employed business and need to register for Self Assessment, Accountancy Net also provides UTR registration support.
What Business Owners Should Do Before Their Tax Return
Whether you are a sole trader or company director, preparing your records before the filing deadline can reduce problems.
Check that:
- Business income has been recorded completely
- Bank accounts have been reconciled
- Business expenses have supporting evidence
- Personal and business transactions are separated
- Customer invoices are accounted for
- Supplier bills are recorded
- VAT records agree with the accounts
- Payroll information is complete
- Dividend records are available where relevant
- Director transactions have been reviewed
- Loans and finance balances are correct
- Previous tax information is available
Good records give your accountant a stronger foundation for calculating the correct tax position.
Corporation Tax vs Income Tax: A Practical Comparison
Imagine two business owners each generate £100,000 of business profit before owner remuneration.
Business Owner A operates as a sole trader.
The £100,000 taxable business profit generally forms part of their personal taxable income, subject to the relevant deductions, allowances and rules.
Business Owner B operates through a limited company.
The company calculates its taxable profit and Corporation Tax liability. The owner may then receive salary, dividends or retain profits within the company.
The two owners could therefore have very different tax calculations even though their businesses generated the same headline profit.
This is why a business owner’s personal circumstances matter.
If Owner B has other employment income, for example, the tax on dividends or salary could be different from someone who has no other income.
Likewise, if the company retains a significant amount of profit for investment, the owner’s immediate personal tax position may differ from a business owner who withdraws most of the available funds.
Can an Accountant Help With Corporation Tax and Income Tax?
Yes.
An accountant can help separate the company tax position from the owner’s personal tax position and identify the records needed for each.
For a limited company, this can include company accounts, Corporation Tax calculations, payroll and dividend records.
For a sole trader, it can include bookkeeping, Self Assessment and allowable expense records.
Accountancy Net offers company accounts, bookkeeping, Self Assessment, payroll and VAT services for businesses. Its company accounts service includes preparing year end accounts and tax calculations and filing relevant accounts with Companies House and HMRC.
The firm also highlights support for entrepreneurs, startups and established ecommerce businesses, including businesses using platforms such as Amazon, Shopify, eBay and Etsy.
For a business owner trying to understand whether Income Tax or Corporation Tax applies, professional advice can help put the numbers into the correct context.
Frequently Asked Questions
Is Corporation Tax the same as Income Tax?
No. Corporation Tax is generally paid by companies on taxable profits, while Income Tax is paid by individuals on taxable income. A limited company owner can potentially have both company Corporation Tax and personal Income Tax or dividend tax obligations.
Do sole traders pay Corporation Tax?
Normally, no. A sole trader generally pays personal taxes on taxable business profits rather than Corporation Tax. The owner may also have National Insurance obligations.
Do limited company directors pay Income Tax?
They can. A director may pay Income Tax on salary and may have personal tax on dividends received above the applicable dividend allowance. The company separately deals with Corporation Tax on its taxable profits.
What is the Corporation Tax rate in 2026?
For Corporation Tax financial years beginning in 2026, the small profits rate is 19% for profits up to £50,000 and the main rate is 25% for profits above £250,000. Marginal Relief may apply between £50,000 and £250,000, subject to the relevant rules.
What is the Income Tax rate in 2026?
For the 2026 to 2027 tax year, the standard Income Tax rates for England, Wales and Northern Ireland include 20% basic rate, 40% higher rate and 45% additional rate, with a standard Personal Allowance of £12,570 for eligible taxpayers. Scotland has different Income Tax rates and bands.
Is it better to be a sole trader or limited company for tax?
There is no single answer that applies to every business owner. The outcome depends on profit, personal income, how much money you take from the business, whether profits are retained, administrative costs and other tax and business considerations.
Are dividends subject to Income Tax?
Dividends have their own personal tax rates within the Income Tax system. For 2026 to 2027, the dividend allowance is £500, with different rates applying above the allowance depending on the individual’s tax band.
Does a company pay Corporation Tax on turnover?
No. Corporation Tax is generally calculated based on taxable profits rather than simply total turnover. The calculation takes account of relevant allowable costs, adjustments, reliefs and other applicable rules.
Can a company retain profits after paying Corporation Tax?
Yes. A company can generally retain post tax profits for legitimate business purposes rather than distributing everything to shareholders. If money is distributed later, the personal tax treatment should be considered at that point.
Do I need an accountant to calculate Corporation Tax?
A company does not necessarily have to use an accountant, but Corporation Tax calculations can involve accounting adjustments, reliefs, company structure considerations and filing requirements. Professional support can help reduce the risk of errors and missed deadlines.
Corporation Tax and Income Tax: Why the Difference Matters
Corporation Tax and Income Tax are not two versions of the same tax.
Corporation Tax generally applies to a company’s taxable profits. Income Tax applies to an individual’s taxable income. A sole trader therefore normally deals with personal tax on business profits, while a limited company deals with Corporation Tax and its owners may then have personal tax obligations on money they receive.
For business owners, the most important step is to look beyond the headline tax rates.
Your business structure, profit level, personal income, salary, dividends, retained profits and other circumstances can all affect the final calculation.
Keeping accurate records throughout the year is equally important. Good bookkeeping gives your accountant the information needed to prepare accounts, calculate tax and identify issues before deadlines become urgent.
Accountancy Net supports entrepreneurs, startups, established businesses and ecommerce businesses with accounting and compliance services, including company accounts, bookkeeping, Self Assessment, payroll and VAT.
If you are unsure whether your business should be dealing with Corporation Tax, Income Tax or both, it is worth reviewing your circumstances before making decisions about how you structure or withdraw money from the business.
For limited company owners, Accountancy Net’s company accounts service provides support with year end accounts, tax calculations and relevant filing requirements.
If you need help with your wider accounting requirements, you can contact Accountancy Net for a discussion about your business.
You can also visit the Accountancy Net Google Business Profile to find the business listing, location and contact information.