Understanding the difference between personal tax and corporation tax is essential for business owners, freelancers, and anyone managing their finances. Whether you operate as a sole trader or run a limited company, knowing which taxes apply to you can help with better financial planning and compliance. Here’s a clear and simple breakdown of how these taxes work in the UK.
What Personal Taxes Are There?
Personal tax refers to the tax you pay as an individual on your earnings. It applies to sole traders, employees, and anyone receiving income from investments or property.
The main types of personal tax include:
Income Tax
If your total earnings exceed the personal allowance of £12,570, you will need to pay income tax. The rates for 2025 are:
- 20% on earnings between £12,570 and £50,270
- 40% on earnings between £50,271 and £125,140
- 45% on earnings above £125,140
For those who are self-employed, income tax is paid through Self Assessment. You must file a tax return each year, with deadlines set by HMRC.
Find out more about personal tax planning here.
National Insurance Contributions (NICs)
If you are employed or self-employed, you must also pay National Insurance Contributions (NICs):
- Self-employed NICs: Class 4 NICs: 9% on profits between £12,570 and £50,270, and 2% on profits above £50,270.
- Employed NICs: Deducted from your salary through PAYE at different rates, depending on income.
As of April 2025, Class 2 NICs have been abolished. Individuals with profits above £6,725 will receive National Insurance credits without payment, maintaining access to contributory benefits, including the State Pension. Those with profits under £6,725 can opt to pay voluntary contributions to preserve these benefits.
Capital Gains Tax (CGT)
If you sell assets such as property, shares, or investments, you may need to pay Capital Gains Tax. The rates depend on whether you are a basic-rate or higher-rate taxpayer, with rates ranging from 10% to 28%.
What is Corporation Tax?
Corporation tax applies to limited companies and certain organisations on their profits. If you run a business registered as a limited company, you must pay corporation tax on all taxable profits.
Corporation Tax Rates for 2025
The current corporation tax rates are:
- 19% for companies with profits up to £50,000
- 25% for companies with profits over £250,000
- Marginal Relief applies for companies with profits between these two thresholds, meaning an effective tax rate between 19% and 25%.
Corporation tax is calculated on profits after allowable expenses but before dividends are paid to shareholders. Unlike personal tax, there is no tax-free allowance—tax is due on all company profits.
Find out more about corporation tax here.
VAT and Business Tax Considerations
If your business turnover exceeds £90,000 per year, you must also register for Value Added Tax (VAT). VAT applies to most goods and services and must be collected from customers and paid to HMRC.
Personal Tax vs Corporation Tax: Which Applies to You?
| Factor | Personal Tax | Corporation Tax |
|---|---|---|
| Who Pays? | Individuals (self-employed, employees, investors) | Limited companies |
| Tax-Free Allowance | £12,570 | None |
| Tax Rates | 20%-45% | 19%-25% |
| National Insurance | Yes (for individuals) | Employers NI (see here) |
| VAT Requirement | No (unless self-employed business meets threshold) | Yes, if turnover exceeds £90,000 |
How Nordens Can Help With Tax:
Whether you need help optimising your personal tax or ensuring your corporation tax compliance, our expert team at Nordens can guide you through the process. We offer tailored advice on tax planning, deductions, and structuring your business for maximum efficiency.
- Need help with self-assessment and personal tax planning? Speak to our experts.
- Want to manage your corporation tax effectively? Learn more here.
Got questions about Tax or need expert advice? At Nordens, we offer assistance with all of your business needs: from your everyday accounting to Advisory, Tax, Audit and more. If you need support with any of the above or just want to speak to a member of the team, get in touch today.
