It is no news that the UK is one of the most attractive destinations for entrepreneurs, especially Nigerian entrepreneurs. This is due to her stable economy, access to international markets, and transparent legal system. To thrive in the UK as a Nigerian entrepreneur, you need to understand the systems and structures. As these systems and structures control and shape how business is done in the UK. One of the most important is the UK tax system.
Whether you reside within the UK or run your business remotely from Nigeria, you need a solid understanding of how taxes work in the UK. This is because running a business in the UK is not only about making profits and solving a need. There is also the aspect of avoiding penalties, establishing your business for long-term sustainability, and credibility. Guess what? Understanding the UK tax system helps you identify which tax rule works for your business structure and stay compliant with legal requirements. In the long run, it positions your business for credibility and growth.
If you are unsure of the tax rule that applies to your Business in the UK, then this article is for you. We would be showing you the tax rules that apply to the different business structures and how to stay compliant with them.
Business Structures And Their Tax Rules In The UK
In the UK, the tax rules are highly determined by the structure of the business. In very basic terms, a sole trader and a Limited company do not share the same tax responsibilities. The first thing you need to understand is that your business structure directly affects or determines your tax obligations in the UK. If you are running a Private Limited Company, your tax obligations will be very different from those operating under an umbrella company or as a sole trader.
Sole Trader
This is the easiest business structure in the UK. This is because it is easier to set up. After all, it doesn’t require you to register with Companies House, and also entitles you to all your profits after tax payments. Now, if you run your business alone and keep all the profits, then you are considered a sole trader. It means that you are the exclusive owner of your business.
UK Tax Rules For Sole Traders
As a Sole Trader in the UK, the following tax rules apply to you:
- Register with HMRC: As a sole trader in the UK, you don’t need to register your business with Companies House. However, it is mandatory to register with HMRC for self-assessment if you earn more than £1000 within one tax year. A tax year runs from April 6th to April 5th of the following year. As a sole trader in the UK, you are expected to register your business on or before the 5th of October, at the end of the tax year in which you started trading. That means, if you start your sole trader business between the 6th of April 2025 and the 5th of April 2026, you must register your business by the 5th of October 2026. This is necessary to avoid fines and also a tax investigation by HMRC.
- Income Tax: As a sole trader in the UK, taxes are paid on your profits and not your total revenue. This implies that before you pay your tax, you would subtract your expenses from your income and pay tax on the profit. Also, you get a tax-free allowance of £12,570, but anything you earn above that is taxed. However, this table shows the standard tax rate you would pay as a sole trader.
| Band | Taxable Income | Tax Rate |
| Basic rate | £12,570 to £50,270 | 20% |
| Higher rate | £50,270 to £125,140 | 40% |
| Additional rate | Over £125,140 | 45% |
- National Insurance (NI): As a sole trader in the UK, you not only pay income tax, but you also have to pay National Insurance on your profits. The NI is a UK tax that funds government benefits such as the NHS, pensions, etc. As a sole trader, you would have to either pay a fixed amount weekly or a percentage of your profits for the tax year.
| Type | Description | Tax Rate |
| Class 2 | For profits over £6,725 | £3.45 per week |
| Class 4 | For profits over £12,570 | 9% for £12,570 up to £50,2702% for £50,270 and above. |
- Annual Tax Returns: As a sole trader in the UK, you must submit a tax return every year. The tax return is used to show how much you earned and what you spent. It is also known as the Self-Assessment Tax Return. It is the form you fill out that tells the HRMC:
- Your total income
- Your allowable expenses—what you spent on your business.
- The tax you are supposed to pay on
- Your NI contributions
- Any other income
Limited Companies
This business structure is more tax-effective, especially when the profits are high. It also offers more protection for your business. With this business structure, your company is regarded as a separate entity from you, unlike the sole trader structure. It means that even if your company ever runs into any financial trouble, your assets will be protected.
UK Tax Rules For Limited Companies
Once your company is registered with Companies House as a Limited Company, the following tax rules apply to you.
- Corporation Tax: This is the main tax a limited company in the UK pays on its profits. As a limited company owner, you are expected to register your company for corporation tax with HMRC within 3 months of starting business. The current rate for Corporation Tax is 25%.
- Annual Company Tax Returns: This is also called the CT600 form. It serves a similar purpose to the self-assessment form for sole traders, but it is used to inform HMRC of the amount of profit the business has made and the expenses the company has incurred in one year. You are legally required to file a company tax return every year. Your company tax return must include the following:
- The company’s total income
- Allowable Business Expenses
- Profit before tax
- Corporation tax owed
- Tax reliefs (if applicable)
- Financial Statements
- Annual Accounts: Every Limited Company in the UK is required to report Annual Accounts to Companies House once a year. This is used to check the financial health of your company, i.e, how your company is doing financially. The annual accounts should include the following:
- The balance sheet
- Income and expenses (profit and loss account)
- Auditor’s report (for larger companies)
- PAYE (Pay As You Earn): PAYE is a taxation system used in the UK to collect income tax and national insurance from employees’ salaries, including the director’s salary. If you are running a company in the UK, even from Nigeria, and you intend to pay salaries, you must first register your company for PAYE with HMRC. For PAYE, deductions are reported to the HMRC every month, and the company is required to send a Full Payment Submission (FPS) through payroll software.
- Dividend Tax: One of the ways you can pay yourself as a Limited Company Owner in the UK is through Dividends. Dividends are a share of the company’s profit that is paid to shareholders after corporation tax has been paid. Now, unlike regular salaries, which are taxed through PAYE, there is a different taxation system for dividends. And it is usually at lower rates when compared to other taxing systems.
| Band | Taxable Income | Tax Rate |
| Basic rate | £12,570 to £50,270 | 8.75% |
| Higher rate | £50,270 to £125,140 | 33.75% |
| Additional rate | Over £125,140 | 39.35% |
As a Nigerian entrepreneur running a company in the UK, you should know that paying yourself in dividends can be more tax-efficient than taking a full salary.
Umbrella Companies
With the Umbrella Company business structure, you are more or less an employee of the company you are working with. This means that the company would be acting as a legal employer for you. They would handle invoicing, taxes, and payroll on your behalf. With this business structure, you would not need to register with HMRC or even submit a self-assessment return. Instead, you would be taxed just like any other UK employee.
UK Taxes Every Nigerian Entrepreneur Must Know
As a Nigerian Entrepreneur about to, or already running a business in the UK, it is non-negotiable to understand the core UK taxes for businesses. These taxes are dependent on your business structure and income level. Here are the most important UK taxes every Nigerian Entrepreneur must know:
Corporation Tax
This is the tax paid by a Limited Company in the UK from the company’s profits. It is paid 9 months and 1 day after the end of the company’s accounting year. The corporation tax applies to:
- Profits from trading
- Investments
- Sales of the company’s assets
Income Tax
This is the tax paid by sole traders and other individuals from personal income, which might include:
- Salaries
- Freelance earnings
- Investments
- Dividends
If your total earnings are between £0 to £12,570, you would have a tax-free allowance. Also, you are required to do a self-assessment test annually.
PAYE
PAYE, which stands for Pay As You Earn, is used to handle tax deductions for employees and deductions. For a Limited Company, the company calculates and deducts tax and national insurance from the salary set for the employees and the director. After calculating, the company goes on to send the deducted money to the HMRC every month. The rates for PAYE are the same as income tax, but don’t require the payers to do a self-assessment test afterwards. This is because, unlike the income tax, the structure of PAYE requires the company to pay taxes on behalf of the employees and directors.
National Insurance
This is the tax that funds Pensions, the National Health Service (NHS), and other government benefits. If you are a sole trader, you either pay a fixed weekly amount or a percentage of your profits every year. For Limited Companies, the NI for the employees and directors is paid through PAYE. The company also pays the employer’s NI at a 13.8% rate.
Value Added Tax (VAT)
VAT is the tax added to goods and services sold in the UK. It is not a tax on your business, but the tax that your business collects from customers and passes on to the HMRC. Your business is expected to register for VAT if your UK turnover reaches £90,000 within one year, and if you are importing goods into the UK. The VAT rates in the UK are as follows:
| VAT Type | Rate | Application |
| Zero rate | 0% | Food, books, Children’s clothes, public transportation, etc |
| Reduced rate | 5% | Home energy (gas, electricity, etc.), children’s car seats, mobility aids for the older persons, etc. |
| Standard rate | 20% | Adult clothing, electronics, beauty and care products, online courses, marketing services, event tickets, etc. |
| Exempt | Nill | Insurance services, Education and training, medical and healthcare services, rent, etc. |
Dividend Tax
A dividend is a share of the company’s profit paid to shareholders after corporation tax has been paid. It is regarded as a tax-efficient way to earn because dividends are taxed separately from salaries and are taxed at lower rates. The first £500 of your dividend income is tax-free, and the rest is taxed based on your income band.
| Band | Taxable income | Tax rate |
| Basic rate | £12,570 to £50,270 | 8.75% |
| Higher rate | £50,270 to £125,140 | 33.75% |
| Additional rate | Over £125,140 | 39.35% |
Capital Gains Tax (CGT)
This is the tax paid when you sell an asset that has increased in value. You are only taxed on the profit, not the entire amount gotten from the sale. If you are a Nigerian entrepreneur with investments, shares, or properties in a UK business, the CGT would only apply when you sell or transfer those assets. If you sell a residential or commercial property in the UK while in Nigeria, you must report the sale and pay the CGT within 60 days of the sale. Lastly, the CGT rate is determined by the type of assets sold.
| Type of Asset | Tax Rate (Basic) | Additional Rates |
| Shares | 10% | 20% |
| Residential Properties | 18% | – |
Business Rates
This is a tax charged on non-residential properties used for any business in the UK, e.g, shops, offices, warehouses, etc. If you are a Nigerian entrepreneur running a business in the UK and you have a physical office space, you would pay Business Rates. The business rate bill is calculated based on the property’s rateable value, which is also estimated in its rental value. Business rates are also a deductible expense, which can reduce your company’s taxable profits, because it is also part of the company’s expenses.
How To Register For Tax In The UK
As we have established so far, if you plan to do business in the UK as a sole trader or through a limited company, you must register with the HMRC (His Majesty’s Revenue and Customs). The registration process is determined by business structure.
How To Register For Tax In The UK As A Sole Trader
- Go on to the HMRC website and set up a government gateway account
- Sign up for Self Assessment
- Fill out the online registration form with the necessary details about your business and yourself.
- HMRC would send you a Unique Taxpayer Reference (UTR) within one to two weeks of registration, and an activation code which you would use to activate your self-assessment service.
- Ensure to activate your account within 28 days.
How To Register For Tax In The UK As A Limited Company
- Register your company with Companies House.
- Once the registration is complete, you will receive a certificate of incorporation.
- HMRC would send your company’s UTR by post to your company’s office within 2 to 3 weeks of incorporation.
- Go to the HMRC website and log in to your business tax account.
- Provide company information
- Complete the Corporation Tax Registration Form
- Submit your registration.
Conclusion
As a Nigerian entrepreneur, understanding the UK tax system and your tax obligations is one way to keep your business free from penalties. Aside from this, it sets your business up for long-term success. If you have not yet registered your UK-based business for tax payment, you should go on to the HMRC website to kickstart your registration process immediately.
