Whether you're a sole trader, self-employed professional, or running a limited company, taxes are a vital part of managing your finances. Two of the most commonly discussed tax obligations in the UK are income tax payable and corporate tax payable. Though they sound similar, they differ significantly in terms of who pays them, how they’re calculated, and the broader implications for your business.

In this blog, we’ll explore the primary differences between income tax and corporate tax, illustrated with examples. We’ll also cover how specialist services like personal taxation services, corporate taxation services, and modern bookkeeping solutions can make tax management simpler—especially for industries like construction where WIP construction accounting and accounting software for construction play a pivotal role.

What is Income Tax Payable?

Income tax is a tax levied on individuals' earnings. This includes employees, sole traders, and partnerships. In this setup, tax is paid personally and based on total income earned during the tax year from various sources—self-employment, employment, dividends, property, and more.

For instance, if you are a self-employed construction worker making £60,000 annually, you will pay income tax after deducting allowable expenses. The tax you owe will depend on your total earnings and which tax band they fall into.

Example:

Let’s take "John," a self-employed plasterer earning £60,000 annually:

• The first £12,570 is his personal allowance and is tax-free.

• The next £37,700 is taxed at 20% (£7,540).

• The remaining £9,730 is taxed at 40% (£3,892).

That brings John’s total income tax payable to £11,432, not including Class 2 and 4 National Insurance Contributions. Using tailored personal taxation services can help John reduce this liability by ensuring every allowable expense, relief, or deduction is properly applied.

What is Corporate Tax Payable?

Corporate or Corporation Tax is paid by incorporated entities like limited companies. This tax is applied to the company’s profits after all business-related expenses have been deducted. Unlike income tax, it is not paid by individuals personally but by the company itself.

As of the 2025 tax year, companies with profits above £250,000 are taxed at 25%, while those under that threshold may qualify for marginal relief, resulting in a slightly lower effective rate.

Example:

Let’s consider "XYZ Constructions Ltd," a small construction firm with net profits of £100,000:

• After applicable reliefs, they fall under marginal relief and are taxed at around 22%.

• The company’s corporate tax payable becomes £22,000.

Here, corporate taxation services play a critical role in ensuring the business takes advantage of available reliefs, including capital allowances, R&D credits, and loss carry-backs.

Major Differences Between Income and Corporate Tax

While both are taxes on profit, income tax and corporate tax are fundamentally different in structure and implication.

Income tax is paid by individuals, usually through self-assessment returns. It has progressive tax rates—meaning, the more you earn, the higher your tax rate. This makes it particularly burdensome for high-earning sole traders or freelancers.

Corporate tax, on the other hand, is fixed or marginal depending on your profit bracket. Businesses may also use strategies like deferred income or capital investment to manage tax liabilities. Moreover, companies can retain profits within the business, reinvest them, or distribute them as dividends.

Another key difference is in reporting and payment deadlines. Income tax under self-assessment is generally due by 31 January each year, while corporation tax is payable 9 months and 1 day after the end of the company’s financial year.

How This Affects the Construction Sector

The construction industry, in particular, illustrates the difference well. Many construction professionals start as sole traders and move on to form limited companies as their operations expand. This shift changes the entire tax strategy—from paying income tax personally to managing corporate tax through the company.

Take "Sarah," a builder who began her business as a sole trader. Her profits reached £75,000 annually, meaning she paid a hefty amount in income tax and National Insurance. Upon becoming a limited company, her business paid corporate tax on its profits, and Sarah drew a modest salary with dividends on top.

This allowed her to manage her personal tax obligations more efficiently with the help of personal taxation services, while the business benefited from experienced corporate taxation services.

Moreover, Sarah adopted WIP construction accounting to better reflect her project-based revenue and manage tax in a more predictable way. This method aligns the recognition of income and costs with the actual progress of work, which is crucial for large or long-term construction projects.

Importance of Accurate Bookkeeping

No matter your business structure, you need accurate records to determine profits and calculate taxes correctly. That’s where bookkeeping solutions come in.

In construction, this becomes even more important due to complexities such as subcontractor payments, CIS deductions, retentions, and material purchases. Failure to properly account for these can distort profits and result in incorrect tax filings.

Cloud-based accounting software for construction can track expenses, generate real-time reports, calculate VAT, and streamline payroll. This reduces the risk of overpaying or underpaying taxes and keeps the business HMRC-compliant.

Dividend and Salary Planning for Company Directors

If you operate through a limited company, you have flexibility in how you draw income—through salary and/or dividends. Salaries are subject to PAYE and National Insurance, whereas dividends are taxed at separate rates (8.75%, 33.75%, or 39.35%) depending on your income bracket.

With proper guidance, you can draw a tax-efficient combination of salary and dividends. For example, paying yourself a small salary just above the National Insurance threshold and taking the rest as dividends could reduce your total tax liability. This strategy is best managed with the help of corporate taxation services and personal taxation services to ensure compliance while optimising tax exposure.

Choosing the Right Structure for Tax Efficiency

Whether you're just starting or considering restructuring your business, understanding the tax implications of your chosen model is essential. Sole traders might benefit from simplicity in the early stages, but as income grows, the tax savings and legal protection of forming a limited company become more attractive.

When choosing a business structure, consider:

• Your expected annual profits

• Risk exposure and liability

• Administrative capabilities

• Long-term business goals

• Access to professional accounting and tax support

Final Thoughts: Strategy is Key

Taxes are a reality for every UK business owner. The key lies in understanding which taxes apply to you, planning ahead, and using the tools and support systems available to your advantage.

If you're a self-employed contractor or run a small limited company—especially in a complex industry like construction—you can't afford to guess your way through tax season. Working with skilled construction accountants who understand your industry-specific challenges, such as WIP construction accounting, can make a massive difference.

With accurate recordkeeping, tailored bookkeeping solutions, and expert guidance, you’ll not only remain compliant but also identify opportunities to save money and grow your business smarter.

Need Help Navigating Your Tax Obligations?

Whether you're a sole trader paying income tax or a company director managing corporate tax, expert support can save you time, stress, and money.

[Contact E2E] today to explore how our team of tax professionals, construction specialists, and software experts can tailor a solution that fits your needs. From corporate taxation services and personal taxation services to advanced accounting software for construction, we’re here to help you take control of your financial future.