Tax liability

Tax liability

Tax liability is the amount of tax you legally owe to HM Revenue & Customs (HMRC) for a period or a specific transaction. It arises from profits, sales, payroll or other taxable events and stays on your books until it’s paid or offset by reliefs or credits.

Common tax liabilities for UK small businesses include:

  • Income Tax or Corporation Tax: tax on business profits, depending on your business structure.
  • VAT: tax on taxable sales, usually reduced by eligible VAT on business purchases.
  • PAYE and National Insurance: amounts deducted from employees’ pay plus employer contributions that you must pay to HMRC.
  • Other sector-specific obligations: for example, schemes or duties relevant to your trade.
Box illustration

Simple example

You charge VAT on a sale, which increases your VAT liability; VAT on your business costs can reduce it. Profit for the period can create a Corporation Tax liability if you trade through a company.

Track each liability separately and keep clear records, so you know what is due and when. If you trade with customers or suppliers overseas, you may also create tax liabilities in other countries, as rules and registration requirements can differ.

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