Accountant for Hairdressers: Salon Tax, VAT and Payroll in 2026/27

Where a Salon's Money Comes From, and What Each Flow Costs You

Money reaches a hairdressing business by four routes, and each one is taxed on different rules. Sort them apart on paper and most of the year's tax questions answer themselves.

• Your own takings. What clients pay you for cuts, colour and treatments. Trading income, taxed as profit after expenses, and standard-rated for Value Added Tax (VAT) at 20% once you are registered.
• Chair rent you receive. What self-employed stylists pay you for the use of a chair or a station. Still your trading income, still counts towards your own VAT threshold, and standard-rated at 20% once you are registered. It is not exempt rent from a property.
• Retail product sales. Shampoo, conditioner, styling products and tools sold over the counter. Standard-rated at 20% like the services, riding the same registration, and counted in the same turnover total. The difference is on the purchase side: retail stock carries reclaimable input VAT that a services-only salon does not have.
• Tips. Taxable in every case, but who declares them and how depends on whether the cash went straight to the stylist or through the salon's till.

The reason this matters more in hairdressing than in most trades is that one premises can carry all four flows at once, split between people with different tax statuses. An owner cutting hair, two employed juniors on payroll, two self-employed stylists paying rent, a shelf of retail stock and a card machine collecting tips is an ordinary high street salon and four separate tax positions in one room.

An accountant who works with salons should be able to tell you, without asking twice, which of your money is in your VAT turnover, which of your people are on payroll, and which of your costs you can deduct. Each flow gets its own section below.

VAT for Salons and Freelance Hairdressers

VAT is where salons get caught out most often, and almost always for the same reason: the threshold is tested on turnover, not profit, and it counts money that many owners assume belongs to somebody else.

The registration threshold is £90,000 of taxable turnover in any rolling 12-month period (2026/27). The deregistration threshold is £88,000. Rolling means exactly that: you test the last 12 months at the end of every month, not at the end of your accounting year. If the total goes over £90,000, you have 30 days from the end of that month to tell HMRC using form VAT1, and registration takes effect from the first day of the second month after you went over.

What goes into the total, for a salon owner:

• Service takings from your own clients
• Retail product sales
• Chair or station rent received from self-employed stylists
• Any other standard-rated or zero-rated business income

What does not: cash tips a client hands directly to a stylist, because that money never was yours.

A worked example: Bethan's salon in Stoke-on-Trent

Bethan runs a three-chair salon as a sole trader. She cuts and colours herself, sells a small retail range, and lets two of the chairs to self-employed stylists. Her income for the 12 months to 31 March 2027:

• Own service takings: £1,200 a week x 52 = £62,400
• Retail product sales: £120 a week x 52 = £6,240
• Chair rent from two stylists: £160 a week each x 2 x 52 = £16,640

Rolling 12-month taxable turnover: £62,400 + £6,240 + £16,640 = £85,280. She is £4,720 under the £90,000 threshold, so no registration is due.

Now she lets the third chair from April 2027, on the same £160 a week. That adds £8,320 over the following 12 months. Her rolling total becomes £62,400 + £6,240 + £16,640 + £8,320 = £93,600, which is over the threshold. She has to spot that at a month end, notify HMRC within 30 days, and start charging VAT.

What registration then costs her, roughly: if she keeps every price exactly where it is, the VAT is inside the £93,600 rather than on top of it. At 20% that is one sixth of the gross, so £93,600 ÷ 6 = £15,600 of output VAT for the year, before she reclaims the input VAT on her product purchases and her other standard-rated costs. Retail stock is the flow that softens the blow, because the VAT on what she buys to sell comes back.

Three chairs at £160 brought in £24,960 of rent and cost her £15,600 of VAT on the whole business. That is the arithmetic worth doing before letting the extra chair, not after. Our page on the VAT registration threshold covers the notification mechanics in more detail.

Flat rate or standard scheme?

Most salons register under the standard scheme, charge 20% and reclaim the VAT on their purchases. The Flat Rate Scheme is the alternative: you still charge clients 20%, but you pay HMRC a fixed percentage of your gross turnover and give up most input VAT recovery. The published sector rate for hairdressing and beauty is 13%, and there is a 1% discount in your first year of registration. Check the current HMRC flat rate table before you commit, because the sector rates do move.

The trap is the limited cost trader rule. If you spend less than 2% of your VAT-inclusive turnover on relevant goods, or less than £1,000 a year, you must use the 16.5% rate instead of your sector rate. A services-heavy salon with almost no retail stock lands there easily, and at 16.5% the flat rate scheme is rarely better than the standard scheme. A salon with a real retail range usually stays on the standard scheme anyway, because the reclaim on stock is worth more than the simplicity. The comparison is set out on our flat rate scheme page.

If you rent a chair rather than own the salon

Your turnover for VAT is your own income from your own clients. The salon owner's takings are not yours and yours are not theirs. You register when your own income crosses £90,000 on the same rolling test.

The awkward part is the rent. If the salon owner is VAT registered, they are charging you 20% on top of the chair fee, and you cannot recover it unless you are registered yourself. On £160 a week that is £32 a week, or £1,664 a year, that a stylist below the threshold simply absorbs as a cost. Voluntary registration can be worth modelling if you also buy significant colour and product, but it brings quarterly returns and VAT on your own client prices with it.

Chair Rental Income: Tax Treatment

Chair rent raises a VAT question and a status question. Neither answer constrains the other. One is VAT: what rate applies to the rent. The other is employment status: whether the stylist is genuinely self-employed. Answering one tells you nothing about the other.

The VAT answer

Letting a chair, a station or a room to someone who uses it mainly to provide hairdressing services is standard-rated at 20%. It is not exempt letting of land. That has been the position since 1 October 2012, when VATA 1994 Sch 9 Group 1 was amended to carve these facilities out of the land exemption.

The part that catches owners out is the second-order effect:

• Describing part of the charge as rent for the floor space changes the invoice, not the supply. It is one standard-rated supply of facilities, however it is described on the paperwork.
• The rent counts towards your own £90,000 threshold. A salon that would be comfortably under on its own takings can be pushed over by the chairs.

A separate room let bare is a different supply and a narrow one; it is not what a chair on the salon floor is.

The income tax answer

If you are a sole trader salon owner, chair rent is added to your other salon income and taxed as self-employment profit. It goes on the SA103 self-employment pages of your return, not the property pages. You deduct a fair share of the costs of providing the space against it: premises rent, business rates, utilities, cleaning, insurance, reception cover.

If you run the salon through a limited company, the rent is company income and the company pays corporation tax on the profit. You then take money out as salary, dividends or, carefully, a director's loan.

The status answer, in short

A properly run rent-a-chair stylist is self-employed. The factors that carry the weight are the ordinary employment status factors applied to a salon: does the stylist have their own clients, set their own prices, buy their own products and kit, keep their own takings and pay the rent whether the week was busy or quiet, and are they free to work elsewhere? A stylist paid a percentage on salon-set prices, working salon-set hours, using salon products, looks like an employee whatever the agreement is headed.

One boundary worth naming rather than testing: splitting one business into several entities so that each stays under £90,000 is disaggregation, and HMRC can issue a direction treating the parties as a single taxable person. Genuinely independent businesses with their own clients, their own money and their own risk are separate; a shared till, shared staff and shared premises pointing at one business are not.

Chair rental has enough detail on both sides of the deal to need its own page. If you are setting up or reviewing an arrangement, read rent a chair in a salon: tax, VAT and employment status, which works through the salon owner's position and the stylist's position side by side.

Tips and Gratuities: Tax Treatment

Tips are taxable in every version. What changes is the route they take.

Cash a client hands directly to a stylist belongs to that stylist and goes on their own Self Assessment return as income of their trade. It was never salon money, so it is not in the salon's turnover and it does not touch the salon's VAT.

A service charge or card tip the salon collects and then shares out is different. Money the salon distributes to employed staff is earnings, so it runs through payroll with income tax and National Insurance contributions (NIC) deducted before the staff member sees it. Getting that wrong is a payroll error, not a tips error, and it compounds every pay run until someone spots it.

One point that is easy to miss on the VAT side: a genuine, freely given tip is outside the scope of VAT, so there is no output tax on it. A compulsory service charge added to the bill is part of the price of the service and is standard-rated like the rest of it.

Keep a record of tips received, cash included. A notebook or a column in a spreadsheet is enough. HMRC has been active on undeclared tips in personal services, and reconstructing a year of cash from memory in an enquiry is a poor position to be in.

PAYE and Employed Stylists

Employing stylists directly means operating Pay As You Earn (PAYE). You register as an employer with HMRC, run payroll each pay period, deduct income tax and National Insurance, and report every payment to HMRC on or before payday under Real Time Information (RTI). Staff get a payslip each time and a P60 after the tax year ends.

Employer National Insurance is 15% on earnings above the £5,000 a year secondary threshold, which has been the position since 6 April 2025. The older 13.8% rate above £9,100 applied only up to 5 April 2025, so any calculator or article still using it will understate your bill. The Employment Allowance offsets up to £10,500 a year of employer NIC for most businesses, though not for a company whose only employee is a sole director.

Take a salon with three employed stylists on £25,000 each. Employer NIC per stylist is 15% of the £20,000 above the threshold, so £3,000 each, £9,000 across the three. The Employment Allowance of £10,500 covers all of it. You still register, still run payroll and still file RTI on time, but the cash cost of the employer NIC is nil at that size. Add a fourth stylist on the same money and £1,500 of it starts falling on you.

Auto-enrolment sits alongside this. Anyone aged 22 to State Pension age earning above £10,000 has to be assessed and, unless they opt out, enrolled with employer contributions on qualifying earnings. It is a cost to price in before you offer the job, not after.

Where an owner is choosing between employing a stylist and letting them a chair, the honest comparison is not just the NIC. Employment gives you control over hours, prices and standards. A chair let gives up that control, and if you keep the control while calling it a chair let, you have the cost of employment plus the risk of being found out.

Sole Trader or Limited Company for a Hairdresser?

Most hairdressers start as sole traders, and for good reason. You register for Self Assessment, file one return a year, and the admin is proportionate to the money. The trade-offs are personal liability for business debts and paying income tax plus Class 4 NIC on your profits. Class 2 NIC stopped being payable from 6 April 2024 for anyone with profits at or above the small profits threshold, and below that it can still be paid voluntarily to protect your state pension record.

A limited company separates the business from you. The company pays corporation tax at 19% on small profits, rising towards 25% with marginal relief in between, and you take money out as salary and dividends.

The old rule of thumb was that incorporation started paying for itself somewhere around £40,000 to £50,000 of profit. That rule has weakened, and it is worth seeing why before you act on it. Two changes moved against the company route: employer NIC at 15% from a £5,000 threshold now bites on a director's salary, and the basic rate of dividend tax rose to 10.75% from 6 April 2026.

On profits of £55,000 in 2026/27, a sole trader pays roughly £9,432 of income tax (20% on the £37,700 between £12,570 and £50,270, then 40% on the £4,730 above) plus about £2,357 of Class 4 NIC (6% then 2% on the same bands). Around £11,789 in total. The personal allowance, the income tax bands and the Class 4 rates and thresholds used here are the 2025/26 figures, still current when this page was checked in August 2026.

A company extracting the same £55,000 in full, on a £12,570 salary and the balance as dividends, lands close to £12,500 once you add the employer NIC on the salary, corporation tax at 19% on what is left, and dividend tax at 10.75%. That is slightly worse, not better, and it comes with annual accounts, a confirmation statement and a payroll to run.

A company still helps if you are leaving profit in the business to fund a fit-out or a second site, if you want the liability separation, or if profits are high enough that the marginal rates start to work for you. It rarely helps a single-chair freelancer drawing everything they earn.

Watch the director's loan account either way. Money taken out beyond salary and dividends sits there, and if it is still outstanding nine months and one day after the year end the company pays a tax charge on it, at 35.75% for loans made on or after 6 April 2026.

Allowable Expenses for Hairdressers

The test is whether the cost is wholly and exclusively for the business. Most of a salon's spending passes it easily; the arguments happen at the edges, on clothing, travel and home use.

Straightforward for hairdressers:

• Products and consumables: shampoo, conditioner, colour, developer, foils, gloves, towels, styling products
• Tools and equipment: scissors, clippers, dryers, straighteners, tongs, brushes, trolleys, chairs and basins
• Chair rent or premises rent, business rates and service charges
• Utilities: the full cost for a salon, a fair proportion if you work from home
• Insurance: public liability, treatment risk, equipment and stock cover
• Training and courses that keep your existing skills current, including the travel to get there
• Professional subscriptions and trade body membership
• Marketing: website, booking system, social advertising, flyers, cards
• Salon software, card machine fees and payment processing charges
• Bank charges and accountancy fees
• Protective or branded clothing such as tunics, aprons and gloves. Ordinary clothes you could wear outside work are not allowable however smart the salon expects you to look

On equipment, the Annual Investment Allowance (AIA) usually lets you deduct the whole cost of qualifying plant and machinery in the year you buy it, up to £1,000,000 in a 12-month period. For a salon that means a full fit-out can often be relieved immediately rather than written down over years.

Mileage. If you do mobile hairdressing, the approved mileage rates rose to 55p a mile for the first 10,000 business miles and 25p after that from 6 April 2026. Travel between clients counts. Travel from home to a salon you work from regularly does not, because that is ordinary commuting.

Working from home. The simplified flat rate is £10 to £26 a month depending on the hours you work at home. Alternatively, work out the actual proportion of your home used for the business and claim that share of rent or mortgage interest, council tax, utilities and insurance. The flat rate is easier and usually smaller. If you run a home salon rather than doing paperwork at the kitchen table, the actual-cost method is normally worth the effort.

Keep the receipts. HMRC can ask to see records up to six years after the tax year, and photographs or digital copies in a bookkeeping app are acceptable evidence. That habit stops being optional once Making Tax Digital reaches you.

Making Tax Digital for Income Tax

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) replaces the once-a-year return with digital records and quarterly updates. The phasing runs on qualifying income:

• April 2026 for qualifying income over £50,000
• April 2027 for qualifying income over £30,000
• April 2028 for qualifying income over £20,000

Qualifying income is gross income from self-employment and property before expenses, not profit. That distinction catches salon owners out. Bethan's £85,280 of turnover puts her in the April 2026 group even though her profit after rent, stock, wages and everything else is a fraction of it.

In practice it means keeping your records in MTD-compatible software, submitting a quarterly update of income and expenses for each business, and finalising the year afterwards. Xero, QuickBooks, FreeAgent, Sage and several cheaper options all support it. If you are still on a shoebox and a spreadsheet, moving early is easier than moving in the quarter it becomes compulsory, because the first quarter under a new system is the one that goes wrong.

If you trade through a limited company, MTD for ITSA does not apply to the company. It can still apply to you personally on any self-employment or rental income you have outside it. Our page on MTD for Income Tax for self-employment and rental income sets out the quarterly cycle.

Choosing an Accountant for Hairdressers

A generalist who has never worked with salons will usually get the return filed and miss the two things that cost real money: the chair rent sitting in the VAT threshold, and stylists labelled self-employed who are not.

Questions worth asking before you appoint anyone:

• Does chair rent I receive go into my VAT turnover, and at what rate do I charge it?
• How would you test whether my chair renters are genuinely self-employed?
• On my product spend, does the flat rate scheme or the standard scheme win?
• What is my qualifying income for MTD, and which April does it start for me?
• At my profit level, does incorporating actually save anything once employer NIC and the 2026/27 dividend rates are in?

An answer that comes straight back, with numbers, tells you what you need to know. So does an answer that starts with "it depends" and then explains what it depends on.

At Holloway Davies we work with salon owners and self-employed stylists across the UK: Self Assessment and company accounts, VAT registration and scheme choice, payroll for salon staff, and reviewing chair rental arrangements before HMRC does. If you work in beauty rather than hair, our page for accountants for beauty therapists covers the same ground for treatment-based businesses.

If you want someone to go through your numbers and tell you what needs to change before the next deadline, get in touch.

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