Tax planning strategies business owners should know

Spotting a gap in the market or coming up with an innovative service or product is just the start. What helps keep a business profitable - and in business - is efficient and effective tax planning.

It’s one of the most important parts of setting up a business, running a business and staying in business.

You don’t want to pay more tax than you need to, but you also don’t want to trip up because you’re not optimising your tax situation.

Check that you know our five tax strategy essentials to get your business finances match fit.

What taxes do business owners need to pay?

Any business is taxed on its profits so the more you make, the more you may pay. The taxes you may need to consider this tax year (2024/25) include: 

• Corporate Tax – 25%, with a small profits rate of 19% for profits under £50,000 and marginal relief for profits between £50,000 and £250,000. 
• VAT – 20% standard rate, with business required to register once their taxable turnover exceeds the annual threshold of £90,000
• Capital Gains Tax – 18% for basic taxpayers or 24% for higher or additional taxpayers.
• Business Asset Disposal Relief (BADR). 10% on the first £1 million, increasing to 14% in April 2025 and 18% in April 2026.
• Income tax for salary – 20% basic rate taxpayers, 40% higher rate and 45% additional rate taxpayers.
• Income tax for dividends - 8.75% basic rate taxpayers, 33.75% higher rate taxpayers, 39.35% additional rate taxpayers
• Employee NI contributions – 8% between primary threshold to upper earnings limit. 2% above this threshold. 
• Employers' NI contributions - 13.8% in 2024/25 rising to 15% in 2025/26.

The amount of tax you pay is governed by statute and based on how your business structured and how you pay yourself and others. Therefore a clear understanding of the tax implications is beneficial from the outset (although you can change your business structure should it be beneficial to do so.) 

Tax strategy 1 – what will your trading structure be?

Before you even start trading, you have a key decision to make about what trading structure you’ll be – sole trader, a partnership, a limited liability partnership or limited company. Each structure has tax advantages and disadvantages, and different ways you can take money out of the business and pay stakeholders. Trading structures also have varying levels of liability (if a venture doesn’t work out). A sole trader’s liability is greater than a limited liability partnership for instance.

Although it’s primarily the role of your accountant to explain the different trading structures, it’s good to involve your financial adviser in these discussions right from the start.

One structure isn’t better than the other, but it’s a question of knowing which one will suit you best, and the future you see for your new venture. 
It’s important to realise you’re not bound to this structure forever. You may start as a sole trader and, as the business expands, choose to join with a partner, or incorporate.  

Getting the right trading structure in place is the first step.

Tax strategy 2: choosing a tax-efficient way to pay

If you have a limited company, creating a tax efficient remuneration structure for you and your staff is an important decision. This is the salary versus dividend question. If you have a very profitable year you could choose to pay more dividends, as well as or instead of bigger bonuses. But with recent changes to the rate of Corporation Tax, the increase in the income tax rates on dividends and the reduction of the Dividend Allowance you might decide on a fixed salary structure.

Incorporating pension contributions into your remuneration structure is an important part of tax-efficient profit extraction.

Tax strategy 3: making pension contributions

Pension contributions are an important consideration for tax deduction, both for retirement planning and tax efficiency. For sole traders and partnerships, personal pension contributions are eligible for tax relief at the individual’s marginal rate of income tax. Employer contributions are highly tax efficient since they are generally an allowance expense for corporation tax and not a benefit in kind for the employee.

Under the auto-enrolment regulations, all eligible employees must be part of a pension scheme (unless they choose to opt out). As their employer, you must contribute a minimum of 3% of their qualifying earnings – with a total minimum contribution of 8% when combined with employee contributions. As a company director, you have the flexibility to make additional pension contributions, which can be a tax-efficient way to extract profits from your business.

Pension contributions are an attractive benefit and for the business owner, you’re also moving money out of your business. So, if the business falters or fails, you have less capital at risk.

Once the money is out of the business and in a personal pension, it's in your name and separate from the business.

Tax strategy 4: Moving money out of a business tax efficiently

As a limited company, you have several options if you want to take money out of your business tax efficiently.

The starting point is making sure you’ve chosen the most tax-efficient way to pay yourself and others, and also maximising pension contributions. 

At some point, you should discuss with your financial adviser what will eventually happen in the long-term. You might be looking to scale up and sell, or pass the business on to family members, or a partner. Or you might want to discuss how your business can provide you with some of your retirement income in the future. Long-range financial planning will help make sure you’re working towards your goal as tax-efficiently as possible.

Tax strategy 5: allowances – know what you can claim and what you can’t

A Capital Allowance is where you offset the costs of buying assets for the company against your Corporation Tax liability. In the early years when you may be scaling up and investing in both people and plant, such as IT equipment, office furniture, storage facilities or plant and machinery, you should maximise this important allowance.

Sole traders, entrepreneurs or businesses running from home can also potentially claim a percentage of household bills, such as heating, lighting, council tax, and a part of rent or mortgage interest, as business expenses if trading from home. But this needs to be approached with caution, consideration and sound advice. 

Do you qualify for Research and Development tax credits?

Research and Development tax credits are often overlooked. No business stays in business on the strength of one idea. You may also be eligible for a tax break when researching or developing new products or services. 

Any expenses you incur could be eligible for a cash payment or a reduction on your Corporation Tax.R & D tax credits, as they’re sometimes known, can be complex so to know if your innovation qualifies, speak to your accountant.

Smarter tax planning for business owners

These are the five essentials of a strong tax planning strategy for your business. But there’s one more. Involving all your professional advisers – your accountant, tax adviser and financial adviser in your tax planning is absolutely key. Accountants focus on tax years, but financial advisers think in decades to ensure you and your business enjoy a long, successful future.

If you have a question about tax breaks for businesses, we’re always happy to help - get in touch today.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

Exit strategies may involve the referral to a service that is separate and distinct to those offered by St. James's Place.

Auto enrolment is not regulated by the Financial Conduct Authority.