From start-up to sale and exit, tax planning is central to running a successful small business. Discover the tax strategy tips that’ll help you make the most of your finances.
At a glance
- Strategic tax planning is one of the most important parts of setting up a business, running a business and staying in business.
- The amount of tax you pay will depend on decisions you make on how you structure your business, and how you pay yourself and others.
- Bringing all of your professional advisers – your accountant, tax adviser and financial adviser together will help you set up a strong tax planning strategy for future success.
Spotting a gap in the market or coming up with an innovative service or product is just the start. What keeps a business profitable – and in business – is efficient, 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 six 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:
- Corporation Tax – 25% once you reach £250,000 profit.
- VAT – 20% once you reach 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 – 8.7% basic rate taxpayers, 33.75% higher rate tax payers, 39.95% additional rate tax payers.
- Employee NI contributions – 8% between primary threshold to upper earnings limit. 2% above this threshold.
- Employers’ NIC contributions – 13.8% in 2024/25 rising to 15% in 2025/26.
The amount of tax you pay will depend on decisions you make at the very start on how your business is structured, and how you pay yourself and others. These decisions aren’t set in stone – but it’s important to get off on the right foot.
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 partner or limited company. Each structure has tax advantages and disadvantages, and different ways you can take money out of the business and pay people. 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 set up a limited company, it’s important to think about your remuneration structure – how you pay yourself, and any staff. 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 Dividend Tax 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 creating tax efficient drawings.
Tax strategy 3: keep it in the family
Employing members of the family can be a smart tax move.
If they have no other income, their earnings may fall within their Personal Allowance £12,570 for the 2024/25 tax year, so as a family you’ll be paying less tax. Plus as their employer, you can potentially pay into their pension too, and take advantage of the tax relief available.
‘Family’ can include adult children, siblings or semi-retired parents. They can all be on your payroll, even if they’re not shareholders. So long as they have a legitimate role that you can demonstrate.
Tax strategy 4: making pension contributions
Pension contributions are an important consideration for tax deduction 2024, both for retirement planning and tax efficiency. For sole traders and partners, personal pension contributions are eligible for tax relief at their highest 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 salary – with a ceiling of 8% for combined employer and employee contributions. But as a business owner, you have the freedom to put more in if you wish.
Pension contributions are an attractive benefit for many employees. For you as 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 5: 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 6: allowances – know what you can claim and what you can’t
The more expenses you can legitimately put through your books the better, since many operational expenses you incur are tax deductible, or subject to allowances.
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.
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 six 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.
SJP Approved 19/12/2024