Running a small business in the UK comes with many responsibilities. One of the biggest is managing taxes. Knowing how to save on taxes can help you keep more money in your business. This guide shares seven practical tax tips for UK small business owners. Each tip is up-to-date for the 2025/26 tax year and designed to be clear and actionable.
Why Tax Planning Matters for Small Businesses
Taxes can take a big chunk of your profits. Good tax planning helps you reduce what you owe legally. It also keeps you compliant with HM Revenue & Customs (HMRC). These tips focus on common questions small business owners ask, like how to claim deductions, reduce VAT, and choose the best business structure.
Key Tax Terms to Understand
- Corporation Tax: A tax on profits for limited companies.
- Income Tax: Paid by sole traders and partners on business profits.
- VAT: A tax on goods and services, charged if your turnover exceeds £90,000.
- National Insurance Contributions (NICs): Payments for employees and self-employed workers.
- Capital Allowances: Deductions for business equipment or property costs.
These terms will appear throughout the tips. Let’s dive into the seven ways to save on taxes.
Tip 1: Claim All Allowable Business Expenses
You can deduct certain business costs from your taxable profits. This lowers your tax bill. Keep track of expenses like office supplies, travel, and utilities. Always save receipts to prove these costs to HMRC.
Examples of Allowable Expenses
- Office rent or home office costs (e.g., £4 per week without receipts).
- Business travel, including mileage (45p per mile for cars).
- Advertising and marketing costs.
- Staff salaries and training.
Action Step: Use accounting software like QuickBooks to track expenses. Review your expenses monthly to ensure you claim everything.
Tip 2: Use Capital Allowances for Equipment Purchases
Capital allowances let you deduct the cost of equipment, like computers or machinery, from your profits. The Annual Investment Allowance (AIA) allows you to claim up to £1 million per year on qualifying items.
How to Maximize Capital Allowances
- Buy equipment before your business year-end to claim relief sooner.
- Check if items qualify for AIA, like office furniture or vehicles.
- Consider timing purchases to offset high-profit years.
Action Step: Talk to an accountant to identify eligible items. File claims through your tax return to reduce your taxable profits.
Tip 3: Register for the VAT Flat Rate Scheme
If your turnover is under £150,000, the VAT Flat Rate Scheme can simplify your taxes. Instead of tracking VAT on every sale and purchase, you pay a fixed percentage of your turnover to HMRC. This can save money and time.
Benefits of the Flat Rate Scheme
- Less paperwork than standard VAT accounting.
- You keep the difference between VAT charged to customers and the flat rate paid to HMRC.
- Flat rate percentages vary by industry (e.g., 14.5% for retailers).
Action Step: Check if your business qualifies on the GOV.UK website. Apply through HMRC if your turnover is below the threshold.
Tip 4: Take Advantage of R&D Tax Relief
Research and Development (R&D) tax relief rewards businesses working on innovative projects. Even small businesses can claim if they solve technical problems in science or technology. You can reduce taxable profits or get a cash repayment.
Who Qualifies for R&D Relief?
- Businesses developing new products or processes.
- Companies improving existing technology.
- SMEs spending on staff or materials for R&D projects.
Action Step: Document your R&D activities, like project plans or prototypes. Consult an accountant to file a claim, which can go back two years.
Tip 5: Pay Yourself Tax-Efficiently
How you pay yourself affects your taxes. Limited company owners can use a mix of salary and dividends to minimize tax. Sole traders pay income tax on profits, so timing income matters.
Salary and Dividend Tips for Limited Companies
- Pay a salary up to the personal allowance (£12,570 for 2025/26) to avoid income tax.
- Take dividends within the £500 tax-free allowance. Higher dividends are taxed at 8.75% (basic rate) or 33.75% (higher rate).
- Avoid pushing your total income into a higher tax band.
Action Step: Review your income with an accountant yearly. Adjust salary and dividends to stay tax-efficient.
Tip 6: Make Pension Contributions
Pension contributions are a tax-efficient way to save for retirement. Employer contributions reduce your corporation tax as a business expense. They also avoid National Insurance Contributions (NICs).
Pension Contribution Benefits
- No NICs on employer contributions, unlike salary.
- Contributions lower your taxable profits.
- Employees benefit from tax-free pension growth.
Action Step: Set up a workplace pension scheme. Contribute before the tax year ends (5 April 2026) to claim relief. Check annual limits with animasters to avoid exceeding them.
Tip 7: Review Your Business Structure
Your business structure—sole trader or limited company—affects your taxes. Each has pros and cons. Choosing the right one can save you money.
Comparing Business Structures
- Sole Trader: Simple, but you pay income tax on all profits. Personal liability for debts.
- Partnership: Similar to sole trader but with shared responsibilities.
- Limited Company: Pays corporation tax (19%-25%). Limited liability protects personal assets.
Action Step: Assess your profits and growth plans. Consult an accountant to decide if incorporating as a limited company could lower your taxes.
Common Tax Questions Answered
Here are answers to questions UK small business owners often ask, based on Google’s “People Also Ask” data:
When Should I Register for VAT?
Register for VAT if your taxable turnover exceeds £90,000 in the last 12 months. You must notify HMRC within 30 days of crossing this threshold.
Can I Claim Home Office Costs?
Yes, you can claim £4 per week without receipts for home office costs. For higher amounts, calculate a proportion of heating, lighting, and council tax. Be cautious, as large claims may trigger Capital Gains Tax when selling your home.
How Do I File a Tax Return?
Sole traders file a Self-Assessment tax return by 31 January after the tax year ends (e.g., 31 January 2026 for 2024/25). Limited companies file a CT600 form within 12 months of their accounting year-end. Use HMRC’s online portal or hire an accountant.
Final Thoughts
Saving on taxes doesn’t have to be complicated. By claiming expenses, using allowances, and planning your income, you can keep more of your hard-earned money. Always double-check your eligibility for reliefs and deadlines with HMRC or an accountant. These seven tips are your starting point to run a tax-efficient business in 2025.
