Tax planning for small business owners
First of all, it’s worth double checking what tax band the business is actually in. Be careful of the rules if you run a small limited company that has what are known as associated companies – for example, one entity to hold investments while the other acts as the main entity for trading.
Associated companies can reduce tax thresholds and pull your business into the higher rate sooner. This is because, normally, if profits are £50,000 or less, the company is subject to the 19% small profits rate. If profits are above £250,000, it’s the main corporation tax rate of 25%. But the gap between is where marginal relief applies, which means the business pays an effective rate of somewhere between 19% and 25% depending on how far company profits sit between those two thresholds. The £50,000 and £250,000 limits are divided by the total number of associated companies you have, including the company itself.
So, if you have one associated company, the limits are split in two, becoming £25,000 and £125,000. If you have three associated companies, the thresholds are divided by four, so the lower limit becomes £12,500 and the upper limit becomes £62,500.
Charles Stanley isn’t a tax adviser. The definition of associated companies is complex and can create unexpected tax outcomes. Independent tax advice is strongly recommended.
The tax benefits of being your own boss
One of the main complaints about the income tax system today is being unfairly punished when earning between £100,000 and £125,970. Once taxable income passes £100,000, the personal allowance starts to reduce by £1 for every £2 of income. By the time income reaches £125,140, it’s gone altogether. There’s an effective 60% marginal tax rate on earnings in that bracket.
If you’re a sole trader, your income is usually profit from your business, then subject to National Insurance and income tax which is deducted through a self-assessment. However, if you have a limited company, you have more control, so careful remuneration planning can help manage exposure to this band.
In broad terms, business owners can decide how much they’re paid, and the way they want to be paid – in salary, dividends or pension contributions.
A common approach is to keep salary relatively modest and take further income as dividends. But be aware: all income, including dividends, counts towards the £100,000 threshold where the personal allowance starts to taper. The dividend allowance of £500 is so low that high earners are unlikely to get much comfort from it, and dividends became subject to higher tax rates anyway from 6 April 2026. The tax changes are shown below.
| Before 6th April 2026 | From 6th April 2026 | |
| Basic rate dividend tax | 8.75% | 10.75% |
| Higher rate dividend tax | 33.75% | 35.75% |
| Additional rate dividend tax | 39.35% | 39.35% |
Source: HMRC.
In fact, they’re effectively taxed twice. Once, inside the company as they come from company profit which is subject to corporation tax. And then again as dividends personally. We’ve crunched the numbers below to show you the effective dividend tax rates:
| Dividend band | Dividend rate | Corporation tax rate (19%) | Corporation tax rate (25%) |
| Basic | 10.75% | 33.06% | 27.71% |
| Higher | 35.75% | 51.81% | 47.96% |
| Additional | 39.35% | 54.51% | 50.87% |
Source: Charles Stanley.
One route that can be particularly effective for some limited company owners is making employer pension contributions through the business. Instead of paying yourself a taxable income personally, you can pay it straight from the company account into your pension. This usually qualifies as an allowable business expense which means the company doesn’t pay any corporation tax and you personally pay no tax on it either. The trade-off, obviously, is that the money is then tied up for retirement. It isn’t available to spend today.
This potential advantage is worth £60,000, as that’s the standard annual pension allowance. This is unchanged in the new tax year. It could be more if you have pension carry forward available, which is any unused annual allowance from the previous three tax years that you can bring forward to increase your present-day allowance. This may well be the case if your business has ups and downs, so in some years you didn’t contribute as much. However, limits may be reduced if the tapered annual allowance or Money Purchase Annual Allowance (MPAA) applies, and employer contributions still need to be the usual “wholly and exclusively” test to count as an allowable business expense.
Owner managed business tax planning
Owner-managers can do more, too. You’ve probably heard of the individual savings allowance (ISA), pension allowance and so on, but there’s another allowance small business owners should be aware of – and that’s known as the annual investment allowance (AIA).
The annual investment allowance lets businesses avoid tax on the full cost of qualifying plant and machinery up to £1mn. If a builder needs tools or a growing start-up is investing in technology, this can be very useful indeed. It’s worth remembering that company cars do not qualify for AIA, although vans for tradespeople generally do.
There are other reliefs worth keeping in mind too. If your business has come up against headwinds this year and made a loss, oddly, that loss may have value to it. In some cases, losses can sometimes be carried forward to reduce future taxable profits. To learn more about whether this is possible for you, we recommend speaking to a tax adviser.
Finally, while we’re on the topic of expenses, let’s talk about what counts. We know it might be tempting to put down after-work drinks and a flash new suit as “investments”, but HMRC are getting wiser to many of these tricks. They say a limited company’s finances should be kept distinct from the owner’s. If HMRC were to raise an issue with expenses, a director’s loan account would need to be created, giving you the financial planning headache of having to find the money to pay back to your own company, later to be taxed properly.
Inheritance tax planning for business owners and farmers
Many business owners build and sell or step back around retirement age. But farming families are different. A farm may be intended to stay in the family and pass on from one generation to the next, making inheritance tax planning especially important.
Charles Stanley’s financial planners regularly advise owners on this issue. Agricultural Property Relief has been a great tool historically because, like allowances, it reduces the taxable value of qualifying assets like most farms when they are passed on. In some cases, by 100%.
From 6th April, the rules around this changed. A new £2.5mn allowance will apply to the combined value of qualifying business and agricultural property that can receive 100% relief. Above £2.5mn, qualifying assets will generally receive 50% relief.
It’s worth confirming first if your farm qualifies, as it can depend on how land and property are used, and how it’s owned. It’s not something families should treat as automatic.
You can check your estimated inheritance tax bill using our easy calculator here. And you can have a discrete conversation with a financial planner about your options here.
Tax planning and relocating abroad
Finally, for some business owners, the best tax planning strategy is simply getting out of dodge and leaving for a sunny tax haven. Leaving the UK altogether in search of more reasonable tax has been the strategy of many well-known businesses. Accenture, WWP, Shire and Eaton have all, at different times, relocated headquarters abroad for tax reasons.
If a move abroad is genuinely on the cards, there are many important questions to answer. You’ll need to decide whether you want to split your time between the UK and another country, what ties to keep with the UK, and how you’re going to time dividends and the selling of investments so they benefit from the foreign tax treatment you’ve moved for.
Be careful, because if you sell your business abroad and move back to the UK afterwards too soon, temporary non-residence rules might pull some of those gains back into the UK tax net.
Before booking the flight, book a call to speak to one of our advisers about how a move abroad would fit into your wider financial plans. While important, remember, tax isn’t everything.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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