7 tax planning strategies for small businesses

Good tax planning for a small business comes down to a handful of decisions made at the right time: how you're structured, how you pay yourself, when you spend, and how close you are to the key thresholds. None of the seven strategies below is aggressive. They're everyday, legal steps that many owners miss.

Key points

• Your business structure has the biggest single effect on your tax bill, so review it as profits grow.
• Company directors can usually cut tax by combining a modest salary with dividends and employer pension contributions.
• Timing matters: buying equipment before your year end brings the tax relief forward by a year.
• Income between £100,000 and £125,140 is taxed at an effective 60%, and pension contributions can bring it back down.
• Planning works best before the year end, not after it.

1. Check you're using the right structure

Sole traders pay Income Tax and Class 4 National Insurance on all their profits, whether they spend them or leave them in the business. A limited company pays Corporation Tax on its profits (19% on profits up to £50,000, rising to 25% above £250,000, with marginal relief in between), and you then choose how and when to take money out.

Once profits reach a certain level, a company often works out cheaper. But it also brings more admin, public accounts at Companies House and stricter rules about taking money out. There's no single break-even figure, because it depends on how much you need to draw and what other income you have. Our sole trader vs limited company calculator gives a quick comparison, and our limited company services page explains what's involved in running one.

2. Get the salary and dividend mix right

If you run a limited company, how you pay yourself matters as much as how much. A common approach is a salary around the personal allowance of £12,570, topped up with dividends.

Why it works:

• Salary is deductible for Corporation Tax, and employee National Insurance at 8% only starts above £12,570.
• Dividends don't attract National Insurance at all.
• The first £500 of dividends each year is covered by the dividend allowance.

For 2026/27, dividend tax rates are 10.75% in the basic rate band, 35.75% at higher rate and 39.35% at additional rate. So a director taking £10,000 of dividends within the basic rate band pays nothing on the first £500 and 10.75% on the remaining £9,500, which is £1,021.25.

The ideal salary isn't the same for everyone. Employer's National Insurance is 15% on salary above £5,000, and whether your company can claim the £10,500 Employment Allowance changes the sums. It isn't available where the director is the only employee. If you live in Scotland, different income tax bands apply to salary, so the answer can differ again.

3. Use employer pension contributions

A pension contribution paid by your company is usually one of the most tax-efficient ways to extract profit:

• It's normally deductible for Corporation Tax.
• There's no employer or employee National Insurance on it.
• There's no Income Tax when it goes in.

If a company paying 19% Corporation Tax puts £10,000 into a director's pension, its tax bill falls by £1,900, and the full £10,000 goes into the pension. The annual allowance is £60,000 (lower for very high earners), and contributions need to be reasonable for the work you do. The trade-off is that the money is locked away until you reach pension age.

4. Time your capital spending

The Annual Investment Allowance lets businesses deduct the full cost of most equipment, machinery and vans (but not cars) from their profits in the year they buy them, up to £1,000,000 a year. That limit is far above what most small businesses spend.

The planning point is timing. If you're going to replace a £20,000 van in the next few months anyway, buying it just before your year end rather than just after brings the relief forward by twelve months. For a company paying 19%, that's £3,800 less tax this year. Don't buy things you don't need to save tax, though. Spending £1 to save 19p still leaves you 81p worse off.

5. Claim every allowable expense

Missed expenses are one of the most common reasons small businesses overpay. Things that often get forgotten include:

• A proportion of household costs if you work from home.
• Business mileage in your own vehicle.
• Professional subscriptions, training and insurance.
• Software, phone and broadband used for the business.
• Accountancy fees and bank charges.

The fix is good records kept through the year, not a shoebox in January. Tidy bookkeeping makes it much easier to spot what you can claim. If your self-employed income is very small, the £1,000 trading allowance may be simpler than claiming actual costs, but only if your costs are lower than that.

6. Make use of family allowances

Each person has their own personal allowance, basic rate band and dividend allowance, so couples can sometimes reduce their combined tax bill:

• Marriage allowance lets a spouse or civil partner who earns less than the personal allowance transfer £1,260 of it to a partner who pays basic rate tax.
• Family members who genuinely work in the business can be paid a reasonable salary for the work they do.
• Shareholdings in a family company can spread dividends, but HMRC looks closely at arrangements where income is simply redirected to a lower-earning spouse. Get advice before issuing or transferring shares.

7. Plan around the thresholds

Some of the biggest savings come from knowing where the cliff edges are:

The £100,000 band catches a lot of successful owners. For every £2 of income above £100,000 you lose £1 of personal allowance, until it has gone completely at £125,140. On £10,000 of extra income in that band you pay £4,000 at 40%, plus another £2,000 because £5,000 of allowance disappears. That's an effective rate of 60%.

Personal pension contributions reduce the income used for this test, and a company director can often choose to take less in dividends in a particular year. Either can bring you back below £100,000.

Frequently asked questions

When should I do my tax planning?

Before your year end. For a limited company that's the end of its accounting period, and for sole traders and landlords it's usually 5 April. Once the year has closed, most of the useful options (pension contributions, timing of spending, how much to draw) have gone. A short review two or three months before the year end is usually enough to catch the main opportunities.

Is it always cheaper to run my business through a limited company?

No. At lower profit levels the savings can be small or disappear once you add the extra accountancy and admin costs. A company tends to make more sense when profits are comfortably above what you need to live on, so you can leave some money in the business. Use our calculator for a rough comparison, then talk it through with us before changing anything.

Is tax planning the same as tax avoidance?

Not in the sense people usually mean. Using allowances, reliefs and choices that the tax rules deliberately offer, such as pension contributions or the Annual Investment Allowance, is ordinary planning. Artificial schemes designed to get around the rules are a different thing, and HMRC challenges them. Everything in this article is standard, mainstream planning.

How Foundry can help

We review our clients' position ahead of their year end so there's time to act, not just report. Our tax planning service covers structure, pay, pensions and timing in one conversation. If you'd like to see what you could save, book a free consultation.

This article is general guidance based on the rules for the 2026/27 tax year and isn't personal advice. Speak to us before acting on it.