How do I make my business more tax efficient?
It is perfectly legal to use all the available tax reliefs and allowances that the UK Government has provided to save tax, but neither it nor HMRC will inform businesses if they have missed these tax-saving opportunities.
That is why it is so important for business owners to be proactive by taking advantage of available tax breaks. In doing so, you can reduce your business’ tax bill, inject money back into the business and drive growth.
In this article, we will explore several strategies you could use to help you maximise some of the reliefs and allowances available for maximum tax efficiency.
Choose the right business structure
Most entrepreneurs initially set up their businesses as sole traders. Sole trader is the most common structure for small businesses due to its simplicity, speed, and minimal reporting requirements.
At some point, you might decide to transition to a private limited company. This decision is often driven by a desire to protect yourself from personal financial liability, but tax considerations can also play a significant role. Your choice of business structure determines the types of taxes you pay, and the tax planning options available. You can find out more about business structures here.
A company pays corporation tax on its profits, whereas a sole trader pays income tax. This distinction becomes more important as a business grows, because income tax rates are currently as high as 45% for sole traders in England, Wales, and Northern Ireland and 48% in Scotland, whereas the highest rate of corporation tax in the UK is 25%.
However, the ultimate tax burden will depend on the business’ profit levels and how much you want to pay yourself, which we’ll cover next.
Decide your remuneration package
Sole traders have little choice in their remuneration. They pay income tax on their total profits and the owner and business are considered to be one legal entity.
However, company directors and shareholders may choose to take a lower salary, supplemented with higher dividends. That’s because dividend tax rates are lower than income tax rates with a top rate of 39.35%, so this combination could help to minimise a director’s personal tax liability.
But remember, to protect your state pension, you need to earn a salary over the Lower Earnings Limit (currently £6,500). In some circumstances you may also need to consider the national minimum wage and national living wage rules.
Also remember that salaries and employer’s National Insurance Contributions (NIC) are tax deductible and so reduce a company’s corporation tax liability, whereas dividends are paid from post-tax profits and so do not have the same effect.
There are lots of things to consider when it comes to transitioning to a limited company structure or developing a tax efficient remuneration package. TaxAssist Accountants can help you to determine what’s right for you and your business.
Know your allowable expenses
One remarkably simple strategy for sole traders and companies alike, is to make sure you know exactly which expenses you can claim in your business. These are known as ‘allowable expenses’ and must be related to business purchases. By claiming all allowable expenses, you can reduce the profits subject to tax and, in turn, minimise the business’ tax liability. Where there are two or more ways to structure an expense, claim the one which maximises relief. This sounds obvious, but many people forget or don’t have the time to check if there are other options. TaxAssist Accountants can help with this.
Expenses typically include costs relating to marketing, travel, and stock, but there are lots more. If you are self-employed and work from home, you might be able to claim a proportion of your home running costs or a flat rate allowance to compensate you for those costs
You can find out more by looking at the examples published by HMRC here.
Claim for asset purchases
Neither large asset purchases, nor the depreciation on those assets, qualify as allowable expenses. Instead, sole traders and companies can claim capital allowances on qualifying equipment, machinery and vehicles needed for the business. This typically includes items like computers and vans, and even larger fixtures like office bathrooms and kitchen suites.
The Annual Investment Allowance (AIA) is particularly generous, as you can deduct up to £1m of qualifying assets bought in the year for your business, from profits before tax.
The advantage of capital allowances is that they let you deduct part or all of an asset’s value from business profits, before your tax is calculated.
The rules can be complex, so if you have made some large purchases and you’re not sure if they qualify, TaxAssist Accountants can review this for you.
Pay more into your pension
When you pay into your pension as a self-employed business owner, you receive income tax relief. You will receive 20% basic rate tax relief automatically, plus you can claim further relief if you are a higher or additional rate taxpayer. You can optimise the relief if your business income tends to vary year-on-year, by making higher contributions in more profitable years to realise a bigger tax benefit.
If you are a company director, employer pension contributions made by the company can be very tax advantageous. Pension contributions are an allowable business expense, and can therefore reduce your company’s corporation tax bill. The contribution needs to be wholly and exclusively for the purpose of the trade. Do be aware of the annual allowance for pension contributions, which is currently £60,000. Any contributions (employee and employer combined, along with the basic rate tax relief given for personal contributions) above this limit have tax implications. Personal contributions also have a specific earnings limit.
But remember that in most circumstances, money in your pension is locked away until you reach retirement age.
TaxAssist Accountants can help your business be more tax efficient
These are just some of the strategies you can explore to keep your business tax efficient. While there is a lot to consider and many rules to navigate, you do not have to do it alone. TaxAssist Accountants are here to help you identify where you can make the most meaningful tax savings. Call us today on 01480 592 002 or use our online contact form to arrange a free initial consultation.
Last updated: 20th August 2025