Tax planning might not be the most thrilling part of running a business, but it’s one of the most important.

Done right, it saves you money, keeps you compliant, and helps you plan for the future.

Done wrong or ignored completely and you could end up paying more tax than necessary or, worse, facing unexpected penalties.

The good news? Tax planning isn’t as complicated as it sounds. Here’s how to get started.

1. Know What You Owe

Tax might feel like a mystery, but it’s really just a set of rules and guidelines about what you owe and when. Judgements also factor into the process.

For UK businesses, the key taxes to be aware of include:

• Corporation Tax – Paid on company profits (currently 19% or 25%, depending on your earnings). This applies to all limited companies, and the rate you pay depends on your taxable profits.

Planning your spending and investments wisely can help reduce your corporation tax bill.

• VAT (Value Added Tax) – Charged on most goods and services if your turnover exceeds the VAT threshold (currently £90,000).

Even if you’re under the threshold, voluntary registration can be beneficial, allowing you to reclaim VAT on purchases.

• PAYE & National Insurance – If you have employees (including yourself as a director), you need to deduct tax and National Insurance from their wages and pay it to HMRC. Employers also pay a contribution on top of this.

It’s worth noting that below £12,570 per year, no PAYE or Employee National Insurance is due (2024/25 tax year).

• Dividend Tax – If you take dividends as a director-shareholder, you pay tax on anything above the dividend allowance (£1,000 for 2024/25). The rate varies based on your income tax band.

Understanding these taxes allows you to plan your cash flow and take advantage of any available reliefs.

2. Plan Ahead (Because Last-Minute Tax Bills Hurt)

Many business owners don’t think about tax until the bill arrives. By then, it’s too late to do much about it. Instead, get ahead:

• Set aside money regularly – A good rule of thumb is to save around 20-30% of your income for tax. Keeping it in a separate account prevents surprises when payment deadlines approach.

You can also invest the money to generate a return, and ensure it’s working for you, and not sat idle.

• Track expenses properly – Every business expense you claim reduces your taxable profit. This includes office costs, travel, salaries, equipment, and even certain training courses. Keeping accurate records is key.

To judge whether an expense is deductible, HMRC’s rule of thumb is: “Does it wholly, necessarily, and exclusively relate to the purposes of the business”. It’s worth noting that this is applied rather strictly.

• Review your finances monthly – Don’t wait until the end of the tax year. Regular financial reviews help you spot opportunities to save and adjust your strategy before deadlines hit.

By planning ahead, you avoid unnecessary stress and potential cash flow crises.

3. Make the Most of Allowances and Reliefs

The UK tax system includes ways to reduce your tax bill—if you know about them. Some key ones:

• Annual Investment Allowance (AIA) – If you buy qualifying equipment or assets, you can deduct up to £1 million from your taxable profits. This includes machinery, office equipment, and even some business vehicles.
• R&D Tax Credits & Other Creative Reliefs – If your business invests in research and development, or is in a creative industry, you may be eligible for generous tax relief. Even small businesses in unexpected industries can claim this—so it’s worth checking.
• Employment Allowance – Reduces your employer National Insurance contributions by up to £5,000 per year. This is especially useful for small businesses hiring their first employees.
• Dividend Allowance – The first £1,000 of dividends is tax-free. Structuring your income to use dividends efficiently can reduce your personal tax liability.
• Pension Annual Allowance – Each individual gets up to £60,000 per year which they can contribute to their pension tax free. They can also carry forward up to 3 years’ worth of unused allowances.

If you’re not using these, you might be handing HMRC money you don’t have to.

4. Choose the Right Business Structure

Your legal structure affects how much tax you pay. Many small businesses start as sole traders, but as profits grow, switching to a limited company can save tax.

• Sole Trader – Simpler to set up, but you pay income tax on all profits at rates of 20%, 40%, or 45%, plus National Insurance.
• Limited Company – Pays corporation tax (19% to 25%), and you can take a combination of salary and dividends, which can be more tax-efficient.
• Partnerships & LLPs – Useful for businesses with multiple owners. LLPs offer some of the benefits of a company while being taxed like a partnership.

The right structure depends on your earnings, future plans, and personal tax situation. A tax-efficient structure can make a big difference to your take-home income.

5. Get Help Before You Need It

Tax is one of those things that’s easy to ignore until it becomes a problem. The smartest business owners don’t wait until year-end to ask for help. Instead, they:

• Work with an accountant – A good accountant does more than file your returns. They help you plan, structure your finances efficiently, and keep you compliant.
• Use accounting software – Platforms like Xero and FreeAgent help track income, expenses, and taxes automatically, reducing admin time and errors.
• Stay informed – Tax rules change frequently. Keeping up to date with changes ensures you don’t miss out on new reliefs or get caught by new regulations.

Build a Better Home for Your Business Finances

Tax planning isn’t just about ticking boxes for HMRC. It’s about keeping more of what you earn and setting up your business for long-term success. The earlier you start, the easier it gets.

If you’d rather not tackle this alone, we’re here to help. For a better home for your business finances, email: hello@redbrickaccounting.com