How to Save Tax Efficiently as a Small Business Owner

Tax efficiency isn’t about complex schemes

It’s about structure, timing, and good habits. From allowable expenses to pension contributions and dividends, small business owners can save thousands each year by planning smartly and staying proactive. Here’s how to keep more of what you earn.

1) Choose the right business structure

Limited company, sole trader, or partnership? Each has different tax implications. A limited company can offer better tax planning flexibility once profits exceed around £35,000. We helped one consultant switch structure and cut their tax bill by nearly 18% legally, simply through better profit extraction. It is important to assess the right structure for your business based on your plans for growth, succession planning and exit. Changing structure is also possible and many businesses “incorporate” and move from a sole trader to a limited company.

2) Pay yourself tax-efficiently

Mixing salary and dividends often gives the best balance between income tax and National Insurance. Typically, directors take a modest salary to stay within thresholds and draw the rest as dividends. The right mix changes yearly, so reviewing it with your accountant after each governmental budget announcement and before any personal tax year is essential. It is also important to plan your remuneration in line with the ability of the business to service that pay plan. Making sure you understand your full tax liabilities with your accountant is an essential service. No-one wants unexpected tax bills!

3) Claim all allowable business expenses

AYou can offset many everyday costs - software, travel, home working, and even certain training against profits. A digital agency client reclaimed over £4,000 last year just by categorising subscription tools correctly under allowable expenses. The rules are expansive and in some cases, ambiguous. It is definitely worth doing a review with your accountant to make sure all your allowable business expenses are being included. In addition, its also very important to make sure you aren’t accidentally claiming ineligible expenses (including petrol costs vs mileage claims) as penalties from HMRC can be expensive.

4) Use capital allowances wisely

When you buy equipment, computers, or vehicles, you can claim capital allowances to reduce taxable profits. Under the Annual Investment Allowance, most SMEs can deduct up to £1m in qualifying spend each year. Planning around capital spending is also very important. In some cases, if you have a contract to purchase capital equipment, that can be included as an accrual in your tax return and you can have the tax relief in an earlier year.

5) Optimise pension contributions

Company-paid pension contributions are tax-deductible and an efficient way to extract profits while saving for the future. It’s a smart, compliant route to build wealth and reduce Corporation Tax liability. Pension contributions, depending on the individual circumstances, can be the most efficient way to reduce a corporation tax bill, whilst still retaining “ownership” of the money.

6) Make use of the Employment Allowance

If you employ staff, the Employment Allowance can reduce your National Insurance bill (at the time of writing this the allowance was £10,500 per year). Many small employers miss this simply because they haven’t activated it in payroll software. This allowance can also be reclaimed going back four years. We managed to reclaim £18,000 for one client who had not claimed it over the last couple of years. You have to make sure your company is eligible though – there are rules like always and it’s important to have your accountant check for you.

7) Review VAT status and schemes

VAT registration isn’t always bad news. Choosing between the standard, cash, or flat-rate scheme can improve cashflow. One creative business we advised saved 4% in net VAT by moving to the flat-rate scheme suited to their industry. The administration of VAT and VAT returns has been made much easier with online accounting software like Xero and the savings can definitely be higher than the time you spend logging all the receipts.

8) Time your expenses and income

Managing when you incur costs or issue invoices can make a difference near year-end. Bringing forward expenses or delaying invoices by a week or two can smooth profits and improve cashflow timing without affecting long-term results.

9) Keep accurate, digital records

Cloud accounting tools like Xero, Autoentry, Veryfi and Dext make tracking receipts, expenses, and invoices easy. Real-time data prevents missed claims and errors that lead to higher tax bills. It also simplifies HMRC’s Making Tax Digital requirements. Using technology definitely makes life easier, speeds up all the boring bits and gives you more time to focus on the fun stuff in your business.

10) Schedule an annual tax review

Your accountant should review your numbers annually before the year closes, not after. Proactive tax planning means adjusting course early - whether that’s pension top-ups, asset purchases, or dividend planning. It is also very useful to be speaking with your accountants regularly through the year to make sure you are on track with all the other things you can do to minimise your tax bill.

How Love Your Accountants can help

We specialise in helping small business owners keep more of what they earn without risky shortcuts. Our tax reviews uncover quick wins, structure improvements, and long-term strategies tailored to your goals. Book your free consultation today and see how small changes can make a big difference next tax year.