Spring Into The New Tax Year

As we spring into the first week of the 2025-2026 income tax year, what do small businesses have to work with and what path should you take? Here are 10 suggestions for you....

1. Frozen Income Tax Allowances

Frozen allowances mean that more people are getting caught by a 40%, 60% or 45% tax rates and the dividend tax equivalents. As a business owner, you have more options than a regular employee.

Some sole traders work less to keep their profits under the 40% higher rate band of £50k. Shareholder-directors should review their mix of dividends-salary to ensure they are optimised.

A sole trader could add another person such as a spouse and set up a general partnership to even out the use of their income tax bands. A shareholder-director may ask a spouse to take on some shareholder responsibilities and receive some dividends to use their basic rate tax bands or to keep your income under £100k.

2. Employer's National Insurance 

As a director-shareholder, in the light of the increase in rate from 13.8% to 15% and lower starting point from £9,100 to £5,000, alongside an increase in the annual allowance from £5,000 to £10,500, consider whether you need to change your dividends-salary mix from this month.

For example, if your company suffers the 26.5%/25% tax rate and some or all of the increased £10,500 national insurance employer annual allowance is available to you, you’re likely to find that a director salary higher than £12,570 is more tax efficient for you.

If you're a sole shareholder-director without staff but with a budget for some services, consider a part time employee who can be a family member so the £10,500 annual allowance available to you. This might even save you money overall.

As an employer facing increased national insurance costs, consider approaching employee remuneration differently. For example, bonus schemes might be replaced by a more tax efficient share option scheme or introduce a salary sacrifice scheme to replace salary or bonuses with employer pension contributions. 

3. Pensions

Plan, plan, plan.

With corporation tax at 25%/26.5% for many company owners, you may wish to re-visit your company pension contributions paid into your own pension to save corporation tax. Contributions must be paid before your company year end so make sure you don't miss that.

4. Annual Investment Allowance and Electric Cars Allowance - 100%

The Annual Investment Allowance rewards investment of up to £1m on plant and equipment or eligible commercial property refurbishment with 100% tax relief. Similarly, new electric cars purchased benefit from 100% tax relief with no limit.

If you plan to incur these costs near to your year end, such as 30 June 2025, ensure you meet the conditions for a claim in this year, so you don’t have to wait a year to get the cashflow tax saving.

Remember hire purchase contracts work, so you don’t need to have bought the assets outright to get full tax relief, assuming the hire purchase contract is good value overall.

5. Entrepreneurs Relief (BADR)

If you're thinking of selling your business or liquidating and your business is eligible for 10% BADR, ensure you exchange or receive your liquidation distribution by next 5 April 2026 so you don't pay the higher 18% (currently 14%) applying in the next tax year.

6. Director Small Wins

With too many tax increases around at the moment, remember use what is still available to you. Maximise your director treats for the tax year ended 5 April 2026; trivial benefits under £50 each, totalling an annual £300 each, annual parties expenditure up to £300 each including guest or have a private health care check.

7. Furnished Holiday Lets (FHLs) Cessation

FHLs now have the same tax treatment as assured longer term lettings.

Tax losses from your FHLs can be brought forward and offset against future property profits. However, tax reliefs such as capital allowances are more restricted and the split of profits between joint spouse owners require a formalised approach.

Review your property ownerships, who should own what percentage and your repair and refurbishment plans,  ensuring you implement your requirements correctly and in good time. For example, HMRC needs to be notified promptly if you want rental profits to be allocated between you and your spouse in certain way, otherwise your will each be taxed 50:50 which may not be optimal.

8. Non-Domiciled Tax Changes

The changes are the biggest for many years. If you are UK tax resident but not a UK domicile, known as a 'Non-Dom', take specialist advice on the implications for you. Your income tax, capital gains and inheritance tax may all be affected.

9. Tax Returns Additional Information

Sole traders will be required to include the date you started or ceased your business. Understand the implications of the dates you use, because these dates affect your registration date with HMRC and your loss reliefs or capital allowances claims, but the date can be debateable. For example, when did you really start your business? During a marketing phase, when you contacted potential clients or when you raised your first invoice? It depends on the whole picture.

Shareholder-directors now need to provide details of your shareholding in your company such as percentage shareholding, company name and registered number. Make sure your dividends always agree with the amount in your company accounts.

10. Interest Charged By HMRC Increased To 8.5%

Be careful about underpaying your tax bills. The interest rate HMRC will charge you on underpaying your tax such as self assessment payments on account or your corporation tax is now 8.5%, which is pretty expensive. If you overpay tax, HMRC will pay you 3.5% which is better than most business accounts, but a 5% difference against the 8.5% charged on underpaid tax.

Therefore, where there is some doubt about your final tax bill, you may wish to err on the side of overpaying rather than underpaying your tax.

Each taxpayer is different and you should only act after being advised about all the financial impacts of your actions.