The biggest impact on tax efficiency will be business structure. The choice drives which of the direct taxes the business is liable for, with sole traders, partnerships, and LLP members paying income tax and National Insurance on their profits, while companies pay corporation tax. 

Although corporation tax rates are lower than the highest rates of income tax, a company director-shareholder will pay a second layer of tax in the form of income tax (and potentially National Insurance) on any salary or dividends that they take out of the business. 

Traditionally, incorporation has always been seen as the most tax-efficient structure since it allows owner-managers to control how much income they take from the business and reduces National Insurance bills. However, in the last decade the tax savings gained from incorporation have narrowed, as taxes on dividends have been increased.

On incorporation, there may be goodwill that could be sold to the business, creating a loan account on which the director can draw. While this would be subject to capital gains tax upfront, typically at 20%, it can still be a tax-efficient way to get value out of the company.

The super deduction

This relief is only available to incorporated firms. Where a business purchases assets like a computer, relief is given through a system of capital allowances. 

Until 31 March 2023, there is a ‘super deduction’ available to give enhanced relief on the cost of plant and machinery purchased by a company. For every £100 spent on equipment before that date, a company can claim £130 in tax relief. 

The only caveat to claiming this would be if the business is intending to dispose of the asset after a couple of years; there are mechanisms to claw this additional relief back. 

Go electric

If the business provides its staff with cars that they can also use privately, it might be worth looking at whether replacing them with an electric alternative could be practical. 

A number of time-limited tax benefits are available for electric cars, including very low benefit in-kind charge for private use, which can be a fraction of the cost of providing a diesel or petrol car, plus 100% capital allowances for electric cars purchased before 31 March 2025. 

Keep records and receipts

It is important not to overlook simple things – such as ensuring all relevant expenses are recorded and claimed, and that copies of receipts are kept to evidence expenditure. 

This is important not just for direct taxes, such as income tax/corporation tax, but also for VAT, where HMRC can disallow claims if the trader does not have supporting evidence.

Receipts are not the only information relevant to your business. For sole traders or partners who use their personal vehicle for business travel, it is common to claim a percentage of the running costs for the year against the business profits. A log of business and private mileage for a few weeks each year will support these claims. 

Get things right

Tax efficiency is also about paying the right amount of tax. If in doubt, take reputable advice – there is a lot of good, if basic, advice to common queries on gov.uk, and HMRC also provides webinars (called Talking Points) on specific aspects of tax, as well as detailed guides for employers on getting payroll taxes and the National Living/Minimum Wage correct.  

Tax efficient perks for staff

Special rules mean that if you offer an employee a choice between salary or a benefit, they will be taxed on what is higher: the salary forgone or the value of the benefit.

However, despite the tightening of rules in recent years, there remains various tax-efficient ways of providing benefits to staff, including:  

• Mobile phones – a single mobile phone is an exempt benefit in kind provided that the contract for the phone is between the firm and the supplier 
• Homeworking allowance – you can offer up to £6/week or £26/month tax-free as reimbursement for additional costs of heating or lighting
• Staff parties – an annual event for staff costing no more than £150 per head does not create a benefit in kind for staff, and the costs will be tax deductible for the employer. 

Salary sacrifice for pension contributions

There can be tax savings if an employee agrees to accept a lower salary in exchange for the employer making pension contributions on their behalf. The employee pays less tax as their salary has been reduced, and the employer benefits from lower employers’ National Insurance contributions – all while pension contributions remain the same. 

This requires a formal change to the employee’s contract to which they must consent – and an employee can’t sacrifice their salary below the minimum wage.

Military veterans

Lastly, a company giving a new member of staff their first civilian role since leaving military service will not have to pay any additional secondary National Insurance contributions for the first 12 months.

Tax is an obligation upon us all, but it needn’t be taxing. That said, to get the best out of the system, forethought and good independent advice are essential.