10 Tax Tips for Small Businesses in the UK

Running a small business in the UK means dealing with Corporation Tax, VAT, PAYE and a growing list of digital filing requirements. The good news is that HMRC offers a range of reliefs and allowances that many small business owners either overlook or under-claim.

Here are ten tips that can make a real difference to your bottom line.

1. Claim the Annual Investment Allowance in full

The Annual Investment Allowance (AIA) lets your company deduct the full cost of qualifying plant and machinery from its taxable profits, up to £1,000,000 per year. That covers equipment, vehicles (excluding cars), tools and IT hardware.

Many small businesses spread costs over several years out of habit, but if the asset qualifies for AIA, claiming it in the year of purchase gives you the tax relief sooner.

2. Use the trading allowance if you have a side income

If you earn less than £1,000 a year from a trade or casual work, you do not need to report it to HMRC at all. This is the trading allowance, and it applies per person rather than per business.

For sole traders with very small side incomes, this removes the need for a Self Assessment return entirely, as long as the total trading income stays under the threshold.

There is also a property allowance of £1,000 that works the same way for rental income. If you earn under £1,000 from property, you do not need to declare it. These two allowances are separate and can be claimed independently.

3. Register for VAT at the right time

You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period. But voluntary registration can be worthwhile even below that threshold if most of your customers are VAT-registered businesses, since you can reclaim input VAT on your purchases .

On the other hand, if you sell mainly to consumers, early registration simply raises your prices by 20%. Think carefully about your customer base before opting in.

Keep in mind that the £90,000 threshold is based on taxable turnover, not profit. Monitor your rolling 12-month figure regularly so you do not accidentally breach the threshold and fail to register on time – HMRC can backdate the registration and charge VAT on sales you have already made at the non-VAT price.

4. Choose the right VAT scheme

HMRC offers several VAT schemes designed to simplify things for smaller businesses:

• Flat Rate Scheme – you pay a fixed percentage of your gross turnover and keep the difference. Works well if your costs are low relative to revenue.
• Cash Accounting Scheme – you only pay VAT when you actually receive payment, rather than when you invoice. Helpful if you have long payment terms.
• Annual Accounting Scheme – you make interim payments during the year and submit one return instead of four.

Each scheme has eligibility limits and trade-offs. The Flat Rate Scheme, for example, is only available to businesses with VAT-exclusive turnover below £150,000.

5. Claim research and development tax relief

R&D Tax Credits are not just for tech companies. Any business that spends money trying to achieve an advance in science or technology may qualify. That includes developing new products, improving manufacturing processes or building bespoke software.

For SMEs, the merged R&D scheme offers an above-the-line credit that reduces your Corporation Tax bill. If your company is loss-making, you can receive a cash credit instead.

Key qualifying costs include:

• Staff salaries (including employer NICs and pension contributions)
• Subcontractor costs
• Software and consumable materials
• Cloud computing costs directly used in R&D

6. Make pension contributions through the company

Employer pension contributions are a tax-efficient way to extract value from your company. They count as a business expense, reducing your Corporation Tax bill, and they are not subject to National Insurance.

For director-shareholders, this is often more tax-efficient than taking the same amount as salary or dividends. There is no annual cap on employer contributions (the annual allowance of £60,000 applies to the individual, but unused allowance can be carried forward for three years).

How the numbers work

If your company has £10,000 of profit to extract:

The trade-off with pensions is that the money is not accessible until you reach at least age 55 (rising to 57 from 2028). But for long-term wealth building, it is hard to beat the tax efficiency.

7. Pay yourself the optimal salary-dividend split

Most small company directors pay themselves a salary up to the National Insurance threshold and take the rest as dividends. This minimises the combined tax and NI burden.

For the 2024/25 tax year, a common approach is:

The exact optimal split depends on your other income, so review it each year or use accounting software that tracks this automatically .

8. Keep mileage records for business travel

If you use your personal car for business, you can claim mileage allowance instead of actual running costs. The approved rates are:

• 45p per mile for the first 10,000 business miles
• 25p per mile after that

This covers fuel, insurance, wear and tear and depreciation. You need to keep a log of each journey with the date, destination, purpose and distance. Fuel receipts alone are not enough.

For company cars, different rules apply. You claim the actual fuel cost and your employee benefit-in-kind is based on the car’s CO2 emissions and list price.

If you use a bicycle for business travel, the rate is 20p per mile. For motorcycles, it is 24p per mile.

9. Set up a workplace pension with auto-enrolment

Every UK employer must provide a workplace pension and automatically enrol eligible workers. Failing to do so can lead to fines from The Pensions Regulator.

The minimum contributions are:

If you are a single-director company with no other employees, you are generally exempt from auto-enrolment duties, but you can still make employer contributions for the tax benefits described in tip 6.

10. File on time to avoid penalties

This sounds obvious, but late filing is one of the most common – and most avoidable – costs for small businesses. The key deadlines to track are:

• Corporation Tax payment – 9 months and 1 day after your accounting period ends
• Company Tax Return (CT600) – 12 months after your accounting period ends
• Annual accounts at Companies House – 9 months after your financial year end (private companies)
• VAT returns – quarterly, monthly or annually depending on your scheme
• PAYE RTI submissions – on or before each pay date

Missing the CT600 deadline triggers an immediate £100 penalty, rising to £200 after three months. After six months HMRC estimates your tax and adds 10% of the unpaid amount.

Using accounting software that tracks your deadlines and automates submissions through Making Tax Digital is the simplest way to stay on top of this.

Here is a summary of the penalties for late filing:

Getting the basics right

Tax planning does not need to be complicated. Most of these tips come down to claiming what you are already entitled to, choosing the right schemes and filing on time. If your current setup makes any of these harder than they should be, it might be time to look at a tool that handles the heavy lifting – compare your options and see what fits.

For more detail on what happens at the end of your financial year, see our year-end accounting checklist and our guide to filing your Company Tax Return .