Running a small business in the UK is rewarding, but managing taxes can be challenging. Many entrepreneurs end up paying more tax than necessary or face penalties simply because they didn’t know the rules.
At Ola Accountancy, we have helped hundreds of small business owners optimise their tax position while staying fully compliant with HMRC. In this guide, we will share:
- Most know tax strategies to minimize their liability
- Common mistakes that cost business owners thousands
- Bonus tip that most accountants would not tell you for free
- Whether you are a sole trader, limited company, or startup, these tips will help you keep more of your hard-earned money.
1. Choose the right business structure for tax efficiency
The way you set up your business makes a huge difference to how much tax you will pay each year. If you operate as a sole trader, you will pay Income Tax (20%-45%) plus National Insurance on all your profits. But if you form a limited company, you will pay Corporation Tax (currently 19%-25%) on company profits, plus you can take money out as dividends, which are taxed at lower rates (8.75%-33.75%).
So how to decide what’s best for you?
- If you are earning under £30,000, being a sole trader is simpler with less paperwork.
- Once you are making £50,000 or more, switching to a limited company could save you thousands in tax.
At OLA Accountancy, we offer free consultations to help you choose the best structure for your situation. You can always change your structure later as your business grows, but getting it right from the start means you won’t pay more tax than you need to.
2. Claim every allowable expense, as most miss these
An important tax tip many business owners miss: You can claim back money on almost any cost that helps run your business. Every pound you claim as a legitimate expense directly reduces your taxable profit.
Some commonly forgotten expenses include:
- Working from home costs like a percentage of your rent, heating, and internet.
- Business mileage as you can claim 45p per mile for the first 10,000 miles.
- Mobile phone bills if you use your phone for work.
- Training courses and professional tools like accounting software, trade magazines.
HMRC pays close attention to items used for both business and personal reasons, like laptops or cars. For these “dual-purpose” expenses, you can only claim the business portion, and you will need to keep all receipts as proof.
The golden rule?
If you spent money to help your business grow, there is a good chance you can claim it back. When in doubt, keep the receipt and check with your accountant. Those small claims add up to big savings at tax time.
3. Use the VAT flat rate scheme if it saves you money
If your business is VAT-registered, there is a simpler way to manage it called the Flat Rate Scheme – and it might put more cash in your pocket. Normally, with VAT, you charge 20% on sales but have to track and reclaim VAT on all your purchases, which means lots of paperwork.
With the Flat Rate Scheme, you:
- Still charge clients 20% VAT
- But only pay HMRC a fixed percentage of your turnover, e.g., 14.5% if you’re a consultant.
- No need to record VAT on every purchase
This is excellent for:
- Service businesses with few expenses like freelancers or consultants.
- Anyone who wants to spend less time on VAT paperwork.
You can’t reclaim VAT on purchases except for certain big assets. But for many small businesses, the time saved and extra cash flow more than make up for this.
Use HMRC’s online calculator to see if you’d pay less VAT under this scheme – it takes 2 minutes but could save you much more!
Remember once you are on the scheme, you normally stay on it for 12 months, so it’s worth getting advice if you’re unsure.
4. Pay yourself Tax efficiently mainly salary and dividends
If you run a limited company, there is a smarter way to take money out that could save you thousands in tax. Instead of taking all your income as salary which gets hit with Income Tax and National Insurance, try this two-part approach:
- Take a small salary up to £12,570 , this uses your tax-free Personal Allowance and avoids most National Insurance if kept below £9,568.
- Take the rest as dividends – these are taxed at just 8.75% for basic rate taxpayers (vs 20% Income Tax)
Here is why it works:
- On £50,000 income, salary-only would cost you £11,432 in tax
- Using salary + dividends Just £5,290 – saving you £6,142
This is completely legal and used by thousands of business owners, but the exact amounts that work best depend on your situation. A quick chat with your accountant can help you get this set up right.
5. Never miss deadlines to avoid costly fines
One of the easiest ways business owners lose money is by missing important tax deadlines. HMRC does not care if you forgot; they will hit you with automatic fines that can quickly add up to hundreds of pounds, even if you do not owe any tax.
Most important dates to mark on your calendar:
- Self-Assessment, which must be filed online by midnight on 31 January each year.
- Corporation Tax is due 9 months and 1 day after your company’s year-end.
- VAT Returns are due 1 month and 7 days after each quarterly period ends.
- Confirmation Statement due every year on the anniversary of when you formed your company.
The solution?
Set multiple reminders in your phone/calendar (at least 2 weeks before each deadline), or
Let us handle it all for you; we will make sure everything is filed correctly and on time and every time.
Remember – these deadlines don’t move for bank holidays, busy periods, or forgotten passwords. One late filing might be forgiven, but repeat offenders get bigger penalties. Why risk it when staying organised is so simple?
Bonus tip: Pension contributions to slash Tax
A brilliant way to pay less tax while securing your future is to put money into your pension through your company. It’s a triple-win:
- Cuts your Corporation Tax bill which is every £1,000 you contribute reduces your taxable profit by £1,000
- Grows completely tax-free as no income tax or capital gains on investments
- Gives you a tax-free cash lump sum at retirement (25% of your pot)
Let’s say your company makes £60,000 profit:
- Put £10,000 into your pension
- Your taxable profit drops to £50,000
- Saving you £1,900 in Corporation Tax instantly
That £10,000 grows untouched until retirement, when you can take 25% completely tax-free. It’s perfect for business owners:
- Those who want to reduce their tax bill now.
- who need to build retirement savings.
- who have profits left after paying themselves.
Pension contributions do not create extra tax complications; just make sure your company can afford the contributions without affecting cash flow.
Paying tax is part of running a business, but there’s no need to pay more than you legally should. With the right approach, you could keep thousands of pounds in your pocket every year completely above board.
At Ola Accountancy, we make tax simple for business owners like you:
- Pay only what you owe so no surprises at year’s end.
- Stay on HMRC’s good side with perfect paperwork and on-time filings.
- Grow your business with tax-efficient financial planning.
Ready to stop worrying about taxes and focus on your business? Let’s chat – the savings could surprise you.
“The best tax is the tax you don’t overpay” – and we’re here to make sure you don’t.
