• Swindon & Wiltshire Experts
• Wednesday May 21 2025
• Author Name: Dave Southby

What taxes do business owners need to pay? – Southby & Co

When you’re starting out, choosing the right company structure and understanding the tax regime might mean pocketing more of your profits, as Dave Southby of Southby & Co Financial Planning explains.

Every business is taxed on its profits so the more you make, the more you may pay. Knowing this and planning accordingly is important in business.

The taxes you may need to consider this tax year (2025/26) include:

• Corporation Tax – 25 per cent, with a small profits rate of 19 per cent for profits under £50,000 and marginal relief for profits between £50,000 and £250,000.
• VAT – 20 per cent standard rate, with business required to register for VAT by law once their taxable turnover exceeds the annual threshold of £90,000 (and that threshold is rolling, which is important to remember).
• Business Asset Disposal Relief (BADR). 14 per cent on the first £1 million, increasing to 18 per cent in April 2026.
• Income tax for salary – 20 per cent basic rate taxpayers, 40 per cent higher rate and 45 per cent additional rate taxpayers.
• Income tax for dividends – 8.75 per cent basic rate taxpayers, 33.75 per cent higher rate taxpayers, 39.35 per cent additional rate taxpayers.
• Employee NI contributions – eight per cent between primary threshold to upper earnings limit. Two per cent above this threshold.
• Employers’ NI contributions – 15 per cent

The amount of tax you pay is governed by law and based on how your business is structured and how you pay yourself and others.

A clear understanding of the tax implications is therefore beneficial from the outset and, with advice, you may consider changing your business structure.

What will your trading structure be?

Before you even start trading, you have a key decision to make about what trading structure you’ll be – sole trader, a partnership, a limited liability partnership or limited company.

Each has tax advantages and disadvantages, and different ways you can take money out of the business and pay stakeholders.

Although it’s primarily the role of your accountant to explain the different trading structures, it’s good to involve your financial adviser in these discussions.

One structure isn’t better than the other, but it’s a question of knowing which one will suit you best, and the future for your new venture. It’s important to realise you’re not bound to this structure forever.

Choosing a tax-efficient way to pay

If you have a limited company, creating a tax efficient remuneration structure for you and your staff is important. If you have a very profitable year you could choose to pay more dividends, as well as or instead of bigger bonuses.

With recent changes to the rate of corporation tax, the increase in the income tax rates on dividends and the reduction of the dividend allowance you might decide on a fixed salary structure.

Incorporating pension contributions into your remuneration structure is an important part of tax-efficient profit extraction.

Making pension contributions

Pension contributions are an important consideration for tax deduction, both for retirement planning and tax efficiency.

For sole traders and partnerships, personal pension contributions are eligible for tax relief at the individual’s marginal rate of income tax. Employer contributions are highly tax efficient since they are generally an allowance expense for corporation tax and not a benefit in kind for the employee.

Under the auto-enrolment regulations, all eligible employees must be part of a pension scheme (unless they choose to opt out).

As their employer, you must contribute a minimum of three per cent of their qualifying earnings – with a total minimum contribution of eight per cent when combined with employee contributions.

As a company director, you have the flexibility to make additional pension contributions, which can be a tax-efficient way to extract profits from your business.

Allowances – knowing what you can claim

A Capital Allowance is where you offset the costs of buying assets for the company against your Corporation Tax liability. In the early years, when you may be scaling up and investing in both people and plant, such as IT equipment, office furniture, storage facilities or plant and machinery, you should maximise this important allowance.

Sole traders, entrepreneurs, or businesses running from home can also potentially claim a percentage of household bills, such as heating, lighting, council tax, and a part of rent or mortgage interest, as business expenses if trading from home.

This needs to be approached with caution and sound advice.

Qualifying for Research and Development tax credits?

These credits are often overlooked yet no business stays in business on the strength of one idea.

You may be eligible for a tax break when researching or developing new products or services. A good financial adviser will recommend discussing this with your accountant.

By Dave Southby is principal at Southby & Co Financial Planning