Tips to Reduce Tax Liability for Business Owners

Running a business takes time and effort, from initial setup to scaling and growth. With so many responsibilities, financial planning and tax-saving strategies often take a backseat. However, smart tax planning can significantly reduce tax liability and free up capital for business growth.

At Ifamax Wealth Management, we have helped business owners across various industries for over 20 years. Below, we outline key tax-saving strategies to help you manage your tax burden effectively and improve your financial outlook.

Why Reducing Tax Liability is Crucial for Business Owners

Businesses are subject to multiple taxes, including corporation tax and National Insurance Contributions (NICs). Without proactive planning, tax liabilities can erode profits and restrict cash flow.

By implementing tax-efficient strategies, business owners can:

  • Free up cash to reinvest in business expansion.

  • Improve financial stability and long-term growth prospects.

  • Ensure compliance with tax regulations while minimising liabilities.

  • Create a more tax-efficient income strategy for personal wealth building.

Income Strategy: Salary or Dividends

As a business owner, you have the flexibility to structure your income tax efficiently. The most common approaches include salary payments and dividends. Understanding the tax implications of each is crucial for optimising your earnings.

Salary vs. Dividends

Salary

Taking a salary through your company means paying tax via HMRC’s PAYE system, similar to employees. This includes:

  • Income Tax and National Insurance Contributions (NICs) are deducted at source.

  • Tax-deductible expenses for the company, reducing taxable profits.

  • Employer NIC obligations depend on salary levels.

While straightforward salaries can lead to higher tax liabilities than dividends.

Dividends

Dividends, paid from company profits, are a tax-efficient way to extract income. Key considerations include:

  • No National Insurance Contributions (NICs) on dividend payments.

  • A lower tax rate than salary (based on income tax bands).

  • A dividend allowance of £500 for the 2024-25 tax year, meaning the first £500 of dividends is tax-free.

However, dividends are not tax-deductible for the company, meaning corporation tax still applies before distribution.

Pension Contributions: A Smart Tax-Saving Tool

Paying into a pension directly from your business is one of the most tax-efficient strategies. Pension contributions provide multiple benefits:

  • Reduce Corporation Tax, as employer pension contributions are a tax-deductible expense.

  • Avoid higher rates of Income Tax and National Insurance.

  • Move business profits into personal wealth in a tax-efficient manner.

For example, if your company is subject to a 25% Corporation Tax rate, a £10,000 pension contribution would only cost the company £7,500 after-tax savings.

Pension Carry Forward

If you have unused pension allowance from the last three tax years, you can carry it forward to make larger contributions in the current year. This is especially beneficial for business owners with fluctuating incomes or those looking to make significant contributions before retirement. However, strict rules apply, particularly regarding earned income and the purpose of contributions.

Charitable Giving: A Tax-Efficient Strategy

Making charitable donations through your business can also help reduce tax liability. Charitable contributions can be deducted from profits before tax, reducing your overall Corporation Tax bill. Business owners can donate via:

  • Direct financial contributions.

  • Donating equipment or assets.

  • Sponsorship of charitable events or initiatives.

Not only do charitable contributions offer tax benefits, but they also enhance corporate social responsibility and brand reputation.

Collaborating with Tax and Financial Professionals

Navigating tax planning strategies requires expertise and careful consideration. Working with professional tax advisors, accountants, and financial planners can help ensure you:

  • Maximise tax-saving opportunities while staying compliant with regulations.

  • Plan effectively for future financial goals, including business succession or sale.

  • Implement tailored strategies based on your income structure and business needs.

At Ifamax Wealth Management, we collaborate with your existing professional network to create a holistic tax and financial plan that aligns with your long-term objectives.

Conclusion 

Reducing tax liability is an essential part of business owners' financial planning. By structuring income tax efficiently, leveraging pension contributions, making charitable donations, and working with experienced professionals, you can optimise tax savings and reinvest more into your business’s future.

At Ifamax, we understand that growing a business is a priority. We help business owners implement simple yet effective tax strategies. Contact us today if you’d like to explore tax-saving opportunities tailored to your situation.

Risk warning

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.  

Ashton Chritchlow