Making the rules work for you
Choose the most tax-advantageous structure for your new business.
Tax changes, such as the recent increase to the rate of employer NICs, have made the decision on how to structure a new business quite difficult. Traditionally, a business would start off as a sole trader or partnership, and then incorporate later on when it had grown. The initial stage of this approach still holds, especially if losses are a possibility in the early years of trading. Running a business as a sole trader or partnership will give you maximum flexibility to set off those losses against your other income.
However, with a marginal rate of corporation tax of 26.5% on company profits between £50,000 and £250,000, and 25% once profits exceed £250,000, it may often make sense to remain unincorporated, especially when the higher costs of running a company are taken into account. One advantage that companies do still have, however, is the ability to make tax-efficient pension contributions (see the retirement planning section).
Don’t miss your VAT registration requirement.
If your business is not VAT registered, you must keep an eye on your turnover for the previous 12 months on a rolling basis. When it exceeds £90,000, you must register for VAT by the end of the month following the month in which your turnover exceeds the threshold. Once registered, you must charge VAT on all of your sales (except those which are exempt) and submit VAT returns to HMRC using making tax digital (MTD) compliant software. You also need to keep your VAT records in a digital format. If you register late, you will still have to pay the VAT on sales you made after you should have been registered but may not be able to recover that VAT from your customers.
Check that your trading profit is calculated using the most appropriate basis.
The cash basis is now the default method for calculating trading profit if you are self-employed or in a partnership. However, there are circumstances where the traditional – more accurate – accruals basis will be preferable, and it is easy enough to opt out of the cash basis if this is the case. More sophisticated businesses will usually want accounts prepared on an accruals basis so they have the information to make business decisions. Also, banks and other lenders may insist on the accruals basis being used.
Lower your tax rate by involving your family.
When your taxable profits go above £50,270 per year, consider bringing in your spouse or adult children as partners in your sole-trader business. A partnership can spread the profits over the basic rate bands and personal allowances of your family members, keeping the average tax rate of the family below 40%. The proportion of profits allocated to each partner can vary each year, although it is advisable to have a partnership agreement drawn up to document this.
Use your own car for business journeys.
By using your own car for business journeys, you can receive a tax- and NIC-free mileage allowance of 45p per mile for the first 10,000 miles, and 25p per mile for any additional miles, per tax year. These rates are the same whatever road fuel your car uses, including for electric cars. If you work for yourself, you can use these mileage rates to calculate the cost of the business journeys you make in your own car, which is generally easier than working out the business proportion of the entire running costs of the vehicle.
Get ready for MTD for income tax.
From 6 April 2026, sole traders (and landlords) with total income of more than £50,000 from self-employment and property letting will need to use MTD-compliant software to keep digital records of their business income and expenses. They will also have to use MTD software to submit quarterly updates to HMRC and finalise their tax position following the end of the tax year. If affected, you need to be looking for suitable MTD software well in advance of the implementation date. The threshold for joining MTD will fall to £30,000 from 6 April 2027 and £20,000 a year later.
Get ready to file company tax returns using software
HMRC’s free online filing system for corporation tax will close on 31 March 2026. If you operate through a limited company, you will have to use third-party software to file your accounts and tax computations. Although the Companies House accounts filing service will continue, you will not be able to submit accounts to both departments jointly as now, and it too will close eventually. You should therefore look for suitable software that can file your company accounts to HMRC and Companies House at the same time. After HMRC’s service closes you will not be able to access any earlier filings, so if you have not previously done so, you should download them now for your records.
Chartwell Tip
With the rate of employer NICs increased to 15% for 2025/26, together with the starting point reduced to £5,000, any previous decisions on how to withdraw profits from your limited company need to be reviewed. Although extracting profits by way of dividends is generally more tax-efficient, each decision has to be made on a case-by-case basis.
Your Business – Tax Planning Checklist
- Ensure your business structure is still tax advantageous
- Review turnover regularly to avoid missing the requirement to register for VAT
- Ensure that you are calculating trading profit in the most suitable way for your business
- Consider whether a family member could work for your business or become a partner
- Review how you calculate the cost of business journeys in your own car
- Plan ahead for the implementation of MTD for income tax
