Transcription
There are lots of different business structures, and the right one for you changes as your revenue grows. Stay in the wrong one too long, and you're handing HMRC money you don't have to. Today, I'm explaining every key business structure and how each one can help you save tax from earning your first pound up to how a million pound business saves tax, so you don't pay a single penny more than you have to. Let's get into it, and don't be tempted to skip ahead because some of the biggest tax saving ideas only make sense once you've seen how each stage builds on the last.
Now, if you're in the just starting out stage, chances are you probably don't have a formal business structure yet. No sole trade registration, no limited company, not even a formal business, just you and probably a notebook full of ideas that are either going to make you a fortune or be forgotten by next Tuesday. Even at this stage, before you've earned a single pound, there's already tax allowances that you should know about. Let's start with personal allowance. Every year, you can earn up to £12,570 before you pay any income tax, simply enough. Then, you have one that's slightly less well-known, the marriage allowance. If you're married or in a civil partnership and one of you earns less than £12,570, you can transfer £1,260 of that unused allowance to your spouse or civil partner. Now, that could save you up to £252 a year. Now, it's not exactly enough for a holiday in the Maldives, but it'll certainly cover a decent meal out or put a dent in the weekly food shop.
Next, let's say you start a dabble in maybe selling things online, doing a bit of freelance work, tutoring, whatever it might be. There's something called the trading allowance, which lets you earn up to £1,000 a year tax-free. And the best part, you don't even need to tell HMRC about it. So, if you made, say, £900 selling clothes online last year, you owe nothing, and you don't have to register as self-employed or file anything.
Now, let's move on to savings. First, you've got your ISA allowance. Now, you can invest up to £20,000 a year, and then interest, dividends, or growth inside that ISA is tax-free forever. Then, if you've got savings outside an ISA, there's the personal savings allowance. Basic rate taxpayers can earn up to a grand of interest tax-free, and higher rate taxpayers get £500. And if you own shares directly, there's also the dividend allowance, which lets you receive £500 pounds of dividend tax-free every year.
Then, pensions. This one surprises a lot of people. Even if you've got no earnings at all, you can still pay up to £1,600 gross a year into a pension. But, the way to do it is for you to put in £2,800, then the government will automatically top that up to £3,600. That's essentially £720 free money, and you haven't even started earning yet. I don't know about you, but if someone's offering to put £720 pounds into my pension, I'm not turning it down. So, before you've even made your first pound, there are already a surprising number of tax breaks available. And honestly, most people don't realize how many of these they're actually missing. We've put together a free tax efficiency quiz, where you can quickly check how much of this you're currently using, and how much you might be leaving on the table.
Once you actually start earning though, that's where the really meaningful tax planning begins. Okay, so we've gone from having an idea to actually making some money. And this is where, usually, people get their first proper introduction to HMRC. Unfortunately, often in the form of a tax bill they weren't expecting. At this stage, most people are operating as a sole trader. Now, as a sole trader, that simply means that you and your business are legally the same thing. There's no separate company. So, the money's yours, the profit's yours, and unfortunately, so is the tax bill. But, the good news is there are still plenty of ways to keep that tax bill as low as legally possible.
Now, the first is expenses. Basically, you only pay tax on your profit, not on everything that lands in your bank account. If you made £20 grand, but spent £4,000 on genuine business costs, you pay tax then on the remaining £16,000. Sounds obvious, but I still see people paying for business expenses out of their own pocket and not claiming for them. It's like voluntarily tipping HMRC.
Now, remember that £1,000 trading allowance that I mentioned earlier? Well, once your income goes over £1,000, you normally get a choice. You can either claim actual expenses or just deduct the £1,000 trading allowance instead, whichever works out better for you. If your actual expenses are less than £1,000, just take the allowance. It's less admin, it's better for you. But, you can't have both.
Pensions are still worth thinking about, too, here. So, even as a sole trader, you can still contribute to a pension and get tax relief on it, just like we talked about earlier. Except now, because you're actually earning, the tax relief you get matches your tax rate. So, not only are you putting money aside for your future, you're also reducing the amount of income you pay tax on today. And one more thing, I always remind sole traders about payments on account. Now, this is not really a tax saving, it's more about avoiding a nasty shock. If your tax bill comes to more than £1,000, HMRC usually doesn't just ask for this year's tax, they ask for an advance payment towards next year's tax. That first tax bill can be almost double what you were expecting. I've had people genuinely think there's been a mistake when they first see it. It usually hasn't. That's just how the system works, sadly. Now, if you know next year's profits are going to be lower, perhaps you're taking time off or winding down a bit, you can apply to reduce those payments on account, but just be careful because if you reduce them too much and your profits don't actually fall, HMRC will want the difference plus interest. As a sole trader, these are the tools you've got to work with. They're good, but they're not the whole toolbox.
Now, if you've spoken to anyone who's been in business for more than 5 minutes, they've probably already told you you need a limited company. The problem is, sometimes that's brilliant advice, but sometimes it costs you money. Let me show you why. This is where things start getting interesting, because here's the thing most people miss. Going limited doesn't just change the name on the paperwork, it changes the tax options you've got. Somewhere between £30,000 and £90,000 of profit, loads of business owners start asking the same question. Should I go limited? The point where a limited company becomes worthwhile is different for everyone. It depends on your profits, your expenses, how much money you actually need to take out of the business to live on, even what your accountant charges. As a rough guide though, once your profit creeps past around £50 to £60,000, the maths does usually start tipping in favor of a limited company. Below that, the tax saving often gets swallowed up by accountancy fees and extra admin.
So, why does the saving exist in the first place? Well, as a sole trader, almost every extra pound gets taxed on you personally. The more profit you make, the more tax you pay. A limited company though works differently. It's kind of like you created a separate person with their own tax return and their own tax rate, totally separate to you. The company pays corporation tax on its profits first, which is 19% on profits below £50,000. Then if you want to take money out, you'd pay 10.75% in dividend tax at basic rate. Now, that might sound a bit unappealing at first. If you're paying higher rate income tax at 40% plus NI, plus payments on account as a sole trader, well, you can then start to see why it starts becoming the better option. That extra layer gives you choices. And in tax planning, choices are where the biggest savings usually come from. One of the biggest advantages is that flexibility. So, if you're having a good year and you don't need to draw all the money out, you're not forced into a higher tax bill because the money exists.
Before I move on, there's one more milestone to be aware of. Once your turnover goes over £90,000, you normally need to register for VAT. Whether you're a sole trader or a limited company, that rule is exactly the same. So, VAT shouldn't be the reason you decide to incorporate. It's a separate decision.
Becoming a limited company though is only the beginning. The structure itself doesn't magically save you tax. If it did, we'd all be opening companies for the family goldfish. It's what you do with it that makes the difference. And that's exactly what we're going to look at next.
Now, you've gone limited, you've suddenly got a lot more choices, and that's where most of the tax savings actually come from. The first thing to get right is how you pay yourself. Um, for most directors, that usually means taking a modest salary, which is classed as a business expense, and is also tax deductible for the company, and then topping up the rest with dividends. But the most tax-efficient mix depends on things like how profitable your company is, how much money you actually need, and what other income you already have. In fact, once company profits and your personal income start getting higher, there can even be a point where taking more salary instead of dividends works out better overall. That's why this isn't something you work out once and forget about. It's something that you need to review regularly as your business grows.
And here's something I see overlooked all the time. If your spouse, civil partner, or even older children are genuinely helping in the business, yeah, answering phones, doing the bookkeeping, packing orders, managing social media, they can usually be paid, too. Instead of the income being taxed on one person, you can spread it across the family and make use of allowances that might otherwise go unused. Just make sure it's genuine work at a commercial rate. HMRC tends to get a little suspicious if your 16-year-old suddenly becomes head of strategic development on £60 grand a year.
Pensions also become even more powerful once you've got a limited company. Instead of paying into your pension personally, your company can make employer pension contributions. They're normally deductible for corporation tax, and you avoid paying income tax and national insurance on that money when it goes into your pension. So, you're reducing tax today whilst building wealth for tomorrow.
Now, one more genuinely underused one, trivial benefits. Your company can give you or any employee small tax-deductible gifts or perks up to £50 pounds a time, completely tax-free to you or the employee with no reporting needed, as long as it's within the eligibility rules, such as not cash, not reward for performance, and so on. And we've got a great video covering this specifically. I'll put the link here. It's one of my favorites because it sounds small, but it adds up, and it's one of the cleanest ways to take a bit of value out of the business with zero tax attached.
And finally, company cars. Now, this one works if it's a commercial vehicle like a van or if it's an electric vehicle. If the company buys you one, it's a genuine business expense that reduces corporation tax and the benefit in kind tax on it to you personally is actually incredibly low compared to a petrol or diesel car. Again, we've got a great video going into real depth about what applies and the latest HMRC changes. So, the link again is going to be here.
So, really, at this stage, the game isn't about one big trick, it's about running as much as legitimately possible through the company. Salary, family wages, pensions, expenses, perks, so that what's left, the actual taxable profit, is as small as it can genuinely be.
But once that profit starts building up significantly and the company itself becomes valuable, a new question shows up. What happens when your company starts making more money than you actually need? Well, that's where things get really interesting. Once your company's consistently making good profits, a lot of business owners stop asking, "How do I pay less tax?" And they start asking, "What do I actually do with all the money I'm not spending?" It's a lovely problem to have, but it is still a problem because by this point, your cash, your assets, everything you've built is sitting inside usually one single trading company. If you're leaving profits inside the business, those cash reserves soon start building up, which means if something goes wrong, such as a legal claim, financial difficulties, or simply a business that hits a rough patch, everything sitting in that trading company is potentially exposed.
That's where a holding company can come in. Now, a holding company isn't really a tax trick on its own, it's more of a structure. But that structure opens up some genuinely powerful tax advantages. Instead of owning your trading company directly, you own a holding company and the holding company owns the trading business. One of the biggest advantages is what happens to surplus profits. Rather than paying those profits out to yourself and triggering dividend tax, your trading company can usually then pay dividends up to the holding company completely tax-free. That means you can move surplus cash into the holding company from the trading company without creating a personal tax bill. It gives you somewhere much safer to build up cash reserves, buy investments, or simply keep money away from the day-to-day risks of trading. Think of it as moving your valuables from the shop window into the safe. Compare that to paying yourself that same money personally, where you'd be hit with dividend tax straight away.
It also gives you much more flexibility as your business grows. Let's say you want to buy a commercial property, buy another business, or start a completely new venture. Instead of putting everything inside the same trading company, you can often keep those activities separate, separate trading companies, separate investment companies, all under the same holding company. One business runs into trouble, it doesn't automatically put everything else you've put at risk.
There's another benefit if you ever decide to sell part of your business. If certain conditions are met, something called substantial shareholding exemption can allow the holding company to sell shares in one of its subsidiaries without paying corporation tax on the gain. So, instead of losing a chunk of the proceeds to tax straight away, all of that money stays within the group, ready to reinvest into your next opportunity.
Now, one more thing worth mentioning here, group relief. If you've got multiple companies under the same holding structure and one of them makes a loss while another makes a profit, those losses can sometimes be used to reduce the corporation tax bill across the group, which means as a group you could end up paying less tax overall than if each company stood alone.
So, by this stage you're no longer just planning for this year's tax bill. You're thinking about protecting your wealth, reducing risk, and giving yourself more options for the future. Because once you've built something genuinely valuable, the next question is how to make sure as much of it as possible ends up with you and your family.
Now, if you've built a business worth a million pounds or more, you've got a completely different challenge now. It's no longer about saving a few thousand pounds of tax each year. It's about protecting everything you've spent years building. And the first question is usually, "How do I eventually get the value out?" Because at some point, most business owners think about selling or at the very least winding things down. Well, if you sell your company, there's something called business asset disposal relief. Some people still know it by its old name, entrepreneurs' relief. But now it's kind of BADR is the acronym for it. If you qualify, it reduces the rate of capital gains tax you pay when you sell your business on up to £1 million of qualifying lifetime gains. The relief isn't as generous as it used to be. The rate is now 18% rather than the old 10%, but it can still save you a significant amount of tax planning to sell your business. The important thing is this, it's not something you look at the week before you sell. The qualifying conditions need to be met long before the disposal. So, good planning usually starts well in advance.
Another option that's becoming more common is an employee ownership trust or EOT. Instead of selling your company to an outside buyer, you sell it to a trust that's set up for the benefit of your employees. Now, until recently, qualifying sales could be completely free from capital gains tax, but the rules have changed. And for newer disposals since the 26th of November 2025, only 50% of the gain qualifies for relief provided all the conditions are met. So, it's still a valuable option for the right business, but it's no longer a completely tax-free exit it once was.
The next question is, "What happens if I'm no longer around?" Well, this is where business property relief becomes incredibly important. If your company qualifies, some or all of its value might be passed on with little or no inheritance tax. And considering inheritance tax is normally charged at 40%, that's a relief that can make a massive difference to your family. Some business owners also use trusts as part of their wider estate planning, giving them more control over how and when wealth passed on, other than it landing with just one person all at once.
And finally, if you've built significant personal wealth, you might also hear people talking about investments like EIS and SEIS. Now, these schemes encourage investment in smaller, higher-risk companies by offering some generous tax reliefs in return. They're certainly not suitable for everybody, though. Think of them as kind of like the hot chili sauce of tax planning. Brilliant for some people, but definitely not something you pour over everything. But for the right investor, they can become another really useful part of the tax planning toolkit.
Now, if you've watched this all the way through, you'll probably have noticed something. The tax saving strategies change as your business grows, but the principle never does. The biggest mistake I see isn't people paying too much tax because they don't know one obscure rule. It's people staying in the same business structure long after they've outgrown it. The structure that's right when you're earning your first £10 grand definitely isn't the right one when you're building a business worth millions. But the biggest savings nearly always come from reviewing your structure as your business grows, rather than waiting until it's too late. And that's how you save tax at every revenue level. See you next time. And if you found this video useful, I've put some more videos here for you that you should go check out next.