Tax may feel like a fact of life, yet for many small and medium‑sized enterprises (SMEs) it is still the single biggest cost they can shape through good decisions. A thoughtful plan does more than trim a few pounds from the bill – it releases working capital that fuels new hires, sharper technology and fresh markets. That’s where tax planning strategies for SMEs come in.
Over the past two years, HMRC has refreshed reliefs, tightened compliance checks and lifted key thresholds, creating fresh opportunities alongside new pitfalls. Our team at Langdowns DFK has distilled the most practical tax planning strategies for SME owners into the guide below, so you can benchmark your current approach. By building routine reviews into your financial calendar and keeping evidence watertight, you can meet obligations with confidence while protecting cashflow.
Why tax planning matters for SMEs
SMEs represent 99.8 % of the UK business population, numbering 5.5m at the start of 2024. They also shoulder a growing share of the tax take. A clear, disciplined method for tax planning, therefore supports:
- higher post‑tax profits to reinvest
- stronger lender and investor confidence, and
- more predictable budgets, freeing founders to focus on growth.
Tax planning strategies for SMEs
Structure profits to use the corporation tax bands
Since April 2025 the corporation tax main rate remains 25% for profits above £250,000, with a small profits rate of 19% up to £50,000 and marginal relief in between. Effective tactics include the following.
- Splitting activities into separate companies – genuine, commercially justified subsidiaries can help each entity stay within the lower band.
- Timing income and expenditure – accelerate deductible costs (for example, pension contributions) into high‑rate years and defer revenue where possible.
- Reviewing associated companies – remember that the £50,000/£250,000 thresholds are divided by the number of worldwide associated companies.
Claim full expensing and the annual investment allowance
Capital allowances remain a cornerstone of tax planning.
- Full expensing – qualifying plant and machinery purchased between 1 April 2023 and 31 March 2026 attracts a 100% first‑year deduction with no upper limit.
- Annual investment allowance (AIA) – still £1 m, covering most other assets that miss full expensing.
Align purchases with year‑end to maximise relief quickly and preserve cashflow. Detailed asset registers are vital evidence should HMRC inquire.
Secure research-and-development (R&D)Â relief under the merged scheme
From April 2024 the former SME and R&D expenditure credit regimes merged. For expenditure in 2025/26 most innovative SMEs will receive a 20 % above‑the‑line credit. Despite extra compliance checks, over 65,000 companies claimed some form of R&D relief in 2023/24.
Key steps are:
- maintain a robust methodology that maps qualifying activities to costs
- file the new mandatory additional information form before the CT600
- budget for HMRC processing times of around eight weeks – earlier if you submit early.
Keep an eye on the VAT threshold
The VAT registration threshold rose to £90,000 in April 2024 and is frozen for 2025/26. Growing enterprises should:
- monitor rolling turnover monthly – use cloud software triggers
- review pricing – decide whether to absorb or pass on VAT once registration looms
- consider voluntary registration below the limit when input VAT is significant.
Factoring VAT into your planning avoids the common trap of hitting the limit unexpectedly – and seeing margins shrink overnight.
Optimise the owner’s reward package
Balancing salary, dividends and pensions remains one of the most effective ways to enhance after‑tax returns.
- A salary at or just above the lower earnings limit (£6,396) secures state pension credits while keeping PAYE and national insurance minimal.
- Dividends (tax‑free allowance still £500) attract no employers’ national insurance contributions (NIC) and lower personal tax.
- Pension contributions made by the company are deductible and, within the annual allowance, free of income tax and NIC.
Revisit the mix each year, especially where profit levels fluctuate.
Utilise loss and group reliefs
Trading losses can be:
- carried back one year – generating a corporation tax refund in as little as six weeks
- carried forward against future profits – with enhanced flexibility since 2017
- group relieved – offsetting a profitable subsidiary’s tax bill and smoothing intra‑group cashflow.
A forward‑looking forecast helps decide which route maximises value.
Good governance underpins every saving
HMRC’s focus on SME compliance is rising: internal estimates suggest that around one in four R&D claims reviewed in 2023/24 contained a material error. Solid governance means:
- bridge working papers to submitted figures
- retain board minutes for major transactions
- use qualified advisers – and check they hold professional indemnity cover.
The better your controls, the more confidently you can capture the savings above.
Wrapping up
Sound, well‑documented tax planning strategies for SME directors are neither exotic nor optional – they are part of everyday financial hygiene. A schedule of quarterly reviews, disciplined records and timely claims can lift after‑tax earnings year after year and spare you the distraction of last‑minute scrambles. As rules evolve, a second pair of eyes keeps the savings flowing and the risks contained.
If you would like tailored advice on tax planning strategies for SMEs, get in touch with our tax planning specialists today – our advisers will help you turn opportunity into lasting value.
