How you are paid can have a significant impact on the amount of tax you pay. For this reason, many owner-managed businesses choose to pay a combination of salary and dividends, an amount paid out from a company’s profits to shareholders.

Getting this balance right can sometimes be the difference between paying tax at the basic, higher and additional rate, as well as reduce National Insurance contributions and protect entitlement to certain personal tax reliefs and state benefits.

By balancing your salary and the dividends you receive you can mitigate the amount of tax you pay.

Every taxpayer has a tax-free dividend allowance of £500. Any dividend income over this amount will be taxed at your marginal rate as follows:

• Basic rate taxpayers. 8.75 per cent (10.75 per cent from April 2026)
• Higher rate taxpayers. 33.75 per cent (35.75 per cent from April 2026)
• Additional rate taxpayers. 39.35 per cent

Finding the right combination of salary vs dividends often relies on several factors, such as:

• Company profitability
• Personal tax liabilities
• A company’s tax arrangements
• Desire to retain state benefits.

In most cases, directors aim to pay a salary at a level that preserves a qualifying year for the State Pension while keeping National Insurance costs low.

National Insurance thresholds change regularly, so rather than relying on fixed weekly figures, it is important to review salary levels each tax year to ensure they remain tax efficient.

Income tax generally becomes payable once earnings exceed the personal allowance, which is currently frozen at £12,570 until April 2031.

Given the potential tax savings on offer, you might wonder why you should get paid a salary at all. However, here are some benefits to consider:

• Accumulation of qualifying years towards your State Pension
• Retaining maternity and paternity benefits
• Easier to apply for mortgages and insurance policies
• Salaries are allowable business expenses for Corporation Tax purposes
• Salaries are paid even if your business makes no profit.

Both the company and the individual may need to pay National Insurance, so the salary level should always be reviewed as part of a wider tax strategy.

A company car can be tax efficient in the right circumstances, but it is still treated as a taxable benefit.

Company cars are taxed through the Benefit-in-Kind (BIK) system, which is based largely on the vehicle’s CO2 emissions and list price. The cleaner the vehicle, the lower the tax charge.

Since the introduction of the World Harmonised Light Vehicle Test Procedure (WLTP) emission and economy tests, many vehicles now show higher CO2 figures than under older systems, increasing BIK charges for some petrol and diesel cars.

Choosing the right vehicle can make a significant difference to both personal tax and employer National Insurance costs.

Electric vehicles (EVs) can still offer tax advantages, but the position is no longer as generous as it once was.

Benefit in Kind

Electric vehicle BIK rates increased from April 2025 and are now set to rise gradually in future tax years. While EVs are still taxed more favourably than petrol or diesel cars, the two per cent rate no longer applies.

Hybrid vehicles are also seeing reduced benefits as emissions thresholds tighten and electric-only ranges are reassessed.

Capital allowances

Electric cars may qualify for favourable capital allowance treatment depending on the company’s circumstances and the allowances available at the time of purchase.

With the introduction of full expensing for many companies, the tax relief available on vehicle purchases should be reviewed carefully before committing.

Vehicle Excise Duty and congestion charges

Electric vehicles are no longer exempt from Vehicle Excise Duty. From April 2025, EVs are subject to road tax in the same way as other vehicles.

They are also no longer automatically exempt from congestion charges, including in London. Businesses should factor these running costs into any decision.

Charging points

The Workplace Charging Scheme remains available, offering support towards the cost of installing EV charge points at business premises, subject to scheme limits and eligibility.

Leasing and salary sacrifice

VAT-registered businesses can usually reclaim 50 per cent of the VAT on leased vehicle payments and up to 100 per cent on maintenance elements.

Electric cars provided through salary sacrifice arrangements can still be attractive, as the optional remuneration rules continue to favour low-emission vehicles, although rising BIK rates should be taken into account.

A director’s loan account is a method for keeping track of the transactions between you and your company.

This acts as a record of money taken out of a limited company, which isn’t:

• Salary;
• Dividend; or
• Business expense repayment.

It also accounts for any money lent to the company by you or another shareholder, which could cover the purchase of new equipment, a cash flow injection or other investments.

HM Revenue and Customs (HMRC) must be provided with a director’s loan accounts through annual company returns.

In your director’s loan account, you should record:

• Cash withdrawals and repayments you make as a director.
• Personal expenses paid with company money or a company credit card.
• Interest charged on any loans.

If you take more money out of the company than you put back in, the loan account can become overdrawn.

Any overdrawn amounts are considered to be assets of the company on your balance sheet until they are repaid.

If you’re a shareholder and director and you haven’t been charged interest on money you owe to your company of more than £10,000 for more than 30 days your company must:

• Treat the loan as a ‘Benefit in Kind’
• Deduct Class 1 National Insurance

This must also be recorded on your tax return and may result in tax on the loan at the official rate of interest.

Therefore, money should be paid back within nine months of the end of the accounting period to prevent a significant tax bill from arising.

There are other Corporation Tax implications of an outstanding overdrawn loan account 9 months after the balance sheet date.

A balance sheet provides a statement outlining the assets of the company owners, its liabilities, such as debts, and the value of its owner’s investment referred to as shareholders’ equity.

The first section of a balance sheet records a business’s fixed assets, such as buildings, land, machinery and equipment, and current assets, which includes cash, stock and accounts receivable that have a ‘lifespan’ of one year or less.

The next section records liabilities, including long-term liabilities like money owed by the company that aren’t due to be repaid within the year, current liabilities that must be paid sooner, such as money owed to HMRC that is paid with 12 months, and accounts payable, which includes salaries and interest on loans.

The final part of the balance sheet is the shareholder equity, which will typically include:

• Share capital – The funds given in exchange for shares.
• Retained earnings – Profits earned once dividends or other distributions are paid out.

For a balance sheet to balance, total assets have to equal total liabilities plus shareholders’ equity. When combined with cash flow records and an income statement the balance sheet should form part of a business’s financial statement.

A balance sheet can give you a great deal of insight into your business and its financial health, helping you improve cash flow, manage debts or seek finance and investment.

To better understand your balance sheet there are two key ratios to consider:

• Current ratio – Current assets divided by current liabilities – This shows the company’s ability to pay short term obligations with its assets that can be readily converted into cash.
• Debt-to-equity ratio – Total liabilities divided by shareholder equity – This shows how much of the company’s operations are funded by debt versus equity.

There are many different approaches to improve your balance sheet and boost cash flow. Here are four common steps that all businesses should consider:

Improving debt-to-equity ratio – Reducing your debts and increasing the cash coming into your business can only strengthen your operations. You need to increase your income and use this to pay down debts. If you can’t increase income, you may need to use assets to reduce debts.

Create a cash reserve – Monitor the amount of cash held and try to build a reserve for investment or emergencies. This can be achieved by disposing of assets, increasing turnover or reducing liabilities.

Reduce cash leaving the business – Cash flow is the lifeblood of your business. If your liabilities exceed the cash being received, you cannot operate and you should find a way to manage liabilities.

Strengthen credit control – Many businesses struggle with debts and late payments. These can create a lot of issues with cash flow and balance sheets. Appoint a professional to manage credit control or invest in software that can help do it for you.

Depreciation is a method of spreading the cost of certain assets over its useful life. It shows how much of an asset’s useful value has been used at any given time.

Depreciation, therefore, refers not only to the decrease in the value of a tangible asset but also the process of writing down the cost of the asset during its useful lifespan.

It can be useful to depreciate the value of long-term assets on a balance sheet as this can affect net income, which may have accounting and tax benefits

The method for calculating depreciation can sometimes vary between asset types, which can affect how assets are accounted for and taxed.

There are two main methods used to calculate depreciation:

• Straight-line method – This is calculated by dividing the difference between an asset’s cost and its expected salvage value by its useful lifespan. This method is easy to calculate and understand but has some drawbacks.
• Reducing balance method – This is calculated by applying a fixed percentage on the ‘book value’ of the asset each year so that the amount of depreciation each year is less than the amount provided for in the previous year. As the ‘book value’ of the asset is continually reduced from year to year it is possible to figure out the depreciation expense.

What is amortisation?

Amortisation is a method used to lower the value of a loan or an intangible asset, such as a patent, over a period of time.

Amortisation is used by lenders to calculate a loan repayment schedule based on a specific maturity date.

Meanwhile, for intangible assets, amortisation helps tie the cost of the asset to the revenues generated by the asset following the matching principle of generally accepted accounting principles.

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortisation and is a method used to evaluate a company’s financial health and performance.

This method shows a business’s profitability from its operations before the effect of capital structure, leverage and non-cash items, such as depreciation, are accounted for.

An asset register is used to list a business’s physical resources, including the date assets were purchased, calculations of their value and identify their current location within an organisation.

Asset registers allow owners and their accounts to compare the value of the assets against their ledgers or balance sheets and calculate depreciation.

Businesses may operate more than one type of register to account for fixed tangible assets, intangible assets or even specific registers for different departments, such as an IT asset register.

Fixed assets registers can be maintained within the business’s accounting software.

The structure of your business can have a big impact on how you and your new enterprise are taxed and the obligations that you face.

Sole traders – From a legal and tax perspective you and your business are considered a single entity.

As such, you are held personally responsible for the business and its debts.

Your profits are declared via a Self-Assessment tax return and classed as your annual income for that year, regardless of whether you receive this as a salary, or it is held in your business’s bank account.

As a sole trader, you do not have to submit information to Companies House each year, it may be easier to take money out of the business and it can be easier to set up and close your business but remember you are personally liable for the debts of your business.

Partnership – Partnerships are similar to sole traders but differ in that they have more than one owner.

Under a partnership arrangement, each partner owns a specified percentage of the profits but is also liable for these profits and must pay tax on them as they are treated as income.

Each partner must complete a Self-Assessment tax return to record and report their income to HM Revenue & Customs.

Depending on the type of partnership formed, partners may be held personally liable for debts and other obligations.

Limited liability partnerships share many of the same characteristics of a conventional partnership, such as the internal management, tax liability and the distribution of profits, but also provide the limited liability of an incorporated company, without the same obligations.

Limited company – Incorporating a business is a popular choice for many business owners, as the business becomes a separate legal entity entirely.

The company will be owned and controlled by those who own its shares. These shares can be owned by a single person or multiple people and can be sold to raise money for the company.

Limited companies must be registered at Companies House and have to submit annual accounts and statements under Companies House rules. They will also have certain standard legal documents that govern what they can and can’t do.

Instead of partners or owners paying tax via their tax return, limited companies are subject to Corporation Tax and must submit an annual Corporation Tax return.

Choosing to operate as a limited company comes with significant benefits for owners and shareholders, including improved tax efficiency and reduced risk from liabilities.

It is important to carefully consider which structure suits your business and how it may affect the tax that you owe and your legal obligations.

It is possible to change your business’s structure later in its life.

Operating as a company may also add a level of credibility that you may not associate with as a sole trader.

IR35 is a way of determining whether a contractor should be treated as an employee for tax purposes or genuinely self-employed.

In the private sector, it was originally the contractor’s responsibility to determine their own IR35 status, whether they operated through a limited company or an agency.

Since April 2021, this responsibility has shifted — but only for medium and large private sector clients. In those cases, the end client (usually the engager of the contractor’s services, or sometimes the recruitment agency) must decide the contractor’s IR35 status.

However, where the end client qualifies as a small company under the Companies Act rules, responsibility does not transfer. In those situations, the contractor’s personal service company (PSC) remains responsible for determining IR35 status and accounting for the correct tax.

All medium and large private sector businesses are responsible for determining the IR35 status of contractors and, where IR35 applies, for operating PAYE and paying the appropriate Income Tax and National Insurance contributions.

Crucially, it is the end client, not the contractor, that is held liable if HM Revenue & Customs later decides that a contractor’s IR35 status was assessed incorrectly.

These rules do not apply in the same way where the end client is classed as a small business, or where the contractor works through an umbrella company and is already taxed through PAYE.

If the end client is a small company, responsibility for assessing IR35 status and accounting for the correct tax does not transfer to the client. Instead, it remains with the contractor’s personal service company.

For this purpose, a company is considered small if it meets at least two of the following conditions:

• Annual turnover of not more than £15 million

• Balance sheet total of not more than £7.5 million

• No more than 50 employees

To help employers HMRC has created the Check Employment Status for Tax (CEST), which can be found here.

However, this is a very complicated subject and we highly recommend speaking with a qualified accountant and tax adviser for help.

Making Tax Digital is HM Revenue and Customs’ programme to modernise the UK tax system and move reporting online using approved software.

Under MTD, qualifying businesses and individuals are required to keep digital records and submit updates to HMRC throughout the year rather than relying solely on an annual return.

MTD will be introduced in several different phases, as follows:

Making Tax Digital for VAT

If your business is VAT registered you now need to comply with Making Tax Digital (MTD) for VAT.

VAT-registered businesses are required to keep financial records digitally and submit VAT returns through the MTD system using a compatible software.

Businesses face potential penalties if they do not use HMRC-compliant software or process to report their VAT affairs.

Making Tax Digital for Income Tax

From April 2026, MTD for Income Tax applies to:

• Sole traders and landlords with gross annual business or property income over £50,000

From April 2027, MTD for Income Tax applies to:

• Sole traders and landlords with gross annual business or property income over £30,000

From April 2028, MTD for Income Tax applies to:

• Sole traders and landlords with gross annual business or property income over £20,000

Affected taxpayers must keep digital records and submit quarterly updates to HMRC using MTD-compatible software, followed by an annual final declaration.

You’ll have the opportunity to sign up voluntarily beforehand to iron out any issues in the transition.

You must use HMRC approved cloud accounting software or a set of compatible software programs that can connect to HMRC systems via its Application Programming Interface (API).

The software must be able to:

• Keep records in a digital form
• Preserve digital records in a digital form
• Create a VAT or tax return from the digital records held in functional compatible software and provide HMRC with this information digitally
• Provide HMRC with VAT and tax data voluntarily
• Receive information from HMRC via the API platform.

We can help you find online cloud accounting software that is suited to you and your business’s needs.

The two most commonly used forms of VAT accounting are cash (based on bank receipts and payments) and accrual (based on invoices raised and received).

Using the cash accounting method, you calculate the VAT when your invoices are paid by your customers, not when they are initially raised. This ensures that you only pay VAT to HMRC once your customer has paid and settled their invoice.

However, this also means that you can only reclaim the VAT from HMRC on purchases where the supplier invoice has been paid.

This method is generally seen as an easier approach on cash flow, as cash reserves aren’t required to pay HMRC for sales not yet collected, making it ideal for smaller to medium-sized businesses.

Businesses should be aware, however, that this method of accounting is only available if taxable turnover is less than £1.35 million in the next 12 months. You must leave the scheme if your VAT taxable turnover is more than £1.6 million.

You are also not allowed to use this method of accounting if:

• You use the VAT Flat Rate Scheme – instead, the Flat Rate Scheme has its own cash-based turnover method.
• You are not up to date with your VAT Returns or payments.
• You have committed a VAT offence in the last 12 months, for example, VAT evasion.

Certain transactions are also not permissible under this method, such as where the payment terms of a VAT invoice are six months or more.

Businesses with long payment terms on their sales invoices, credit control issues or businesses, such as consultants with no real significant expenses each quarter, may benefit from using the cash basis for VAT.

This is the default option for VAT. If you use the accrual accounting method you must calculate VAT based on when the invoice was either received or issued, not when payment was made.

This method of accounting is not concerned with when payments were received or made, which is why it is the preferred (and often required) form of accounting for larger businesses with a higher turnover.

If you intend to use this method of accounting, you should make sure that you have sufficient cash reserves to cover VAT payments to HMRC on unpaid invoices.

Businesses that typically have a VAT repayment each VAT period may wish to use the accrual-based scheme to reclaim the VAT refund more quickly.

VAT payments are typically due around five weeks after the end of the VAT quarter, so if your customers tend to pay you within two to three weeks of invoicing, the accruals scheme could be more appropriate.

Businesses need to consider which form of accounting is most suited to their business and seek advice from a qualified professional before adopting one or the other.

Directors, as well as other employees, should be able to claim tax relief for additional household costs if they are required to work from home regularly.

You may be able to claim tax relief for:

• Gas and electricity within your work area
• Metered water
• Business phone calls

However, you are not permitted to claim for the whole bill, just the part that relates to your work. You also cannot claim tax relief if you choose to work from home.

Under the rules, you can either claim tax relief on:

• The exact amount of extra costs you have incurred above the weekly amount with evidence, such as receipts, bills or contracts; or
• At a flat rate of up to £6 a week without evidence.

You will receive tax relief according to your marginal tax rate. For example, if you pay the basic rate of tax and claim tax relief on £6 a week, you will get £1.20 per week in tax relief (i.e., 20 per cent of £6).

You will not have to report anything or pay tax and National Insurance on a work social event, as long as it:

• Is open to all your employees
• Is annual, such as a Christmas party or summer barbecue
• Costs £150 or less per person.

These rules also apply to online or virtual parties that your business holds.

If your business operates from multiple locations, an annual event that is open to all of your staff based at one location will still be exempt.

Similarly, you can also put on separate parties for different departments, as long as all of your employees can attend one of them.

You can also hold multiple annual events, as long as the combined cost of the events is no more than £150 per head each year.

There are complicated rules that surround BIKs so we highly recommend speaking with an accountant before proceeding.

Businesses must have an Economic Operations Registration and Identification (EORI) number to move goods between Great Britain and other countries. It is a mandatory part of a customs declaration and is necessary to report and pay import and export VAT as well.

You usually need to be ‘established’, by having a premises in the country you’re moving goods from or to, to get an EORI number, but you can also get one if you need to make a customs declaration for another country.

Businesses offering services to customers in the EU and not goods, do not need an EORI number.

GB

Businesses need a GB EORI number to move goods between Great Britain and the EU.

If the business uses a post or parcel company, they may tell the business if it needs an EORI number, but it is best to check.

If you already have an EORI number and it does not start with GB, you will need to apply for a new one here.

To apply, you need a:

• Unique Taxpayer Reference (UTR)
• business start date and Standard Industrial Classification (SIC) code
• Government Gateway user ID and password
• VAT number and effective date of registration (if you’re VAT registered)
• National Insurance number (if you’re an individual or a sole trader).

EU

If a business makes declarations or gets customs decisions in an EU country, it will need to get an EU EORI from the customs authority in the EU country where it is submitted.

XI

If a business moves goods into Northern Ireland or via it into the EU, then they should sign up for the Government’s Trader Support Service and acquire an ‘XI’ EORI number.

You are required to register for VAT in the UK if:

• You expect your VAT taxable turnover to be more than £90,000 in the next 30-day period; or
• Your business had a VAT taxable turnover of more than £90,000 over the last 12 months.

The VAT threshold may change in future.

VAT taxable turnover includes all sales that are not VAT exempt.

You may also need to register immediately if you are not UK-based but supply goods or services in the UK.

Voluntary VAT registration is possible below the threshold and can be beneficial, particularly if you incur VAT on costs or deal mainly with VAT-registered customers.

Most businesses can register for VAT online. This will grant you a VAT number and create a VAT online account, which will allow you to submit your VAT Returns to HMRC.

You should get a VAT registration certificate within 30 working days of making your submission, though it can take longer.

You can then start charging VAT on applicable products and services from your ‘effective date of registration’.

You’ll usually need to send a VAT return four times a year to show what you have paid and what has been paid to you. This should now be done through Making Tax Digital for most businesses, unless you are registered for the VAT Annual Accounting Scheme.

You can also appoint an accountant to submit your VAT Returns and deal with HMRC on your behalf.