Tax Planning for Business Owners

Profit Extraction, Pensions & Company Cars 

In this second article about early tax planning measures for entrepreneurs and business owners, we take a look at tax-efficient profit extraction, pensions and company cars and the measures that you may be able to take to help mitigate your tax liability. 

Dividends vs salary in 2025/26

The dividend rules are:  

• First £500 of dividends: tax-free. 
• Above that: 8.75% (basic), 33.75% (higher), 39.35% (additional).   

Salary/NICs 

• From 6 April 2025, employers will pay 15% NIC on employee earnings over £5,000, making salary less attractive relative to dividends.
• The Employment Allowance can reduce the employer's NI contributions by up to £10,500 pa, but this will not apply where the only employee of the company is a director.

Tax planning tips  

• Run the numbers annually. With employer NICs rising, revisit the optimal salary+dividend mix each April. 
• Mind pensionable pay. Very low salaries can limit personal pension contributions. Salary sacrifice to employer contributions can solve this.

Using family allowances (adult children) 

If adult children hold shares, their first £500 of dividends is tax-free, and dividends within their unused basic rate band are at 8.75%.  
 
Tax planning tips  

• Share classes. Alphabet shares can allow tailored dividends (but ensure company law/admin is correct) and no regulatory issues. 
• Purpose-linked funding. Use basic-rate dividends to help fund post-18 education or first-home savings. 

Gift Aid interactions 

Gift Aid requires sufficient Income Tax/CGT paid to cover the tax credit. Large dividend income with low PAYE can create shortfalls.  

Tax planning tips  

• Do a Gift Aid test. Before large donations, check your total tax paid covers the tax reclaimed by charities—or top up tax (e.g., small salary/bonus) to avoid an HMRC bill. 

Director’s loan interest 

If you’ve lent money to your company, the company can pay you interest: deductible for the company, no NICs on the interest.  The interest will be taxable on you personally, subject to the Savings Allowance limits.  
 
Tax planning tips  

• Commercial rate and paperwork. Put a written loan agreement in place, pay a market rate, operate withholding tax if required and report correctly.

Pensions: big relief, but watch out for the taper 

• Personal tax relief up to the higher of £3,600 or 100% of relevant earnings (subject to £60,000 annual allowance). 
• Carry forward unused Annual Allowance for 3 years (2021/22 £40k, 2022/23 £40k, 2023/24 £60k). 
• Tapered allowance: if taxable income > £200k and adjusted income > £260k, annual allowance reduces £1 per £2 over £260k, to a £10k minimum. 

Tax planning tips  

• Employer contributions. Company contributions aren’t limited by your relevant earnings (but do use up your annual allowance). Great for owner-managers with low salary/high dividends. 
• Salary sacrifice. Swapping salary/bonus for employer pension saves both Income Tax and NICs. 
• Advice allowance. Up to £500 p.a. of pension advice can be provided tax-efficiently. This must be made available to all employees to qualify, however director only companies will qualify. 

Company cars, vans & fuel (and 2025+ rises)  

• Car benefit = list price × CO₂ % (max 37%, rising to 38% in 2028/29, 39% in 2029/30).  For diesel cars, a supplement of 4% is usually added. 
• Fuel benefit uses the same % applied to £28,200 (2025/26). 
• Vans: Flat rate benefit £4,020 (plus £769 for private fuel) in 2025/26. 
• EV and low-emission rates have been rising gradually, 3% from 2025/26 onwards. 

Tax planning tips

• Ditch “free fuel”. It’s rarely tax-efficient unless you do very high business/private miles. 
• Favour EVs via salary sacrifice. Benefit-in-kind on EVs is 3% in 2025/26, and salary sacrifice creates Income Tax + NIC savings that often beat personal lease costs. 
• Mileage instead? Using your own car: pay 45p/mile (first 10k) then 25p, plus 5p per passenger. Bikes 20p/mile, motorcycles 24p/mile. 

Double-cab pick-ups (DCPUs): new treatment 

From 1 April 2025 (CT) and 6 April 2025 (IT), DCPUs ≥1 tonne payload are treated as cars for capital allowances, benefits-in-kind and some profit deductions. Transitional relief applies where purchased/leased/ordered before 6 April 2025, until disposal/lease end or 5 April 2029.  

What next?

As always, these articles provide an overview of the various measures available, and no action should be taken without seeking professional advice.  At Ritchie Phillips, we pride ourselves on providing clear, pragmatic advice to help businesses, individuals and families. If you’d like to discuss any of the above, please get in touch.