5 Ways UK SMEs Can Save Tax in 2025
Published: January 15, 2024 | 8 min read
Table of Contents
With corporation tax rates at 25% for profits over £250,000 and ongoing economic challenges, UK SMEs need every legitimate tax advantage available. Here are five proven strategies that could save your business thousands in 2025.
1. Claim R&D Tax Credits
Research and Development tax credits remain one of the most underutilized tax reliefs for UK SMEs. Contrary to popular belief, you don't need to be a tech company or have a laboratory to qualify.
Who Can Claim?
If your business has:
- Developed new products, processes, or services
- Improved existing products or processes
- Overcome technical uncertainties
- Created new software for internal use
💡 Key Statistic: SMEs can claim up to 33% of qualifying R&D costs as a tax credit. The average claim is £57,000, but many eligible businesses never apply.
Qualifying Costs Include:
- Staff costs (including PAYE and NI)
- Subcontractor costs (65% eligible)
- Software licenses
- Consumables and materials
- Utilities directly related to R&D
Action Step: Review your projects from the last two tax years - you can make retrospective claims. Our R&D specialists can identify qualifying activities you might have missed.
2. Maximize Pension Contributions
Pension contributions remain one of the most tax-efficient ways to extract profits from your business while reducing corporation tax.
The Numbers That Matter:
- Annual allowance: £60,000 for 2024/25
- Corporation tax saved: Up to 25% on contributions
- No employer NI on pension contributions (saving 13.8%)
💰 Example: A £40,000 pension contribution could save £10,000 in corporation tax plus £5,520 in employer NI - a total saving of £15,520.
Advanced Strategy: Carry Forward
You can use unused annual allowances from the previous three tax years, potentially allowing contributions up to £200,000 in one year.
Warning: The pension annual allowance is tapered for high earners with adjusted income over £260,000.
Learn more about tax-efficient extraction strategies with our personal tax planning service.
3. Use Capital Allowances Strategically
The super-deduction may have ended, but there are still significant opportunities to reduce tax through capital allowances.
Annual Investment Allowance (AIA)
The AIA remains at £1 million until March 2025, allowing immediate 100% tax relief on qualifying expenditure:
- Machinery and equipment
- Computer equipment and software
- Commercial vehicles (not cars)
- Furniture and fixtures
Full Expensing (Permanent from April 2023)
Companies can claim 100% first-year relief on qualifying main rate plant and machinery - with no upper limit.
📊 Planning Tip: Time your purchases strategically. Buying assets just before your year-end gives immediate tax relief.
Special Rate Assets
Don't forget the 6% writing down allowance for:
- Integral features (electrical systems, air conditioning)
- Long-life assets
- Solar panels
Our business tax team can help identify all available capital allowances.
4. Optimize Dividend vs Salary Mix
For director-shareholders, the right balance between salary and dividends can save thousands annually.
2024/25 Optimal Strategy:
- Salary: £12,570 (personal allowance) or £9,100 (if claiming employment allowance)
- Remaining extraction: Via dividends
The Tax Rates (2024/25):
| Income Band | Dividend Tax | Income Tax + NI |
|---|---|---|
| Basic rate | 8.75% | 32% |
| Higher rate | 33.75% | 42% |
| Additional rate | 39.35% | 47% |
💡 Don't Forget: The dividend allowance is just £500 for 2024/25 (down from £1,000). Plan accordingly.
Family Tax Planning
Consider making your spouse a shareholder to utilize their tax allowances - but ensure they genuinely contribute to the business.
Get personalized advice on profit extraction with our personal tax service.
5. Review Your Business Structure
Your business structure significantly impacts your tax liability. With recent tax changes, what worked five years ago might not be optimal today.
Consider These Options:
Limited Company vs Sole Trader
The incorporation threshold has changed. Generally, consider incorporating when profits exceed £30,000-£40,000, but factors include:
- Corporation tax (19-25%) vs income tax (20-45%)
- Dividend tax implications
- Pension contribution flexibility
- Limited liability protection
Holding Company Structure
Benefits include:
- Tax-free dividends between group companies
- Asset protection
- Easier business sales
- Investment opportunities
Property in SPVs
For property investors, Special Purpose Vehicles can:
- Avoid Section 24 mortgage restrictions
- Enable lower corporation tax rates
- Facilitate portfolio growth
⚠️ Important: Restructuring has tax implications. Always get professional advice before making changes.
Explore restructuring options with our business structure specialists.
Bonus Tips for 2025
6. Employment Allowance
Claim up to £5,000 off your employer NI bill if eligible.
7. Patent Box Relief
10% corporation tax rate on profits from patented inventions.
8. Enterprise Investment Schemes
Attract investment with 30% tax relief for investors.
9. Trading Losses
Carry back losses to previous year for immediate tax refunds.
10. Green Tax Incentives
Enhanced capital allowances for energy-efficient equipment.
Get Your Personalized Tax Strategy
Every business is unique. These strategies could save you thousands, but implementation requires expert guidance.
Free Tax Review Offer: Book a 15-minute consultation and we'll identify at least three tax-saving opportunities specific to your business.
Conclusion
Tax planning isn't about avoiding your obligations - it's about understanding the rules and using legitimate reliefs to keep more of what you earn. The strategies outlined here could save a typical SME £10,000-£50,000 annually.
Remember: tax legislation changes frequently. What's optimal today might not be tomorrow. That's why working with experienced accountants who stay current with regulations is crucial.
Disclaimer: This article provides general information only and does not constitute tax advice. Tax treatment depends on individual circumstances and may change. Always consult a qualified accountant before making tax decisions.