Tax Planning Strategies for UK Businesses in 2026: How to Reduce Tax Legally

1. Review and Optimise Your Business Structure

One of the most powerful tax planning decisions is how your business is structured.

Why this matters 

• Sole traders pay income tax up to 45% on profits
• Limited companies pay corporation tax at 19%–25%
• Dividend tax rates increase from April 2026
• Employer NIC rules and thresholds have tightened

Planning considerations

• Are profits consistently above £40,000–£50,000?
• Do you plan to reinvest profits rather than withdraw everything?
• Do you need limited liability or added credibility with clients?

For many growing businesses, operating as a limited company can offer tax efficiency but only when combined with proper planning and compliance.

2. Time Income and Expenses Strategically

Tax planning is often about when transactions happen, not just what they are.

Practical strategies

• Accelerate allowable expenses before your accounting year-end
• Defer income to the next tax year where commercially appropriate
• Make pension contributions before year-end for immediate tax relief
• Purchase qualifying assets before the relief rules change

Full expensing for qualifying plant and machinery remains available until March 2026, after which relief rules may be less generous. Timing capital purchases carefully can significantly reduce taxable profits.

3. Maximise Allowable Expenses and Capital Allowances

Claiming all legitimate deductions is one of the simplest and safest ways to reduce tax.

Allowable expenses

Allowable expenses include costs incurred wholly and exclusively for business purposes, such as Rent, utilities, and office costs, Software and subscriptions, Professional fees (accountants, legal), Marketing and advertising, and business travel (non-commuting). They reduce:

• Corporation tax
• Income tax
• National Insurance

Capital allowances

Capital allowances allow businesses to claim tax relief on certain long-term assets, spreading or accelerating relief depending on the allowance used. The Annual Investment Allowance (AIA) allows 100% tax relief on up to £1 million of qualifying plant and machinery expenditure. This can include:

• Computers and servers
• Office furniture and equipment
• Machinery and tools
• Commercial vehicles
• Certain integral building features, such as heating and ventilation systems

In addition, full expensing allows companies to deduct 100% of the cost of qualifying main-rate assets in the year of purchase. This relief remains available until March 2026.

The key planning point is intent. Buying assets reactively can distort profits, while planned capital investment can smooth taxable income and reduce tax at the right time.

4. Use Pension Contributions as a Tax Planning Tool

Pensions remain one of the most tax-efficient planning tools available.

Why pensions are powerful

• Employer pension contributions are allowable business expenses
• No employer or employee National Insurance contributions
• Personal pension contributions receive tax relief at your marginal rate

Currently, the annual pension allowance is £60,000 (or 100% of earnings if lower), and unused allowance from the previous three years may be carried forward

For company directors, pension contributions can often be more tax-efficient than additional salary or dividends.

5. Plan How You Pay Yourself (Salary vs Dividends)

For limited company directors, how you extract money from the business is a key planning decision.

2026 changes to note

• Dividend tax rates increase from April 2026
• Dividend allowance remains at just £500
• Salary levels affect both income tax and National Insurance

Planning approach

• Use a small salary up to relevant thresholds
• Top up income with dividends where appropriate
• Review the mix annually as rates and thresholds change

There is no single “perfect” split; it depends on profit level, personal income, and long-term plans.

6. Take Advantage of Available Reliefs and Schemes

Several government reliefs can reduce tax when used correctly.

Common examples

• R&D Tax Relief for qualifying innovation and development work
• Employment Allowance, offsetting up to £10,500 of employer NICs
• SEIS and EIS, supporting investment in early-stage companies
• EMI share schemes, offering tax-efficient employee incentives

In 2026, HMRC continues to tighten compliance around reliefs, so accurate records and eligibility checks are essential.

7. Build Digital Compliance into Your Tax Planning

Tax planning in 2026 is inseparable from digital compliance.

Why this matters

• MTD for Income Tax begins in April 2026 for qualifying sole traders and landlords
• Quarterly updates replace annual-only reporting for many businesses
• Errors and late submissions trigger penalties more quickly

Smart planning move

• Use MTD-compatible accounting software
• Track tax liabilities in real time
• Review figures quarterly—not just at year-end

Digital systems turn tax planning from guesswork into informed decision-making.

Planning Early 

The most tax-efficient UK businesses in 2026 aren’t aggressive, they’re prepared.

Effective tax planning means:

• Understanding which taxes apply to your business
• Timing income, expenses, and investments strategically
• Claiming all available reliefs and deductions
• Embedding compliance into everyday operations

When tax is planned for and not reacted to, it stops being a source of stress and becomes a tool for stability and growth.