Why tax planning is crucial from launch: your start-up to-do list

At a glance

• Tax planning from day one can bring benefits in the short and long term – for example, by positively impacting your cash flow.
• You can potentially reduce your Corporation Tax bill by making use of all the available reliefs and allowances for your SME.
• Experts such as a financial adviser and an accountant can support you to make the right decisions for you and your business.

Tax planning can feel like a low priority for new business owners as you understandably focus on getting sales and operations off the ground. But optimising your tax position is just as valuable in a start-up as it is in larger organisations.

Smart fiscal planning from launch can significantly impact your cash flow by helping you make the most of your tax allowances and avoid fines for non-compliance. You may think tax planning becomes necessary only once you start making a profit. But it is equally important if you make a loss in the first year or two – for example, it can help you offset these deficits against other taxable income.

Why is tax planning important for new businesses?

Tax planning means arranging your finances in a compliant and tax-efficient way. It ensures business and personal tax efficiency while avoiding unnecessary costs such as fines for non-compliance with HMRC rules or interest for overdue payments.

For example, if you fail to repay a director’s loan within a set period, your company can be penalised by having to pay additional Corporation Tax. So you need to be careful about how you pay yourself and avoid using company money for personal expenses, which HMRC treats as a director’s loan.

Tax incentives for businesses

You could reduce your Corporation Tax bill by taking advantage of the available tax reliefs and benefits for businesses. For example, you could make use of capital allowances or research and development (R&D) credits – explained below. You should also consider how you pay yourself and your staff, as this will impact both your Corporation Tax bill and your personal liability.

Simon Martin, Chartered Financial Planner at Technical Connection, a subsidiary of St. James's Place, says one incentive to plan from day one is that most tax allowances work on a “use it or lose it” annual basis, so if you don’t use an allowance one year, you can’t use it the next.

“You don’t want to miss a year or more of planning opportunities because you didn’t get round to it,” he says.

Simon adds that money is often tighter in a start-up, so using allowances or exemptions can make a critical difference to your cash flow. “It’s also crucial to ensure you’re taking income from your company in the most efficient way,” he says. “Every pound you save in tax can potentially be used for income or to reinvest into your business”.

Your tax to-do list for start-ups

• Kick off by appointing an accountant. There’s much more to tax planning in a start-up than you may realise, especially if you have never run a company before. It’s a specialised area, so most businesses need a professionally qualified accountant to help.
• Decide whether you want to be registered for VAT, and if so, which VAT scheme to use.
• Make sure you understand all your tax obligations. Your chosen business structure (sole trader, partnership or limited company) is a key factor in this, so think carefully as it can be difficult to change later. Richard Jones, Senior Technical Manager at the Institute of Chartered Accountants in England and Wales (ICAEW), says: “Start by projecting your turnover, expenses and profit. These numbers will influence your decision on whether to incorporate (start a limited company) and register for VAT.”
• Register with HMRC for each tax you need to pay. There is no one-stop shop for this, so you must register separately for Income Tax, PAYE, VAT and (for limited companies) Corporation Tax.
• If you’re self-employed, decide whether to use cash or accrual accounting to calculate your business profits subject to Income Tax. For cash accounting, you calculate profits based on the cash coming in and out of the business. With accrual accounting, you account for adjustments such as debtors, creditors and provisions. This decision can affect your cash flow significantly.

Thresholds, credits and allowances

There are a multitude of tax allowances, credits, rates and thresholds you can use to reduce your overall payments to HMRC.

Lower Dividend Tax rates and the dividend allowance can help make limited companies slightly more tax efficient for some business owners, especially those with lower profits. A financial adviser could also look at your income from your business in the context of your personal finances as a whole. For instance, they might suggest increasing your pension contributions to avoid paying higher or additional-rate Income Tax. Your accountant can also help to make this happen.

Capital allowances are one of the most attractive tax incentives for companies, especially since the introduction of the annual investment allowance (AIA) in 2008 and ‘full expensing’, which succeeded the super-deduction in 2023. These both offer 100% relief on spending on qualifying plant and machinery in the year of expenditure. Richard says these allowances are even more beneficial given last year’s Corporation Tax hikes. “These allowances can be incredibly helpful for start-ups,” he says. Unincorporated businesses don’t miss out either – although they don’t qualify for full expensing, they can claim AIA, which provides full upfront relief on £1 million of qualifying expenditure. p>

R&D tax relief is available to firms that meet strict conditions. This allows SMEs to deduct an extra 86% from their yearly profit, plus the standard 100% deduction – so deducting up to 186% in total. However, you must plan this carefully to ensure your claim is robust.

A range of other tax benefits could help your business longer term – from tax-efficient share schemes to reward employees, to Capital Gains Tax exemptions and Business Asset Disposal Relief (BADR) when you come to exit. The earlier you plan for these, the better. As Simon says: “There are lots of actions you can take that end up losing you reliefs. For example, BADR can be worth £100,000 per person, and £200,000 to a couple. Holding too much non-trading capital in your business can result in this relief being lost, therefore professional taxation advice is vital.”

Integrating tax with personal financial planning

Simon says tax planning is also crucial to understanding how your business and personal goals fit together.

“For example, many start-up owners plan to sell their businesses in future,” he says. “But what if that doesn’t work out or the sale price isn’t what you hoped for? It’s important to also start moving money into your own name by paying yourself properly and making pension contributions. Financial planning can help you reduce your level of risk by diversifying away from your business and therefore help protect your retirement goals.”

The sooner you make these plans, the better. Early saving makes a huge difference to the final sum available for retirement due to the cumulative effect of long-term investment returns.

To make sure you’re taking advantage of the available tax reliefs and allowances for your business as well as your personal income, get in touch with us today.

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.