Maximising tax efficiency for business owners
For successful business owners, managing tax effectively is just as important as generating profit. The UK tax system is complex, particularly for those with multiple income streams, business interests, and investment portfolios. But with careful planning and expert advice, it’s possible to reduce tax liabilities legally and ensure your hard-earned wealth is working as efficiently as possible.
This blog explores the key tax planning strategies that can help business owners optimise their financial position, both inside and outside the business.
Understanding the Tax Landscape
Business owners often face a unique set of tax exposures:
Corporation tax on company profits
Income tax and National Insurance on salary or dividends
Capital Gains Tax (CGT) on business sales or asset disposals
Inheritance Tax (IHT) on wealth passed to heirs
VAT complexities if providing goods or services
Taxation on investments, property, and pensions
Each of these can be managed more effectively with forward planning. What’s more, the interplay between different tax liabilities means that even small changes in one area can affect your overall efficiency.
1. Salary vs Dividends: Balancing income extraction
If you run a limited company, you have flexibility in how you draw income:
Salary is subject to PAYE income tax and National Insurance
Dividends are taxed more favourably but can only be paid from retained profits
A common strategy is to take a modest salary within the personal allowance (to maintain pension eligibility) and top up with dividends. This balances tax efficiency with National Insurance contributions and protects entitlement to the state pension.
You may also consider a bonus structure tied to company performance, though this is less tax-efficient, it may have motivational value for key employees or directors.
2. Utilising allowances and reliefs
Each year, you’re entitled to various tax-free allowances:
Personal allowance (currently £12,570)
Dividend allowance (£500 for 2025/26)
Capital Gains Tax allowance (£3,000 from 2025/26)
ISA allowance (£20,000)
Pension annual allowance (up to £60,000, subject to tapering)
Structuring your income and investment withdrawals around these thresholds can reduce your overall tax burden. Effective use of spouses’ or civil partners’ allowances can also double tax efficiency in many cases.
3. Pension contributions
Contributing to a pension is one of the most tax-efficient ways to extract profits:
Corporation tax relief on employer contributions
No National Insurance payable on pension contributions
Investments grow tax-free
Potential for carry-forward of unused allowances from prior years
Business owners can use pension contributions to reduce taxable profits and accumulate long-term wealth. Be mindful of the Annual Allowance and the Money Purchase Annual Allowance (MPAA) if you have already accessed pension benefits.
Pensions can also be highly efficient from an IHT perspective, remaining outside of the estate if unused.
4. Family income planning
Splitting income across family members can further enhance tax efficiency:
Employing a spouse or adult children in the business (at a commercial rate)
Transferring shares in the company to utilise their dividend allowance
Using Junior ISAs and pensions to save for children tax-efficiently
These approaches reduce income tax and build future financial resilience across the family. However, documentation and transparency are key to avoiding scrutiny from HMRC.
5. Business asset disposal relief (Entrepreneurs’ relief)
When selling your business, Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) can reduce the CGT rate to 10% on qualifying gains, up to a £1 million lifetime limit.
To qualify, you must:
Own at least 5% of shares and voting rights
Be an employee or director
Meet the criteria for at least two years before disposal
Early planning is crucial to ensure you meet the requirements. If you're thinking about a business sale in future, review your ownership structure and management role well in advance.
6. Investing via a Family Investment Company (FIC)
FICs are a popular structure for HNW business owners to:
Retain control over investments
Separate personal wealth from the trading company
Allow future generations to benefit from growth
Potentially reduce exposure to IHT
FICs can invest in shares, property, or other assets with lower corporation tax rates than personal income or CGT. They must be correctly structured and administered, often with legal and tax advisery input.
7. Trusts for long-term wealth transfer
Trusts remain a valuable tool for:
Protecting assets for future generations
Reducing IHT liability
Providing structured access to wealth
Used alongside lifetime gifting allowances and business reliefs, they can create a robust legacy plan. Trusts also offer flexibility in controlling when and how beneficiaries receive wealth, protecting against divorce, spendthrift tendencies, or poor financial literacy.
8. Tax-efficient investments
Certain investments offer tax reliefs that reward entrepreneurship and innovation:
Enterprise Investment Schemes (EIS): 30% income tax relief, CGT deferral, IHT exemption after 2 years
Seed Enterprise Investment Schemes (SEIS): 50% income tax relief on investments up to £200,000
Venture Capital Trusts (VCTs): 30% income tax relief, tax-free dividends
These options carry higher risk but can complement broader investment strategies. Diversifying into these vehicles also supports UK growth companies.
9. Planning for inheritance
IHT planning is critical for business owners whose estates may exceed the nil-rate band (£325,000). Strategies include:
Gifting assets early (utilising the 7-year rule)
Using Business Relief for qualifying business assets
Whole-of-life insurance policies held in trust
Loan trusts or discounted gift trusts
Reorganising ownership through partnerships or corporate wrappers
Proactive planning can reduce the IHT burden and ensure more of your wealth is passed to the next generation.
10. Work with a multi-disciplinary team
Tax efficiency requires coordination across:
Accountants
Wealth managers
Solicitors
Tax specialists
An integrated approach ensures all parts of your financial life work harmoniously and compliantly. Frequent review is essential to keep pace with changing legislation.
Final thoughts
Strategic tax planning is not about avoidance, it’s about making smart, legal choices to protect your business and family wealth. For business owners, the opportunities are significant, but so are the complexities.
Are you making the most of every opportunity to reduce tax and preserve wealth? At Oculus Wealth, we work with successful entrepreneurs to design integrated financial plans that reduce tax, grow capital, and build legacies. Schedule a complementary call to explore what’s possible together.