Your business – making the rules work for you 

34 Choose the most tax-advantageous structure for your new business.
Tax changes, such as the recent 3% cut to the main rate of self-employed NICs, have made the decision on how to structure a new business quite difficult. Traditionally, a business would start off as a sole trader or partnership, and then incorporate later on when it had grown. The initial stage of this approach still holds, especially if losses are a possibility in the early years of trading. Running a business as a sole trader or partnership will give you maximum flexibility to set off those losses against your other income. 

However, with a marginal rate of corporation tax of 26.5% on company profits between £50,000 and £250,000, and 25% once profits exceed £250,000, it will now often make sense to remain unincorporated, especially when the higher costs of running a company are taken into account. One advantage that companies do still have is the ability to make tax-efficient pension contributions (see tip 22).  

35 Use the £1,000 trading allowance.  

Sometimes it is difficult to know exactly when a business begins, as many start gradually in order to test an idea in the market. You can receive up to £1,000 per year of tax-free income from a trade without having to declare this to HMRC. Once you generate more than £1,000 of sales in a year you need to register your business with HMRC or risk a penalty.  

36 Don’t miss your VAT registration requirement.
If your business is not VAT registered, you must keep an eye on your turnover for the previous 12 months on a rolling basis. When it exceeds £90,000, you must register for VAT by the end of the month following the month in which your turnover exceeds the threshold. Once registered, you must charge VAT on all of your sales (except those which   are exempt) and submit VAT returns to HMRC using making tax digital (MTD) compliant software. You also need to keep your VAT records in a digital format. 

37 Check that your trading profit is calculated using the most appropriate basis.
The cash basis is now the default method for calculating trading profit if you are self-employed or in a partnership. However, there are circumstances where the traditional – more accurate – accruals basis will be preferable, and it is easy enough to opt out of the cash basis if this is the case. More sophisticated businesses will normally want accounts prepared on an accruals basis so they have the information to make business decisions. Also, banks and other lenders may insist on the accruals basis being used. 

38 Lower your tax rate by involving your family. 

When your taxable profits go above £50,270 per year, consider bringing in your spouse or adult children as partners in your sole-trader business. A partnership can spread the profits over the basic rate bands and personal allowances of your family members, keeping the average tax rate of the family below 40%. The proportion of profits allocated to each partner can vary each year, although it is advisable to have a partnership agreement drawn up to document this.  

39 Use your own car for business journeys.
By using your own car for business journeys, you can receive a tax- and NIC-free mileage allowance of 45p per mile for the first 10,000 miles, and 25p per mile for any additional miles, per tax year. These rates are the same for whatever road fuel your car uses, including for electric cars. If you work for yourself, you can use these mileage rates to calculate the cost of the business journeys you take in your own car, which is generally easier than working out the business proportion of the entire running costs of the vehicle.    

TIP 

With the main rate of employee NICs cut by 4% to 8% for 2024/25, any prior decisions on how to withdraw profits from your limited company need to be reviewed. Although extracting profits by way of dividends will still generally be more tax-efficient, the decision is not nearly as straightforward as it used to be. 

This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. This publication represents our understanding of the Finance  
(No 2) Bill 2024, the Budget (Scotland) Act 2024 and law and HM Revenue & Customs practice as at 1 May 2024. All rights reserved.