Tax Planning for Owner-Managed Business Owners: A Complete Guide

The owner of a UK limited company has access to tax planning opportunities that employed individuals do not — but also faces complexity that can lead to costly errors if not managed carefully. The interaction between personal and corporate tax, the choice of extraction method, the timing of disposals, and the use of reliefs specific to business owners requires a coherent strategy rather than a series of ad hoc decisions.

This guide sets out the key tax planning considerations for UK owner-managed business owners, from day-to-day extraction to exit and estate planning.

The Corporate versus Personal Extraction Decision

The central tension in business owner tax planning is between income that is retained in the company (taxed at corporation tax rates) and income extracted to the individual (taxed at income tax and NI rates). The gap between these rates creates planning opportunity.

Corporation tax rates for 2026/27:

• 19% on profits below £50,000
• Marginal rate on profits between £50,000 and £250,000 (effective blended rate increases)
• 25% on profits above £250,000

Extraction methods:

Salary

A salary paid to a director is:

• Deductible from company profits for corporation tax purposes (reduces the CT bill)
• Subject to income tax at the director's marginal rate (20%, 40%, or 45%)
• Subject to employee's National Insurance (NICs) at 8% above the primary threshold (£12,570 for 2026/27)
• Subject to employer's NI at 15% above the secondary threshold (£5,000 for 2026/27)

The combined tax and NI burden on salary is high — at the higher rate, the effective total charge (including employer's NI) on a marginal pound of salary can exceed 60%.

Dividends

Dividends are:

• Paid from post-corporation-tax profits (the company has already paid CT on the underlying profit)
• Subject to income tax at dividend rates: 8.75% (basic rate), 33.75% (higher rate), 39.35% (additional rate)
• Not subject to NI (either employer or employee)
• Covered by a dividend allowance of £500 for 2026/27 (tax-free)

The absence of NI on dividends makes them more efficient than salary for extraction above the NI thresholds. The disadvantage is that dividends can only be paid from distributable profits — if the company has no profit or retained reserves, a dividend cannot legally be paid.

Employer Pension Contributions

Employer pension contributions are the most tax-efficient form of extraction for most business owners with remaining pension annual allowance:

• No income tax for the individual
• No NI (employer or employee)
• Deductible for corporation tax as a business expense (subject to the "wholly and exclusively" test)

The effective cost to the company of making a pension contribution is 75p–81p per £1 of contribution (depending on CT rate), while the individual receives £1 in their pension. This is more efficient than salary or dividends for the same net cost to the company.

The pension annual allowance (£60,000 for 2026/27) and the tapered annual allowance (which reduces to £10,000 for those with adjusted income above £260,000) are the main constraints. Carry-forward of unused allowance from the previous three years can significantly increase the available allowance in any given year.

Director's Loan Account

A director may lend money to their company (or borrow from it, through a DLA). Borrowing from the company creates a debit DLA. If a debit DLA exceeds £10,000 at any point during the tax year, a benefit in kind arises (taxed at the official rate of interest). If the DLA is not repaid within nine months after the company's year end, the company faces a s.455 tax charge of 33.75% of the outstanding balance — which is recovered when the loan is repaid. The DLA should not be used as a routine extraction mechanism.

Optimal Salary for 2026/27

For a director who is the sole employee of their company (with no other employees whose NI the company pays), the optimal salary level depends on whether the company is claiming the Employment Allowance (EA):

Without EA (many single-director companies are not entitled to EA): the optimal salary is typically around the NI lower earnings limit (£6,708 for 2026/27) — which is above the secondary threshold (£5,000) but below the primary threshold (£12,570). At this level:

• A small amount of employer's NI is due (15% on earnings between the £5,000 secondary threshold and the salary level), but this is deductible for corporation tax
• No employee's NI
• No income tax (below personal allowance)
• Counts as a qualifying year for State Pension purposes

Some directors take a salary of exactly £12,570 (the personal allowance level) to utilise the personal allowance fully — accepting some employer NI at 15% above £5,000 but generating a deduction for that NI cost in the company's CT computation. The net benefit depends on the company's CT rate.

With EA (where the company has multiple employees and is entitled to the Employment Allowance of £10,500): taking salary up to £12,570 is more straightforwardly efficient because the EA absorbs the employer's NI.

The optimal salary level should be calculated precisely each year in conjunction with the accountant, taking into account the company's CT rate, whether EA applies, and the director's other income sources.

Pension Planning for Business Owners

For business owners with remaining pension annual allowance, employer pension contributions remain the most efficient extraction mechanism in most cases. Key planning points:

Maximise carry-forward: the pension annual allowance carry-forward (unused allowance from 2023/24, 2024/25, 2025/26) allows substantial one-off contributions in years when company profits are high. A business owner who has not made significant pension contributions in recent years may have up to £180,000 of carry-forward available.

Timing contributions: employer pension contributions are deductible for CT in the accounting period in which they are paid. A contribution paid before the company year end will reduce CT in that year; one paid after will reduce CT in the following year. Plan the timing of contributions around the company's financial year end and the director's personal tax position.

Salary sacrifice: where the director is also an employee (taking a salary above the NI secondary threshold), converting some salary to employer pension contribution via salary sacrifice reduces NI on both sides — saving the director 8% employee NI and the company 15% employer NI on the converted amount, in addition to the income tax saving.

Multiple beneficiaries: the annual allowance applies to the individual, not the company — but the company can make employer contributions to pensions for multiple family members who are genuine employees, subject to the "wholly and exclusively" test for CT deductibility.

Business Asset Disposal Relief (BADR)

When a business owner sells all or part of a qualifying business, Business Asset Disposal Relief (formerly Entrepreneurs' Relief) provides a reduced rate of CGT on qualifying gains. The BADR rate has risen in stages — it was 10% to 5 April 2025, 14% in 2025/26, and is 18% for 2026/27 — but still sits below the standard 24% upper CGT rate that applies to gains above the lifetime limit.

Qualifying conditions for BADR on company shares (2026/27):

• The company must be a trading company (or holding company of a trading group) — not an investment company
• The individual must own at least 5% of the ordinary share capital and voting rights
• The individual must have been an employee or officer of the company
• The 5% holding and employment conditions must have been met for at least 24 months before the disposal

Lifetime limit: BADR is subject to a lifetime limit of £1 million of qualifying gains. Gains above £1 million on qualifying BADR disposals are taxed at the standard CGT rate.

Planning considerations:

• For business owners whose business is approaching an exit, ensuring that the qualifying conditions are met before the sale date is essential — the 24-month requirement in particular should be monitored if shareholdings have recently changed
• Where the business is owned by multiple family members, each may be entitled to their own £1 million BADR lifetime limit — structuring the shareholding across spouses or family members can multiply the benefit
• BADR applies to gains on share disposals, not to gains within the company (a sale of business assets within a company is subject to CT, not CGT)

The government has a track record of modifying Entrepreneurs' Relief / BADR. The current rules may change — business owners planning exits should take current advice.

EIS and SEIS: Investment Relief for Business Owners

Business owners who have generated gains or high income from their business can use the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) to shelter that income and those gains through investment in qualifying small companies.

EIS relief:

• 30% income tax relief on investments up to £1 million per year (£2 million for knowledge-intensive companies)
• No CGT on gains if shares held for at least three years
• CGT deferral: gains deferred into EIS can be shelved for the duration of the EIS investment
• Loss relief: if EIS shares are lost, income tax relief on the loss net of the income tax relief already obtained

SEIS relief:

• 50% income tax relief on investments up to £200,000 per year
• No CGT on gains if held for three years
• 50% reinvestment relief: SEIS investment can shelter 50% of a CGT gain in the year of SEIS subscription

For a business owner who has just sold a business (generating a large capital gain and a large income tax bill), EIS and SEIS can be highly tax-efficient. However:

• EIS and SEIS investments are high-risk — the underlying companies are small, unquoted, and often early-stage
• The tax relief does not fully compensate for investment loss — net of relief, a total loss on an EIS investment still leaves the investor worse off than not investing
• The three-year holding period means the investment is illiquid
• HMRC advance assurance is available but does not guarantee EIS/SEIS qualification

EIS and SEIS should be used as part of a diversified investment strategy, not as a primary tax mitigation mechanism.

Business Property Relief

Business Property Relief (BPR) provides relief from IHT on the value of qualifying business property after it has been held for two years. Historically, qualifying unquoted trading company shares attracted 100% relief without limit. From 6 April 2026, however, the rules changed significantly: 100% relief on shares in an unquoted trading company (and on agricultural property qualifying for APR) is now capped at a combined £2.5 million per person, with the value above that £2.5 million threshold attracting only 50% relief (a 20% effective IHT rate). The £2.5 million allowance is transferable between spouses and civil partners (up to around £5 million per couple). The cap was originally announced as £1 million in the October 2024 Budget but was raised to £2.5 million in December 2025. AIM-listed and other quoted-but-unlisted shares no longer qualify for 100% relief at all — they are restricted to 50% relief from 6 April 2026 and do not use the £2.5 million allowance. Business owners can therefore no longer assume that the full value of a large trading company will pass entirely free of IHT.

Qualifying property:

• Shares in an unquoted trading company — 100% relief up to the £2.5m combined allowance, 50% above it (from 6 April 2026)
• AIM-listed shares — 50% relief only (from 6 April 2026)
• A sole trade or partnership interest — within the same £2.5m combined 100% allowance
• Assets used in a partnership or qualifying company — generally 50% relief

Qualifying conditions:

• Held for at least two years before death
• The business must be a trading business — BPR does not apply to investment companies or companies whose activities are "wholly or mainly" investment

Planning implications:

• A business owner with substantial business value and a large potential IHT liability should ensure they understand the BPR position — and, since the £2.5m cap took effect on 6 April 2026, that the portion of business value above the £2.5m combined allowance now attracts only 50% relief and may carry an IHT charge. Lifetime planning (for example, gifting shares earlier or using trusts) is more important than it was under the previous unlimited 100% relief
• BPR is lost if the shares are converted to cash — a business owner who sells the company receives cash that is fully in the IHT estate. The window between sale and deployment into IHT-efficient structures is a period of elevated IHT exposure
• Holding company structures should be reviewed for BPR qualification — a holding company that holds mainly investment assets may not qualify, even if underlying subsidiaries are trading companies

Interplay with Personal Wealth Planning

Business owner tax planning does not operate in isolation. The business is often the largest single asset, and its relationship to the rest of the wealth plan needs to be managed:

• The business represents significant concentration risk — most of the family's wealth is in a single illiquid asset. The accumulation of other assets (ISAs, pensions, investment property) outside the business reduces this concentration over time
• IHT planning for the estate as a whole must account for whether the business qualifies for BPR and for how long the owner intends to hold it
• Exit planning — whether a trade sale, MBO, or family succession — has different tax implications in each case and should be planned years before execution
• Shareholder protection insurance provides capital to the surviving shareholders to buy out the deceased shareholder's estate — ensuring that the family receives value and the business continues, without the estate needing to find a buyer in distress

How Global Investments Can Help

Global Investments works with business owners at every stage — from structuring day-to-day extraction to planning exits and integrating business wealth into the family's long-term financial plan.

We coordinate with specialist corporate tax advisers, corporate solicitors, and pension specialists to ensure that your business tax planning, personal tax planning, pension strategy, and estate planning are coherent and optimised as a whole.

We understand that the business is both your most valuable asset and your biggest planning challenge, and we bring the integrated perspective needed to manage it effectively.

This guide is for general information only. Tax rules for businesses and their owners change regularly and depend on individual circumstances, corporate structure, and trading position. You should seek regulated financial and tax advice from qualified professionals. Tax relief thresholds and rates referred to in this guide are as of the 2026/27 tax year and are subject to change.