6 Ways UK Small Businesses Can Reduce Their Tax Burden Legally And Compliantly

Small business owners in the UK are working harder than ever to protect their profits – understandably so – and smart tax planning has become an essential part of running a successful enterprise.

With 5.5 million private sector businesses in the country – 99% of which are small and medium-sized enterprises, according to the House of Commons Library – there’s a growing risk of overpaying taxes simply because owners are unaware of the reliefs that are available to them.

What’s worse than paying tax? Paying more tax than you’re obligated to.

Chris Roberts, Managing Director at Capital Allowance Review Service, a firm specialising in uncovering overlooked tax reliefs for commercial property owners and investors, explains: “Small business owners work incredibly hard for their profits. The tax system offers legitimate ways to reduce your burden, but people often miss out because they don’t realise what’s available. Understanding these reliefs can make a significant difference to your cash flow and long-term growth.”

6 Strategies for SMEs To Stop Paying Unnecessary Tax

So, with these things in mind, here are six practical, fully compliant strategies for 2025 that SMEs can use to keep more of what they earn.

1. Make the Most of Capital Allowances

Capital allowances remain one of the most powerful yet underused tax reliefs. They allow businesses to deduct the cost of qualifying assets from profits before tax. This isn’t limited to machinery or equipment – it can include fixtures in commercial properties, heating systems, electrical installations and certain building alterations.

“Business owners may not realise they can even claim retrospectively on assets they’ve owned for years,” says Roberts. For 2025, the Annual Investment Allowance (AIA) allows businesses to claim 100% tax relief on qualifying plant and machinery up to £1 million (Merranti Accounting). This can mean substantial savings on everything from office furniture to manufacturing equipment. In fact, you may be shocked at how much you can save.

2. Claim Home Working Expenses

Remote and hybrid working are now standard for many SMEs. HMRC allows business owners to claim a portion of household costs including electricity, heating, internet and phone bills, proportional to the space and time used for work.

For the sake of simplicity, HMRC also offers a flat rate of £6 per week (£312 per year) without needing to track exact costs or provide receipts.

3. Boost Pension Contributions

Employer pension contributions are a highly tax-efficient way to both build retirement savings and reduce taxable profits. Contributions are deductible as business expenses and are exempt from National Insurance for both employer and employee.

“Directors of limited companies can save considerably by making employer pension contributions rather than taking dividends,” notes Roberts. “It’s a win-win for building personal wealth while reducing your tax bill.”

4. Take Advantage of the Employment Allowance

Businesses that employ staff can reduce their National Insurance liability by up to £5,000 per year through the Employment Allowance. According to British Business bank, this relief is available to most companies whose employer NI bill was less than £100,000 in the previous tax year.

Eligible businesses can claim this automatically via payroll software, offering immediate savings – especially valuable for companies hiring staff for the first time.

5. Explore Research and Development (R&D) Tax Credits

Many SMEs assume R&D tax credits are only for tech startups or laboratories, but the definition is broader than that. Companies that develop new products, services or processes(or even just significantly improve existing ones) may qualify.

“We’ve seen manufacturers, food producers and construction firms successfully claim,” Roberts says. SMEs can deduct an extra 86% of qualifying costs from profits or claim a tax credit if the company is loss-making.

6. Keep Meticulous Records of Business Expenses

While straightforward, many small businesses miss out on legitimate deductions, including travel, professional fees, marketing, training, insurance and software subscriptions. The key is thorough record-keeping.

“Maintain receipts and accounting records throughout the year,” Roberts advises. “Use apps or accounting software to track expenses in real time – this ensures you don’t miss valid claims and makes year-end filing far less stressful.”