Jan 19 2026

Tax Planning Tips for Start-Up Businesses in Their First Year

Launching a start-up business in the UK is an exhilarating venture, but effective tax planning for start-ups is essential to minimise liabilities, enhance cash flow, and ensure HMRC compliance. With rules updated for the 2025/26 tax year, proactive startup tax advice can prevent costly errors and unlock valuable tax reliefs for startups.

At Jan McDermott & Co Chartered Accountants, based in Wirral and serving clients nationwide, we specialise in accounting for startups, including sole traders, partnerships, and limited companies. As Xero Certified Advisors, we deliver expert tax planning for new businesses, cloud accounting setups, and personalised support to help UK startups thrive.

This comprehensive guide outlines key tax planning strategies for UK startups in their first year, reflecting current HMRC rules as of December 2025.

1. Choose the Right Business Structure for Tax Efficiency

The foundation of startup tax planning is selecting the optimal structure.

Sole Trader: Simple setup with personal Income Tax and Class 2/4 National Insurance on profits. Suitable for early-stage small business tax needs.
Partnership/LLP: Shared taxation similar to sole traders.
Limited Company: Pays Corporation Tax at 19% (profits up to £50,000) or 25% (above £250,000, with marginal relief). Enables tax-efficient profit extraction via salary and dividends.

Many new businesses start as sole traders and incorporate later. Professional tax advice for startups helps model options and avoid Capital Gains Tax traps on transition.

2. Register Promptly with HMRC

Avoid penalties by registering early:

Sole traders: For Self-Assessment by 5 October in the second tax year.
Limited companies: For Corporation Tax within 3 months of trading.
VAT Registration: Mandatory above £90,000 turnover (2025/26 threshold). Voluntary registration allows reclaiming VAT on startup costs.
PAYE: For employees or director salaries.

Cloud tools like Xero streamline Making Tax Digital compliance.

3. Maximise Capital Allowances for Startups

New businesses invest heavily in assets, claim generously:

Annual Investment Allowance (AIA): 100% relief on up to £1 million qualifying plant and machinery.
Full expensing: Unlimited 100% relief on certain assets.

Strategic timing reduces taxable profits, improving cash flow via capital allowances for new businesses.

4. Unlock R&D Tax Relief for Startups

Innovative UK startups (e.g., tech, product development) qualify for R&D tax credits.

The merged scheme offers a net benefit of approximatley15-20% after Corporation Tax; loss-making firms get cash repayments.
Intensive schemes provide up to 27% for qualifying startup R&D.

Even unsuccessful projects count if addressing technical uncertainties.

5. Attract Investment with SEIS and EIS

Tax-efficient fundraising via investor reliefs:

Seed Enterprise Investment Scheme (SEIS): Up to £250,000 raise; investors get 50% Income Tax relief (on £200,000), CGT exemption.
Enterprise Investment Scheme (EIS): Higher limits; 30% relief (up to £1-2 million for knowledge-intensive).

HMRC advance assurance boosts investor confidence in startup investment tax reliefs.

attracting investments with seis and eis

6. Claim All Allowable Expenses and Startup Deductions

Meticulous records maximise startup tax deductions:

Home office (flat rate or actual).
Marketing, travel, fees, training.
Pre-trading expenses (up to 7 years prior).

Xero automates tracking for accurate HMRC-compliant claims.

claiming allowable expenses and start up deductions

7. Optimise Remuneration and Pensions

Pension contributions: Tax relief up to £60,000 the current annual allowance.
Directors: Low salary + dividends for NI efficiency.

Enhances personal tax planning for startup owners.

8. Navigate VAT for Startups and MTD

Monitor turnover for VAT registration. Voluntary early registration reclaims input VAT.

MTD mandates digital records, Xero ensures seamless VAT compliance for new businesses.

9. Explore Additional Tax Reliefs for New Businesses

Employment Allowance: Up to £10,500 offset on employer NI.
Share incentives: EMI for tax-advantaged employee shares.

10. Forecast and Review for Ongoing Tax Planning

Anticipate Corporation Tax or Self-Assessment payments.
Annual reviews: Many startups incorporate when profitable.

UK tax rules for startups evolve, stay ahead with expert guidance.

Why Early Startup Tax Advice is Crucial

Tax planning for startup businesses demands expertise amid frequent changes. Mistakes forfeit reliefs or trigger penalties.

Jan McDermott & Co provides end-to-end support: formation, Xero integration, bookkeeping, payroll, returns, and strategic tax planning for UK startups. Our packages free you to focus on growth.