The entrepreneurs tax year kick-off plan: maximising allowances and minimising tax

As the new tax year begins, it's important for entrepreneurs to consider taking advantage of available allowances and reliefs to optimise their tax position for the year ahead. While you can leave it until the last minute to use your allowances, it increases the chance of missing the deadline and could even mean missing out on a number of months of growth if markets rise (though of course, investments could go down instead of up over the course of the year).

Here, we look at some key strategies to help get your entrepreneurs tax plan in order this year.

The value of any of the products mentioned below, and the income from them, can fall and you may get back less than invested. Tax treatment depends on individual circumstances and is subject to change.

For many entrepreneurs, their business is their retirement plan. However, relying solely on a successful business exit can be risky, particularly given the recent changes to business asset disposal relief (BADR) – commonly referred to as entrepreneurs tax relief.

Contributing to a pension can not only supplement future retirement income but also offers significant tax advantages. Contributions attract tax relief at your marginal rate, and all income or capital gains within a pension are tax-free.

Using a salary sacrifice scheme can be particularly beneficial. By making pension contributions through your business, you can reduce both your personal and your company's national insurance contributions (NICs). This makes pension saving even more tax-efficient, especially for higher or additional rate taxpayers.

Of course there are downsides to salary sacrifice. As it reduces your net income (‘take home’ pay), it can reduce your borrowing capacity for debt such as a mortgage. Lower earnings can also impact other earnings-related benefits, such as life insurance and statutory maternity pay.

Pensions are very tax-efficient, and the forced long investment time frame (pensions can’t be accessed until age 55, rising to 57 in 2028) make them an excellent option when it comes to tax planning for entrepreneurs.

If you've neglected pension savings in the past, now could be the time to catch up. The carry forward rules allow you to use unused pension annual allowances from the previous three tax years, provided you had an active pension during those years. This means you could potentially make a gross pension contribution of up to £220,000 this tax year.

However, it’s important to remember that contributions are only allowable up to your level of earned income in the current tax year. So, for example, if you wanted to contribute £100,000 using your allowance for this year and some carry forward from previous years, your earned income must be at least £100,000 in the current tax year.

The £20,000 per tax year ISA allowance allows you to invest and access tax-free growth, income and withdrawals. While the allowance may not seem like a huge amount for many entrepreneurs, £20,000 a year (or £40,000 for a couple) can really add up over time if you stay consistent in using it.

This is a ‘use it or lose it’ allowance, so if you don’t use it before the end of the tax year, you lose that year’s allowance forever. If investment markets go up over the course of the year, contributing early could give you the opportunity for some extra tax-free growth, but it’s worth keeping in mind that investing earlier also exposes your funds to the risk of falling in value.

Charitable donations can provide valuable tax relief, while also allowing you to support causes you care about. Higher rate taxpayers can benefit from tax relief on gift aid donations, reducing their overall tax liability.

If you’re an entrepreneur with a substantial amount you would like to donate to charity, you could even consider a donor advised fund (DAF). This allows you to make donations into your own charitable investment vehicle immediately for tax purposes, but then provides flexibility on how and when you distribute these funds in the future.

One of the best ways to maximise your family's tax efficiency is by considering your tax positions in a combined way. Everyone in your family has their own set of tax allowances; even children, and it may be possible to transfer assets or use trusts to make the most of these.

Interspousal transfers are one example, enabling you to transfer assets between a husband, wife or civil partner to manage the amount of capital gains tax (CGT) you pay.

Pensions are another area to consider, as even non-taxpayers can benefit from pension contributions (up to certain limits) and the subsequent tax relief (even if they pay no income tax).

For those who have maxed out their ISA and pension allowances, venture capital trusts (VCTs) and the enterprise investment scheme (EIS) offer significant tax advantages. These investments attract 30% income tax relief, provided VCTs are held for five years and EISs for three years. They are free from capital gains tax whilst also enjoying other tax breaks, making them attractive options for higher earners with a higher risk appetite looking to invest for the long term.

However, there are some important downsides to consider, as these structures are high risk and highly illiquid and they should only form a small part of a portfolio, so be sure to seek professional advice before investing.

A well-thought-out financial plan can make a significant difference for entrepreneurs and can help offset income that can often be unpredictable.

Whether it's boosting pension contributions, using ISAs, or exploring riskier tax-efficient investments like VCTs and EIS, taking proactive steps now can lead to substantial benefits. The key is to act early and seek professional advice to ensure you're making the most of the opportunities available.

To speak to Evelyn Partners about your financial strategy for this tax year and beyond, book a free initial consultation.