Tax Exemptions and Allowances in the UK for 2025/26: A Guide for Business Owners

As we move through the 2025/26 tax year, it's crucial for business owners, company directors, and self-employed professionals to understand what tax exemptions and allowances are available to them. With new thresholds and tax policies continuing to shift, this guide from MCC Partners breaks down the most relevant tax-free allowances and reliefs for UK businesses and offers tips to optimise your tax position.

What Are the Tax Exemptions in the UK?

A tax exemption is an amount of income or type of expense that is not subject to tax. For business owners, these exemptions and reliefs can help reduce your Corporation Tax, Income Tax, and overall tax burden.

Examples include:

• Personal allowance

• Dividend allowance

• Annual Investment Allowance

• Business expense deductions

• Research & Development (R&D) relief

📈 Understanding which exemptions apply to your structure – whether you're a sole trader, partnership, or limited company – is key to staying tax-efficient.

What Is the Tax-Free Allowance for 2025/26?

Tax-Free Allowances (Confirmed for 2025/26):

Note: These figures are subject to change in future Budgets, so it's wise to review them each year.

Is There a Tax-Free Allowance for Business?

While limited companies don't receive a "personal allowance" like individuals do, they can benefit from:

• Annual Investment Allowance (AIA): 100% tax relief on qualifying capital purchases (up to £1 million)

• R&D Tax Credits

• Super Deduction (until March 2023, now replaced by Full Expensing)

• Business expense deductions for running costs, salaries, pensions, and software

🚀 MCC Tip: Knowing what counts as an allowable business expense can significantly reduce your Corporation Tax bill.

How Do I Avoid 25% Corporation Tax?

From April 2023, the Corporation Tax rate increased to 25% for companies with profits over £250,000. However, there are ways to legally reduce what you pay:

1. Use allowable expenses effectively

2. Invest in qualifying equipment (Full Expensing)

3. Make employer pension contributions

4. Claim R&D tax relief

5. Consider profit extraction via salary/dividends mix

Will Small Businesses Have to Pay 25% Corporation Tax?

No – if your profits are under £50,000, you will continue to pay 19% Corporation Tax. Businesses earning between £50,000 and £250,000 pay a tapered rate.

How to Avoid 40% Tax in the UK (Self-Employed and Directors)

When your income exceeds £50,270, you enter the higher-rate Income Tax band (40%).

How Can I Stop Paying 40% Tax?

You can’t avoid it entirely, but you can legally reduce your exposure:

• Make pension contributions (tax-deductible)

• Use the Marriage Allowance (if eligible)

• Split income with a spouse (if they are a shareholder)

• Reinvest profits into the business

🔹 Ask MMC Partners about optimal salary/dividend combinations to manage your personal tax position.

What Tax Relief Can I Claim as a Limited Company?

You may be eligible for:

• Annual Investment Allowance (AIA)

• Research and Development (R&D) Tax Credits

• Patent Box Relief

• Employer pension contributions

• Staff training costs

• Business vehicle and mileage deductions

💼 Keeping clear records and working with a tax advisor is essential for claiming these correctly.

Is It Better to Earn £50k or £55k in the UK?

This is a common question because of the tax thresholds. At £50,270, you cross into the 40% tax band. Earning slightly more may result in a higher effective tax rate, especially when factoring in loss of child benefit or personal allowance tapering above £100,000.

A professional review can help you understand whether bonuses, dividends, or pension contributions would be more tax-efficient than increasing salary.

Need Tax Planning Support in 2025/26?

At MMC Partners, we help business owners across the UK reduce their tax liability, structure income efficiently, and ensure full compliance with HMRC.

Whether you're a sole trader, limited company, or director with multiple income streams, our team is ready to help you keep more of what you earn.

Call: 01474 619 990 
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Website: www.mccpartners.co.uk