As we approach the end of the 2025/26 tax year, this is the ideal time to review profit extraction, corporation tax exposure and personal tax positions. The landscape has shifted significantly over the past two years, and traditional assumptions — particularly around incorporation — no longer automatically hold true.
Here is a focused year-end planning list covering the most important areas.
Review Corporation Tax Position
Companies with profits up to £50,000 (no associated companies) continue to benefit from the 19% small profits rate. Between £50,000 and £250,000, marginal relief applies, creating an effective marginal rate of 26.5%.
If profits are falling in the marginal band, consider whether action before year end could reduce the exposure — for example:
- Increasing director pension contributions
- Accelerating capital expenditure
- Bringing forward major repairs or revenue costs
- Reviewing whether an electric vehicle purchase is commercially appropriate
Associated company rules remain critical, as they reduce profit thresholds.
Reconsider Incorporation Assumptions
With dividend tax rates rising again from April 2026 (basic rate increasing to 10.75% and higher rate to 35.75%), and Class 4 NIC reduced for sole traders, incorporation is no longer automatically a tax-saving strategy.
For many businesses in England and Wales, the tax gap between sole trader and limited company has narrowed or reversed. Each case now requires proper modelling rather than relying on historic rules of thumb.
Optimise Director Salary and Dividend Mix
The correct salary level depends on:
- Whether Employment Allowance is available
- The corporation tax rate applying (19% or 26.5%)
- State pension age
- Whether all profits are being extracted
In some scenarios — particularly where Employment Allowance is available — paying a higher salary can produce a better net tax result than minimal salary plus dividends.
Also check that salaries are high enough to secure NIC credits towards state pension entitlement (35 qualifying years required).
Consider Director Bonuses Before Year End
If corporation tax is charged at 26.5%, declaring a bonus before year end can create a corporation tax deduction, even if the amount is determined later (provided a valid obligation exists).
Bonuses must be paid within 9 months of year end to secure the deduction. Timing payroll carefully can help manage cashflow.
Pension Contributions
Company pension contributions remain one of the most tax-efficient planning tools. However, unlike bonuses, contributions must be physically paid before the year end to qualify for deduction.
Also review annual allowance taper rules for high earners.
Electric Company Cars
The 100% first-year allowance for electric cars remains available until 31 March 2026. Benefit-in-kind rates remain low (currently 2%, rising gradually). For appropriate cases, this continues to be highly tax-efficient.
Personal Tax Planning
- Personal allowance remains frozen at £12,570 until 2028.
- CGT annual exemption is now just £3,000.
- BADR rises to 18% in 2026/27.
- Residential property disposals require 60-day CGT reporting.
Timing disposals and income remains critical.
Overdrawn Director Loan Accounts
An overdrawn loan account at year end can trigger a 33.75% (rising to 35.75%) temporary corporation tax charge if not cleared within 9 months.
Clearing options — dividend, salary or write-off — have different corporation tax, income tax and NIC consequences. Anti-avoidance rules prevent circular repayments.
Final Thought
Year-end planning is no longer about simple dividend timing. It now requires careful modelling of corporation tax bands, dividend rates, NIC interactions and cashflow.
If you have not reviewed your position recently, this is the time to do so — before 5 April and before your company year end closes planning opportunities.
