A new wave of tax changes is coming into effect at the start of 2025, impacting small and medium-sized enterprises (SMEs) across the UK. These updates allow businesses to optimise their finances and introduce compliance challenges.
Here’s what you need to know about the latest tax changes for SMEs and how they could affect your business.
Key tax changes for SMEs in 2025
1. Corporation tax increases
The corporation tax rate for businesses with profits over £250,000 remains at 25%. However, businesses with profits below £50,000 will continue to benefit from the 19% small profits rate. For profits between these thresholds, marginal relief will apply, gradually increasing the effective tax rate as profits grow.
Action: Review your profit projections to determine if you fall into the marginal relief bracket. Optimising your expenses or considering reinvestments might help reduce your tax liability.
2. Full expensing continues
Introduced in 2023, full expensing allows businesses to deduct 100% of the cost of eligible plant and machinery from their taxable profits in the year of purchase. This measure has been extended to 31 March 2026, replacing the previous super-deduction.
Action: If you plan to upgrade your equipment or invest in new machinery, doing so before the end of the tax year could help lower your corporation tax bill.
3. Changes to VAT penalties
The VAT penalty regime introduced last year is now in full effect. Late VAT submissions incur penalty points, leading to financial penalties if thresholds are exceeded. The system is designed to encourage compliance but may catch some businesses off guard.
Action: Ensure your VAT submissions are made on time to avoid penalties. Consider using accounting software with VAT automation to reduce errors and delays.
4. Making Tax Digital (MTD) updates
From April 2026, MTD for income tax will apply to sole traders and landlords with an income of £50,000 or more, followed by those earning £30,000 or more in April 2027. While this doesn’t directly affect 2025, SMEs should start preparing early.
Action: If your business operates as a sole trader or earns rental income, this is the year to upgrade your accounting systems. Embracing digital tools now will smooth the transition when the new rules come into effect.
5. Dividend allowance reduction
For business owners who take income via dividends, the tax-free dividend allowance has been reduced to £500 for the 2024/25 tax year. Any dividends above this threshold will be taxed at your marginal rate.
Action: If you rely on dividends, consider rebalancing your income structure or exploring alternative tax-efficient strategies such as pension contributions.
How to stay compliant
Tax changes can be daunting, but staying compliant doesn’t have to be overwhelming. Here are three practical steps SMEs can take to manage these updates effectively:
- Stay organised: Keep all your financial records current, including invoices, receipts, and payroll information. Cloud-based accounting software can streamline this process and ensure accuracy.
- Work with professionals: An accountant can provide tailored advice and ensure your business takes advantage of available reliefs while remaining compliant. Regular reviews of your financial situation can help you spot opportunities and avoid costly mistakes.
- Plan ahead: Some tax changes, like MTD and corporation tax updates, require forward planning. Use this year to assess how these will affect your business and adjust your operations accordingly.
Opportunities for optimisation
While compliance is essential, tax planning is just as important for SMEs. Here are three ways to optimise your finances under the current tax regime:
- Maximise allowances and reliefs: Whether it’s the annual investment allowance, R&D tax credits, or full expensing, there are many opportunities to reduce your tax bill. Understanding which reliefs apply to your business is key.
- Review your structure: If you operate as a sole trader or partnership, switching to a limited company might be more tax-efficient under the current rules. Assess your options with a professional to ensure they fit your business correctly.
- Invest in staff training: Tax reliefs like the apprenticeship levy can support your efforts to upskill your team while reducing costs. This could be especially beneficial if you want to grow your business in 2025.
What’s next for SMEs?
The Government continually updates tax legislation to support businesses and generate revenue. Keeping up with these changes is crucial for avoiding penalties and identifying growth opportunities.
At Total Accounting Kent, we’re here to help SMEs navigate the latest tax changes confidently. Whether you need support with compliance or advice on optimising your tax strategy, our team of experts is ready to assist.
Contact us today to learn how we can help your business thrive in 2025 and beyond.