Example 1

Newt is going to commence self-employment on 6 April 2025, but is unsure whether to run his business as a sole trader or to trade via a limited company, Amphibian Ltd.

In either case, Newt’s tax adjusted trading profit for the year ended 5 April 2026 will be £100,000 (before taking account of any director’s remuneration or employer’s class 1 NIC if trading via a limited company).

If Newt trades via a limited company, he is considering three alternative approaches to extracting profits from Amphibian Ltd:

• The entire profits will be withdrawn as director’s remuneration of £87,609 (after allowing for employer’s class 1 NIC of £12,391 (Amphibian Ltd is not entitled to the NIC annual employment allowance)).
• The entire net of tax profits will be withdrawn as dividends (after allowing for corporation tax).
• Newt will pay himself gross director’s remuneration of £8,000 and dividends of £50,000. Amphibian Ltd will make a pension contribution of £10,000 into a company pension scheme on behalf of Newt, with the balance of the profits remaining undrawn within the new company.

Self-employment

• Newt’s income tax liability will be:
   

• Class 4 NIC will be:
   

Limited company - Director’s remuneration

• Newt’s income tax liability will be:
   

• Newt’s employee class 1 NIC will be:
   

• There is no corporation tax liability for Amphibian Ltd because the entire profits of the company have been withdrawn.

Limited company - Dividends

• There will be no employee or employer class 1 NIC.
• Amphibian Ltd’s corporation tax liability will be £22,750 ((50,000 at 19%) + (50,000 at 26.5%)).
• Dividends of £77,250 (100,000 – 22,750) will be paid to Newt.
• Newt’s income tax liability will be:
   

Limited company – Mixed remuneration package

• Newt’s income tax liability will be:
   

• There will be no employee class 1 NIC because the earnings of £8,000 are below the NIC lower threshold.
• Amphibian Ltd’s corporation tax liability will be:
   

Conclusion
The total tax and NIC cost under each alternative is:
 

The mixed remuneration package appears to be the most beneficial, although £13,689 (100,000 – 8,000 – 450 - 10,000 - 50,000 – 17,861) of Amphibian Ltd’s profits remain undrawn within the company. This is not an issue if profits need to be retained within the company (maybe to fund future capital expenditure) but otherwise it distorts the comparison.

Also, Newt will not receive any benefit from the £10,000 pension scheme contribution until he retires. However, this approach to pension saving is more beneficial than Newt personally making contributions out of his taxed income.  The pension contribution reduces Amphibian Ltd’s taxable total profits (obtaining corporation tax relief at the marginal rate of 26.5%) and there are no tax implications for Newt personally.

The total tax and NIC cost of a mixed remuneration package could be further reduced if Newt restricted his dividends to a level so that there was no 33.75% higher rate income tax liability, but this would mean retaining more profit within Amphibian Ltd.

Example 2

On 4 May 2025, Daniel made a gift to his son of 15,000 £1 ordinary shares in ABC Ltd, an unquoted investment company. Before the transfer, Daniel owned 60,000 shares out of ABC Ltd’s issued share capital of 100,000 £1 ordinary shares. ABC Ltd’s shares are worth £18 each for a holding of 60%, £10 each for a holding of 45% and £8 each for a holding of 15%.

Although Daniel’s son received a 15% shareholding valued at £120,000 (15,000 x £8), Daniel’s transfer of value is calculated as follows:
 

In contrast, for CGT purposes the valuation will be based on the market value of the shares gifted, which is £120,000.

Example 3

On 20 June 2025, Craig made a gift to his grandson of a residential property valued at £250,000. The gift of the property resulted in a chargeable gain of £145,000.

The value of the property is expected to increase to £300,000 by 31 December 2027, and to £340,000 by 31 December 2032.

Craig is an additional rate taxpayer. He will not make any other disposals during the tax year 2025-26, and he has not made any previous lifetime gifts. Craig has an estate valued in excess of £2,000,000 for IHT purposes.

CGT liability
Craig’s CGT liability for 2025-26 is:
 

Craig dies on 31 December 2032
The gift of the property is a PET. If Craig lives until 31 December 2032, the PET will be exempt because he will have survived for seven years. The IHT saving will be £136,000 (£340,000 at 40%), so a lifetime gift would appear to be beneficial despite the immediate CGT cost of £34,080.

Craig dies on 31 December 2027
If Craig were to die on 31 December 2027, the IHT saving (ignoring annual exemptions) would be:
 

Note that although there will be no IHT liability in respect of the PET, the PET will reduce the amount of nil rate band available against Craig’s death estate.

The lifetime gift no longer appears to be beneficial because the immediate CGT cost of £34,080 outweighs the IHT saving of £20,000.

Example 4

Tobias has recently inherited the residue of his aunt Mildred’s estate. He will use this inheritance for the following purposes:

• Tobias will make the maximum possible amount of additional tax relievable personal pension scheme contribution for the tax year 2025-26, having already made contributions of £30,000 during this tax year. His adjusted income for the tax year 2025-26 will not exceed £260,000. Tobias has been self-employed since 6 April 2023, and has been a member of a personal pension scheme from the tax year 2024-25 onwards. Tobias’ trading profits and gross personal pension contributions since he commenced self-employment have been as follows:
   

• Tobias will make a cash gift of £100,000 to his daughter when she gets married on 29 March 2026. He has not made any previous lifetime gifts.
• Tobias will invest the maximum possible additional amount into an individual savings account (ISA) for the tax year 2025-26. He has already invested £5,400 into a cash ISA during this tax year, having previously invested £6,200 into a cash ISA during the tax year 2024-25.

Personal pension contribution
Although the maximum contribution which will qualify for tax relief is £68,000 (net relevant earnings of £98,000 less the £30,000 of contributions already made), the maximum amount of tax relievable personal pension contribution will effectively be restricted to the available annual allowances of £44,000:
 

Gift to daughter
The gift will be a potentially exempt transfer of £89,000 (£100,000 less the marriage exemption of £5,000 and annual exemptions of £3,000 for 2025-26 and 2024-25).

If Tobias dies before 29 March 2033 (within seven years of making the gift), the amount of nil rate band available against his estate will be reduced by £89,000.

Individual savings account
Since Tobias has already invested £5,400 into a cash ISA, he can invest a further £14,600 (20,000 – 5,400) into an ISA in 2025-26. This could be in a cash ISA, a stocks and shares ISA, or any combination of the two.

Example 5

Nigel and Nook are a married couple. For the tax year 2025-26, Nigel will have a salary of £140,000 and savings income of £400. Nook will have a salary of £60,000 and dividend income of £900.

Nigel is an additional rate taxpayer, so he does not receive any savings income nil rate band. Nook, as a higher rate taxpayer, has an unused savings income nil rate band of £500. Transferring the savings to Nook will therefore save income tax of £180 (400 at 45%) for 2025-26.

Nook has fully utilised her dividend nil rate band of £500, but Nigel’s nil rate band is unused. Transferring sufficient investments to Nigel so that he receives £400 of the dividend income will therefore save income tax of £135 (400 at 33.75%) for 2025-26.

Example 6

Adam and Zoe are a married couple. Before taking account of any tax planning measures, you have prepared a forecast of the couple’s tax position for the tax year 2025-26.

Adam
Adam will have an income tax liability of £30,113. This is based on total income of £106,000, consisting of gross director’s remuneration of £94,000 and dividend income from quoted shares of £12,000.

He has an unused capital loss of £20,900 brought forward from the tax year 2024-25.

Zoe
Zoe will have an income tax liability of £1,086. This is based on total income of £18,000, consisting entirely of employment income.

She will also have a CGT liability of £7,904. This is in respect of the disposal of quoted shares which will result in a chargeable gain of £44,000. The disposal will not qualify for business asset disposal relief.

Tax planning measures
After a meeting with Adam and Zoe, you have identified two tax planning measures which the couple could undertake for the tax year 2025-26:

• Adam’s quoted shares will be put into joint names so that Zoe receives 50% of the dividend income of £12,000.
• Zoe’s quoted shares will be put into joint names prior to their disposal.

After taking account of the tax planning measures, the couple’s revised tax liabilities will be:

Adam - Income tax computation 2025-26
 

Adam’s personal allowance is no longer restricted.

Adam – CGT computation 2025-26

Adam has utilised £19,000 of his brought forward capital loss of £20,900.

Zoe - Income tax computation 2025-26
 

Zoe – CGT computation 2025-26
 

Tax saving
The overall tax saving for 2025-26 if Adam and Zoe undertake the two tax planning measures is £7,228:
 

Example 7

Harold and Ingrid are a married couple.

Harold is currently self-employed, and his forecast trading profit for the year ended 5 April 2026 is £100,000. He does not have any other income. Ingrid does not have any income, although she does a considerable amount of unpaid work for Harold’s business.

The couple want to know if it would be beneficial to form a partnership from 6 April 2025, with profits shared 75% to Harold and 25% to Ingrid.

Harold - Tax saving
 

Ingrid – Tax cost
 

The overall tax saving for the tax year 2025-26 is therefore £7,268 (10,500 – 3,232).

Example 8

Kim is currently employed at an annual salary of £200,000. Kim will continue to earn the same salary until she retires on 5 April 2029, at which point her income will reduce to annual pension income of £55,000.

Kim has the opportunity to undertake £40,000 of work on a freelance basis during the year ended 5 April 2026, and she will do this work via Mik Ltd, a newly formed limited company. This freelance work will not involve any expenditure and will last for just one year.

After allowing for corporation tax, the entire net of tax profits will be withdrawn by Kim as dividends either during the tax year 2025-26 or during the tax year 2029-30.

Dividends withdrawn during 2025-26

• Mik Ltd’s corporation tax liability for the year ended 5 April 2026 will be £7,600 (40,000 at 19%).  
• Kim will receive dividend income of £32,400 (40,000 – 7,600), and the income tax payable on this amount will be £12,553 ((32,400 – 500) at 39.35%).            

Dividends withdrawn during 2029-30

• Mik Ltd’s corporation tax liability for the year ended 5 April 2026 will be unchanged at £7,600.
• For 2029-30, Kim will be a higher rate taxpayer (55,000 – 12,570 = £42,430), so the income tax payable in respect of her dividend income will be reduced to £10,766 ((32,400 – 500) at 33.75%).
• The overall tax saving from postponing the withdrawal of dividends until 2029-30 will be £1,787 (12,553 – 10,766).