Setting up a business in the UK offers many opportunities, from a stable legal environment to a welcoming approach towards international investment. However, if you’re coming from abroad, there’s an essential step you shouldn’t overlook: tax planning.

By understanding the UK’s tax structure and making strategic decisions early, you can avoid common pitfalls and maximise startup incentives. Here, we’ll cover some effective tax planning tips for global entrepreneurs.

Structure your business for tax efficiency

The structure of your business can have a significant impact on how it’s taxed. When setting up in the UK, you have several choices for business structures, each with unique tax implications. The most common options include the following.

1. Limited company: By far the most popular choice for small and medium-sized enterprises (SMEs), a limited company offers limited liability for owners and is taxed on its profits at a corporate rate. For the 2024/25 tax year, corporation tax rates are set at 25% for companies with profits above £250,000 and 19% for those under £50,000.
2. Sole trader or partnership: If you’re planning to operate on a smaller scale or are testing the market, setting up as a sole trader or a partnership might be a simpler option. However, it’s important to note that your income will be subject to personal income tax, which can be as high as 45% on earnings over £125,140.
3. Branch of a foreign company: If you’re a global entrepreneur looking to expand your business into the UK, establishing a branch might be a viable option. However, branches are not separate legal entities, and profits made in the UK will be subject to UK tax, potentially complicating matters if you plan to repatriate earnings.

When selecting your structure, it’s important to consider your long-term plans. A limited company structure is often the most tax efficient for entrepreneurs aiming to grow, but each option has merits depending on your situation.

Take advantage of UK startup incentives

The UK offers a range of tax incentives for startups and innovative businesses to encourage entrepreneurship and economic growth. Two of the most beneficial schemes for startups are the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme.

1. Enterprise Investment Scheme (EIS): Through EIS, investors in your company can benefit from tax relief of up to 30% on their investment, provided you meet the scheme’s requirements. This relief can make your business more attractive to potential investors, giving you a valuable edge in raising funds.
2. Seed Enterprise Investment Scheme (SEIS): SEIS is designed for newer, smaller businesses and offers up to 50% tax relief for investors. This can be a powerful tool if you’re in the early stages of building your business and need initial funding.
3. Research and development (R&D) tax credits: For businesses focused on innovation, R&D tax credits offer the opportunity to reclaim a portion of your costs. Under the scheme, small and medium-sized companies can receive a cash refund or a reduction in their tax bill. As of the latest date, businesses can claim up to 33% of eligible R&D costs, making this one of the most valuable reliefs for high-growth companies.

These schemes reduce your company’s tax burden and help attract the investment needed to scale and compete in the market.

Understand VAT requirements

One area that frequently trips up international entrepreneurs is the UK’s Value Added Tax (VAT) requirements. If your business’s taxable turnover exceeds £90,000 within a 12-month period, you must register for VAT, which is charged at 20% on most goods and services.

Beyond basic registration, you must choose a VAT scheme that best suits your business model. The Flat Rate Scheme allows certain businesses to simplify their VAT reporting, while the Cash Accounting Scheme enables you to pay VAT based on the cash you receive rather than invoiced sales. VAT zero-rating for exports is another useful consideration for companies with substantial export activity, as it can reduce the VAT on goods sold overseas to 0%, easing cashflow for international transactions.

Understanding and complying with VAT is essential for cashflow and compliance, as HMRC penalties can be steep for errors or missed payments.

Comply with UK employment tax obligations

If your plans include hiring UK-based employees, you must understand the UK’s employment tax obligations. In addition to salaries, employers are required to pay national insurance contributions (NICs). For the 2024/25 tax year, employer NICs are charged at 13.8% on earnings above £175 per week.

Understanding these contributions early can help you forecast labour costs and avoid unexpected expenses. You may also need to operate PAYE (Pay As You Earn) for certain employees, which involves withholding tax and NICs from salaries. Automated payroll software can help ensure timely reporting and compliance with HMRC requirements.

Plan for your exit strategy

Finally, it’s never too early to consider your long-term exit strategy, as this can impact your tax position from the outset. Whether you’re planning to sell, merge or hand over the reins in the future, the UK offers reliefs that can ease your tax burden on disposal.

For example, business asset disposal relief (BADR), previously known as entrepreneurs’ relief, currently allows you to pay a reduced capital gains tax rate of 10% on gains from selling qualifying business assets up to a lifetime limit of £1m. This relief can make a substantial difference in your tax liabilities when you eventually decide to move on.

Seeking tailored advice

Tax planning for a new business in the UK can be challenging, particularly if you’re navigating unfamiliar regulations. However, you can lay a strong foundation for success by understanding the basics – choosing the right structure, utilising startup incentives, complying with VAT and employment tax requirements, and planning for your exit.

If you’re an international entrepreneur ready to take on the UK market, we’re here to help. Pearson May offers specialised advice for global entrepreneurs, from structuring your business to maximising tax efficiency and planning for sustainable growth.

Contact us to see how we can help.