The new tax year is upon us so now’s the time to start your business budgeting, but smarter.

Entering a new tax year is the perfect time to take a strategic approach to your finances for small business owners and contractors. Business budgeting can help you manage cash flow, reduce unnecessary costs, and set your business up for long-term success.

Here’s how you can approach smart business budgeting for the 2025/26 tax year.

1. Review your previous year’s financial performance

Before looking ahead, take some time to reflect on the past year’s financial performance. Key areas to assess include:

• Revenue trends and fluctuations
• Profit margins
• Key expenses and overheads
• Areas of unexpected financial strain
• Tax liabilities and how they were managed

Understanding these factors will help you make more informed financial decisions for the new tax year.

When you analyse revenue trends, you can identify seasonal patterns and anticipate future income fluctuations.

Reviewing profit margins helps you understand how efficiently your business is operating, while examining key expenses and overheads allows you to pinpoint areas where you may be overspending.

Identifying unexpected financial strains ensures you can prepare better for similar challenges in the future.

Lastly, assessing how you managed tax liabilities helps you improve tax planning strategies for the new tax year.

Altogether, this review provides the insights needed to make smarter budgeting and financial decisions moving forward.

2. Set clear financial goals

Defining financial goals as part of your business budget can provide direction and motivation for the year ahead. Your goals may include:

• Reducing or repaying a business loan

A freelancer who took out a loan to buy equipment might aim to clear half of their debt this year to reduce interest payments.

• Building company reserves to allow for additional time off

A contractor planning to take a month off next year may set a goal of saving £5,000 in reserves to cover expenses during that period.

• Setting aside funds for a major investment or expansion

A small business wanting to upgrade its office space might aim to save £10,000 for a lease deposit or renovation costs.

• Increasing profit margins

A consultant might focus on securing higher-paying contracts to improve their profit margins by 10%.

• Diversifying revenue streams

A sole trader might plan to develop an online course or subscription service to create passive income.

• Improving cash flow stability

A company with inconsistent income may set a goal of maintaining a three-month operating expense buffer.

• Hiring new staff

A growing business could aim to generate an additional £50,000 in revenue to justify hiring an employee.

Having specific targets will make it easier to allocate resources effectively and stay on track.

3. Consider tax rate and allowance changes for 2025/26

Tax rates and allowances can change each year, so it’s essential to stay updated. Check if there are any new allowances or tax reliefs available that could benefit your business. For example:

• Changes in Corporation Tax rates
• Adjustments to dividend tax thresholds
• Updates to VAT registration thresholds
• New capital allowances for equipment and investments

Planning ahead for these changes ensures you won’t face unexpected tax liabilities later in the year.

4. Create a monthly cash flow forecast

A cash flow forecast allows you to anticipate periods of surplus and shortfall, helping you plan accordingly. Consider:

• Predicting seasonal fluctuations in revenue
• Factoring in expected tax payments
• Scheduling large expenses to avoid cash flow crunches

Using accounting software or spreadsheets to track your monthly cash flow can make this process easier.

5. Identify cost-saving opportunities

Reviewing your expenses regularly can reveal ways to reduce costs without compromising on quality. Some areas to evaluate include:

• Subscriptions: Are you paying for services you no longer use or need?
• Insurance: Shopping around for better deals on business insurance, such as through providers like Kingsbridge, can lead to savings.
• Bank charges: Consider alternatives like Mettle by NatWest, which offers free business banking with fewer hidden fees.
• These small changes can add up to significant savings over the course of the year.

6. Plan for growth and investment

If you’re looking to expand, consider how you will fund your growth within your business budget document. Options may include:

• Reinvesting profits

Using your business’s existing profits to fund growth is one of the safest and most sustainable methods. This approach prevents reliance on external funding and avoids debt. Ways to reinvest profits include:

• Upgrading technology or equipment to improve efficiency
  • Investing in marketing to attract new customers.Hiring additional staff to scale operations.
  • Expanding to a new location or adding new service offerings.

• Applying for business grants or loans

If profits alone won’t cover expansion costs, seeking external funding might be necessary. Consider government or industry-specific grants; business loans; and invoice financing.

• Exploring tax-efficient investment schemes

Tax incentives can help reduce the financial burden of expansion. Some options include Annual Investment Allowance (AIA); Research & Development (R&D) Tax Credits; Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS)

A smart budget should allow room for business development without putting unnecessary strain on cash flow.

7. Monitor and adjust

Finally, your smart budget for the new tax year should be a living document that you review and adjust regularly. Set a schedule – monthly or quarterly – to track performance, assess any unexpected financial changes, and make necessary adjustments.

Proactively managing your business budget will help you take control of your finances. It’ll also help reduce risks and position your business for success in the new tax year.