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Efficient tax planning has become an essential part of maintaining commercial viability for community pharmacy businesses, as Vinku Shah explains…

With the main rate of corporation tax at 25 per cent, evolving capital allowance rules, and increased HMRC scrutiny, pharmacy owners must take proactive steps to minimise corporation tax liabilities while staying fully compliant.

We set out practical, compliant, pharmacy‑focused tax planning strategies which can help maintain cash flow.

Understand your corporation tax band 

The UK maintains the tiered corporation tax system with a corporation tax small profits rate of 19 per cent applicable to profits up to £50,000 and 25 per cent main rate for profits above £250,000. A marginal relief is given to profits that fall in between these two thresholds.

If the business is within a group or business owners operate associated companies, the thresholds are divided by the number of all associated companies for example, if the pharmacy business has two associated companies, the thresholds are then divided by three.

The thresholds are also pro-rated if the company financial year end is less than 12 months old.

Plan around profit thresholds

For pharmacies and locums operating as limited companies this tax structure creates opportunities for tax planning. Pharmacies near the thresholds could benefit from bringing forward deductible costs or capital expenditure, allowing profits to remain within a lower band. 

Strategic use of Capital Allowances 

Capital allowances remain one of the most powerful tools to reduce corporation tax. An Annual Investment Allowance (AIA) on plant and machinery of up to £1 million is available to companies. 

In addition to AIA, an additional capital allowance called Full Expensing is available on expenditure incurred on or after 01 April 2023 to companies subject to UK corporation tax.

This provides a 100 per cent first year deduction on new, unused main rate plant (Vans, computers, printers, etc) and machinery and 50 per cent on special-rate assets (Air conditioning, solar panels, integral features, etc).

Both options allow substantial immediate tax relief in the year of acquisition. The key distinction is that Full Expensing may trigger a tax charge if the asset is sold later as the sales proceeds become taxable, whereas AIA gives more flexibility, especially for pharmacies that periodically refresh dispensing automation, refrigeration units, or digital equipment as the sales proceeds are offset against remaining available capital allowances reducing future annual allowances.

For example, a pharmacy planning a £150,000 capital expenditure on new dispensing robots or automated storage systems could reduce its taxable profit by the full amount in the year of purchase, potentially lowering the effective corporation tax band.

This area remains highly relevant as pharmacies increasingly adopt automation to reduce staffing pressures and combat an increase in costs. Due to the cost of dispensing robots, they can also be financed and the resultant finance charges incurred will also be allowable for tax.

It is important to time these investments an interim management accounts may help identify whether to bring planned investments forward into the current financial year to help reduce overall corporation tax liability.

Company cars

A generous tax relief is available for electric vehicles provided by companies to its employees. Most pharmacy businesses being owner managed, can provide brand new electric vehicles to its directors and claim a 100 per cent First Year Allowance (FYA) on the cost of the vehicle in the year of acquisition. A vehicle costing let’s say £40,000 would attract a tax saving of £10,000 at the main rate of corporation tax. 

If the business does not have sufficient funds to acquire outright, the vehicle can be financed through a finance lease to be eligible for 100 per cent FYA. The interest element of the finance lease will also be tax deductible against corporation tax.

Another alternative is to lease the vehicle under an operating lease. Although 100 per cent FYA will not be available, the lease payments will be tax deductible for corporation tax.

Optimise director remuneration 

Specialist pharmacy accountants emphasise the growing importance of optimising director pay structures, ensuring the correct balance between salary which is tax deductible for corporation tax and dividends which are paid out of taxed profits to ensure personal tax efficiency for the directors.

Shifting part of remuneration into employer pension contributions has become increasingly attractive. Additionally, as tax thresholds tighten, reviewing remuneration timing before year‑end can mitigate potential corporation tax liabilities.

It may be worth contributing director pension before the year end provided there are sufficient funds without impacting the working capital needs of the business.

Advice should be sought from and independent financial adviser to set up the company pension. If you have unutilised pension allowances for the three years prior, these can be utilised to make a substantial tax saving or even a corporation tax repayment if a loss occurs and can be carried back to the previous year.

Allowable expenses 

There are a number of expenses that a pharmacy business can claim to reduce corporation tax for example business miles where directors use their own vehicles for delivery, staff training costs, professional fees, etc.

Any expense incurred wholly and exclusively for the purpose of the trading business would be allowable but certain expenses such as entertainment would net be tax deductible.

It is important to understand what can be allowed and may be worth discussing with your accountant if you are unsure before incurring these costs.

Conclusion: Proactive, pharmacy‑specific tax planning is now essential

With corporation tax rates at their highest levels in years and the challenges facing community pharmacies at an all‑time peak, tax planning is no longer optional — it is a strategic necessity.

Therefore, it is vital to manage profit thresholds and marginal relief, optimise remuneration, plane for capital expenditure ahead and maximise allowable expenses to mitigate corporation tax.

As pharmacy specialist accountants that provide a tailored planning approach tend to deliver the biggest savings for pharmacy businesses.

In a challenging economic climate for the sector, effective tax planning can provide pharmacies with the financial breathing room needed to remain sustainable and continue delivering vital patient care.

Vinku Shah is a partner at Xeinadin.