How to Reduce Your Corporation Tax Bill
Corporation Tax is tax paid by UK limited companies (and some other organisations) on their profits. It applies whether these profits have come from trading, investment income or selling capital assets such as property or shares. Corporation Tax is paid to HM Revenue & Customs (HMRC) on the taxable profits of a company after allowances, deductions and reliefs have been applied.
As a business owner it’s important to understand how Corporation Tax works and how much you need to pay. But it’s equally important to know how you can legally reduce your Corporation Tax bill by planning ahead and keeping good records.
Reduce Corporation Tax: How Much is It?
Currently Corporation Tax is charged at two rates, but these can change and there are often taperings or different levels based on profit sizes. With changing tax rates and allowances it pays to have a plan in place so you don’t overpay.
There are many HMRC-approved ways that you can cut your Corporation Tax bill.
5 Easy Tips to Reduce Corporation Tax
1. Claim All Allowable Business Expenses
It sounds obvious, but one of the easiest ways to save on Corporation Tax is to make sure you claim all of your allowable business expenses. Allowable business expenses are costs that are incurred wholly and exclusively for business purposes. Office rental and bills, professional subscriptions and fees, marketing and advertising costs, software licences, staff wages and business travel costs are all examples of allowable expenses. Make sure you keep good records throughout the year so you don’t miss anything. Small expenses can quickly add up to a big reduction in your taxable profit.
2. Make Use of Capital Allowances
Capital allowances are essentially another form of allowable business expense that you can claim to reduce your pre-tax profits. They apply to items that are necessary for the business such as machinery, equipment, vehicles and computers. The Annual Investment Allowance (AIA) allows businesses to write-off 100% of the cost of capital assets up to a certain limit in the year that it is purchased.
3. Take Advantage of R&D Tax Credits
Research & Development tax relief is available to companies that spend money on improving products and services or developing completely new ones. You may be able to reduce the amount of Corporation Tax you pay (or actually receive tax credit if your company makes a loss).
Lots of companies miss out on R&D tax relief because they don’t realise they qualify.
4. Use Trading Losses
If your company has made a loss in previous years, you can often carry those losses forward and set them against future profits. This reduces your Corporation Tax bill in years where you make a profit. In some circumstances you can also carry losses back to reclaim Corporation Tax already paid. It’s important to plan how losses are used so they provide the greatest tax benefit.
5. Pension Contributions
Paying into your pension is another good way to save on Corporation Tax. Pension contributions made by an employer are classed as an allowable business expense so can also be used to reduce your pre-tax profit. Pensions not only save you tax, they’re also a great way to plan for the future for yourself and any employees or directors.
6. Pay Directors Tax Efficiently
The way you pay yourself and your other directors can also affect your Corporation Tax bill. By paying a mixture of salary and dividends you could potentially save on Corporation Tax and reduce personal tax too. Salary is paid out of pre-tax profits making it an allowable expense for Corporation Tax purposes. Dividends are paid from profits once tax has already been applied.
You’ll need to get the balance right. It’s strongly advised to seek professional help.
7. Donate to Charity
Finally, if your business makes donations to registered charities you can also reduce your Corporation Tax bill.
The key things to consider
To reduce your corporation tax bill, make sure you claim all allowable business expenses, maximise capital allowance, invest in R&D Tax Credits, make employer pension contributions, and also be smart with how you pay your directors. Furthermore, making charitable donations as a company also helps with reducing your corporation tax bill. Finally, always ensure that you comply to HMRC rules and guidelines to avoid legal action being taken for non-compliance.
We would recommend getting professional help when attempting to better your compliance tax bill.
Plan Ahead and get Advice
Knowing how you can cut down on Corporation Tax shouldn’t be about avoiding tax. You should always pay the full amount you owe but make sure you are using all the allowances and reliefs available to you.
Tax rules and reliefs change all of the time so employing an accountant means you can be sure your business is complying with legislation, but also reducing your bill by keeping on top of new developments. Reduce your Corporation Tax bill and put the savings back into your business.
