Paying corporation tax is an essential part of running a limited company. As with most parts of the UK tax system, it seems fairly complex to the uninitiated. And that's why it's too easy to get your corporation tax bill wrong.
Without proper knowledge and attention, you could pay corporation tax that's way higher than what you should pay and may even miss out on amazing tax deductibles. Or, worse still, you might even underpay and incur penalties later on.
Luckily, there are many ways to prevent this, and learning how to reduce your corporation tax bill is a fantastic way to only pay the legally required tax amount.
All limited companies, organisations and foreign companies with local offices in the UK are legally obligated to pay tax on profits in a tax year. If you run any business incorporated as a corporation in the UK, your establishment falls under this bracket.
Corporation tax applies to:
If you are a sole trader then you do not pay corporation tax, but still need to declare your self-assessment taxable income every year.
The short answer is it depends, which is of course not a satisfactory answer. So instead, let's dive into greater detail.
The corporation tax rate for the 2021/2022 tax year is 19% for all taxable profits.
But here's how much corporation tax you'll pay, according to the office of the Chancellor:
Businesses that make above £250,000 will pay 25% starting from April 2023.
Companies that make under £50,000 yearly will still pay 19% corporation tax, while those who earn between £50,000 and £250,000 will pay a marginal rate of 26.5%.
All you have to do is find your tax bracket and calculate your tax rate.
Here are 11 great ways to save money when settling your next corporation tax bill.
Every limited company has a long list of business expenses they need to operate, and you can claim tax relief for nearly all of them, but only if you keep count.
They're officially called 'allowable business expenses,' and you can claim everything from your telephone bill to your office equipment. Other claimables in this category include parking tickets, taxi fairs, and stationary purchases.
There are no hard and fast rules for what allowable expenses cover as long as it's wholly and exclusively for business use.
We recommend using good accounting software to keep track of every expense. That way, you don't have to think too hard when tax season rolls in. More importantly, you won't get into any trouble for mixing up some of your expenses. Over an accounting period, it adds up, and it's one of the most tax-efficient ways to reduce your taxable income during an accounting period.
If technical problem-solving and research and development are integral parts of your business model, you should consider applying for R & D tax reliefs. You can get back as much as £25,000 of every £100,000 you spend on developing new technology.
To sweeten the tax relief pot, you can claim patent box tax relief if a large part of your company's profits come from patents. Some businesses use this provision to pay as low as 10%in taxes.
Another easy tax deductible you can claim is business mileage. Your employees can claim 45p per mile, up to 10,000 miles per year, on a personal car for business errands. For travel above 10,000 miles, they get 25p; that's tax credit you can deduct from company profits paid to employees.
The HMRC doles out interest for early payment of your tax, and all you have to do to use this "how to reduce corporation tax" system is to pay your tax on time. Just as you receive more corporation tax for late payments, you can also receive a tax break for settling your bill 6 months before the end of your accounting year. The credit interest is 0.5% of your tax bill.
It's true. Paying yourself a salary will reduce your corporation tax. As the director of your business, you can pay yourself compensation, which can be filed as an allowable expense, along with paying employee salaries, employers' contributions, national insurance contributions, and VAT.
Unlike a sole trader, you're a separate legal entity from your business, which means you have more avenues to pay yourself. We recommend a mix of dividends and salaries for the best result. Note that you will have to pay income tax on your salary.
The UK government's annual investment allowance is a great way to shave a significant amount off your corporation tax bill. The allowance allows you to knock off as much as £1 million spent on plant and machinery, fixtures, commercial vehicles and other investments.
There are eight tax reliefs available for businesses operating in the creative industry. They include:
The relief scheme was set up to inspire cultural productions and attract investors to the UK. It operates similarly to the R&D relief and helps you reduce corporation tax liability.
If you operate in this industry, consult your accountant to claim the tax relief, or visit the Gov.UK website for more information.
Companies can claim a 3% allowance on new commercial building expenditures. The provision has been in place since April 2020, and you can even retroactively claim capital allowances if you qualify.
Paying pension contributions is another obvious deductible that can help you reduce corporation tax. Employer contributions to tax schemes are tax-free if you file them in your accounting records before the end of the tax year.
You also can claim a portion of your household expenses as a deductible if working from home eats into your utility bill. You can claim deductibles for your heat and light, as well as internet access, insurance, phone calls, etc. The starting point is £4 per week, but that number can be substantially higher if your work consumes more utility.
Did you know you can reduce your corporation tax liability by offering share schemes to your employees?
The government awards deductibles to companies that reward their employees with shares. You'll have to set up a tax scheme and confirm with an accountant to see if it's the most tax-efficient decision, but it can be well worth it for the employees and the company director.
Although every limited company in the UK needs to pay corporation tax, there are many ways to keep your tax liability down. By understanding what you can put through as a business expense and the various tax breaks that are available to you, you can ensure your business, small or large, doesn't overpay tax.
While every business owner does need to understand what tax they need to pay, you don't need to spend months studying your company books to reduce corporation tax for your business. Taking the time to organise and file for breaks and relief is the real challenge.
This is why every limited company on the rise has an accountant they go to for professional advice, keep their accounting, and handle corporation tax and paperwork.
Here at Henderson and Co Accountants, we work with business of all sizes, from sole traders to SMEs and large limited companys in the UK.
With the knowledge and expertise of our team of accountants in York and with offices in Kilkeel, Northern Ireland, we have plenty of experience helping our clients ensure they pay the right tax. So rather than spending hours poring over spreadsheets and paperwork, get in touch for a no-obligation discovery call to see how we can make sure your corporation tax bill is as low as it legally can be.