Would you like to reduce your corporation tax bill? You’re probably going to say “yes” but may worry it means resorting to illegal tactics.
Well, that’s not the case. There’s nothing wrong with wanting your limited company to pay less in corporation tax. And there are ways to legally do that!
Many incorporated companies are likely to be paying too much in corporation tax, according to researchers. A study last year revealed that UK firms overpaid corporation tax by more than £14 billion in 2023-24!
The research – based on a Freedom of Information request – uncovered a number of worrying trends, including:
- Around 400,000 companies were paying higher corporation tax than necessary.
- A complex tax system is the main cause of the problem.
- The system often leads to significant cash flow issues, as resolving overpayments is left to the company, not HMRC.
Researchers reported that most overpayments of the tax are due to worries about HMRC penalties. They also said there was a lack of understanding about available reliefs and deductions. Poor record keeping was also cited as an issue.
What is corporation tax?
Limited companies in the UK must pay corporation tax on their annual profits. Currently, your company will pay 25% on profits of more than £250,000. Companies with profits of less than £50,000 pay the small profits rate of 19%.
If your limited company has earned profit between the two limits, you may be able to claim marginal relief. This is a sliding rate of corporation tax.
As well as limited companies, other organisations might also need to pay corporation tax. These include:
- Trade associations
- Housing associations
- Members clubs, societies and associations
- Groups of individuals who carry out a business, such as a co-operative.
We’ve looked at depth at corporation tax before. So check out that blog.
How can you reduce your corporation tax bill?
The good news is you may be able to reduce your corporation tax bill legally and without worry. So, let’s look at just some of the things you can do. And if you want to know more, you can always contact our friendly team.
Pay company directors efficiently
We recently looked at how company directors who are shareholders can be paid in dividends as well as a salary. Check out our advice on dividend strategies here. This helps reduce tax that an individual pays.
But did you know that paying a modest salary to directors can also reduce the corporation tax paid by a company? Remember that even if you’re the only person working in your limited company, the profits made are the company’s and not yours.
Salaries are a legitimate business expense as are National Insurance contributions (NICs). Paying yourself and directors a salary within your personal allowance or just above the NIC threshold keeps your contributions active.
For example, a director earning £50,000 as a salary would pay more in income tax and NICs than if they took a salary of £12,570 and the rest in dividends.
If you pay a director this way, it means the profits of the company decrease, as does the corporation tax liability.
Claim allowable business expenses
From stationery, financial services, professional fees and even uniforms, businesses run up expenses. Ensuring your company claims every allowable business expense also reduces your corporation tax bill because it reduces your profits.
The key here is the word ‘allowable’. You must be able to show that what was bought was for the company. So, you can claim for training and advertising and even entertaining clients. But make sure whatever you claim is exclusively for business purposes.
Keep a record of your payments as HMRC can refuse to accept the claim if you can’t pinpoint what the expense was.
Invest in R&D
Research and development is essential for many businesses. For example, you might be trying to improve a piece of equipment you sell using new, sustainable and longer lasting materials. All the cost spent on researching the best materials and developing the product or service could qualify for R&D tax relief.
This relief can help companies claim back up to 27% of their expenditure on R&D.
R&D sounds very scientific or technical, but it doesn’t have to be. And it doesn’t have to be new products. As we’ve mentioned, you could be trying to improve something you currently sell.
Even if the efforts don’t work, you might still be able to claim R&D tax relief. The best thing to do is speak to your accountant before you start the work rather than leaving it until the year-end.
Use the Annual Investment Allowance
You can usually claim 100% tax relief on these costs through the Annual Investment Allowance (AIA). It lets you deduct the full cost of qualifying items from your profits before tax, and up to £1 million a year.
The items include machinery, computers, equipment, tools and even office furniture. It does allow for business vehicles but not cars.
It can also apply to used purchases too. It’s a generous tax relief that many company owners forget about.
Claim relief on losses
Any company making a loss can often reduce its corporation tax bill from losses it made now or in the future. The losses can be ‘carried back’ on previous profits or ‘carried forward’ against future profits. This helps lower the tax liability once the business becomes profitable.
This can be a lifeline for new or growing businesses. If your company was profitable in the previous year, you can usually carry the loss back 12 months to reclaim some corporation tax that’s already been paid. Or you can carry it forward indefinitely and offset it against future profits.
Companies that are part of a group can sometimes share losses between companies. This helps reduce the overall tax bill for the group.
Other ways to reduce your corporation tax bill
The four points above are some of the main ways of reducing your corporation tax bill. But there are others including:
- Contributing to employee pensions, as they are a business expense.
- Making charitable donations to registered charities because they are also classed a legitimate business expense.
- Paying HMRC early as they usually pay interest at 0.5% on early payments.
- Don’t pay late as that can lead to penalties, interest payments or fines.
- Check for any sector tax reliefs, such as creative industry tax relief or the Patent Box.
Where do I start?
As you can see, there are many ways that you can reduce your corporation tax bill legally. But are you doing that? If you aren’t sure or want more details, then you can contact our team today. We’re ready to help.
