There’s nothing wrong in paying a corporation tax bill! If you are paying tax it means your business is doing well.
But, of course, the issue is are you paying too much? If you have a limited company you pay corporation tax. For full details on corporation tax check our blog from earlier this year. In that blog we cover the basics. This time, we want to give you an insight into how you can legally reduce your corporation tax bill.
Notice that we mention the word ‘legally’. This isn’t tax evasion! If you try to evade paying tax, you face a big penalty, a large fine or, in the worst cases, imprisonment.
A good accountant can help you reduce your corporation tax bill without the risk of doing porridge!
Corporation tax is currently set at 19% but for many, this is likely to rise from April 2023. Firms with profits of less than £50,000 will continue to pay 19% from that day. It will then taper to the headline rate of 25% for companies with profits over £250,000.
4 ways to reduce your corporation tax bill
1. Pay your directors a salary
Directors can pay themselves with dividends if their company records a profit. You have to show that the company is in profit before you can use dividends.
Dividends offer tax free income if they fall under the dividend allowance. While this is great news, directors should also pay themselves a salary.
Salaries are considered a business expense, meaning profits are reduced if you pay directors a salary, and this reduces your corporation tax.
Paying directors with a mixture of dividends and salary is the best idea. This needs to be planned carefully as there are other tax implications to consider.
2. Claim expenses
An easy way to reduce your corporation tax bill is to claim every allowable expense possible. Be aware that expenses must be ‘allowable’.
While claiming for every £2 parking charge may seem to be a hassle to record, every penny counts. Claiming for parking, fuel and stationery is common, but there are other industry-specific items you can claim for.
Overnight stays before meeting clients are not a luxury if they are hours away in the car. You can also claim for food while away on business.
3. Claim for research and development
If your business produces innovative products or services, you may be eligible for R&D tax credits. Such allowable costs include developing new products, processes or software. This equates to additional tax relief of up to £24,700 for every £100,000 spent on research.
4. Pay HMRC early!
We haven’t lost our senses… paying HMRC helps you! HMRC rewards early payments with interest. If you pay late you incur interest, which you will pay at a higher rate than the interest received on early or overpayments.
There are many other ways that you can reduce your corporation tax bill legally. For example, creative industry firms can claim additional tax relief.
Each business is different, so if you want to know more, contact us today for details.