How to Reduce Your Company’s Corporation Tax: Expert Tips and Strategies

If you run a business in the UK, understanding corporation tax and exploring legal avenues to reduce your tax bill is crucial. This article outlines effective strategies to minimise your corporation tax, enhancing your company’s financial health.

One effective way to lower your corporation tax is by diligently claiming all allowable business expenses. From office rent to equipment purchases, every penny spent on legitimate business activities can reduce your taxable profits. Familiarising yourself with what business expenses a sole trader can claim extends this benefit to freelancers and independent contractors, ensuring they too capitalise on possible deductions.

Understanding Corporation Tax

Grasping the basics of Corporation Tax is essential for every business owner. This tax, levied on a company’s profits, varies by profit levels, with rates for the 2023/24 tax year set between 19-25%. By understanding tax rates and allowances for 2024, businesses can better forecast their tax obligations and plan accordingly.

Corporation Tax Basics

Corporation Tax is a tax on the profits of limited companies, foreign companies with a UK branch or office, and any other organisations that are considered to be a taxable entity for Corporation Tax purposes. The current Corporation Tax rate for the 2023/24 tax year is 19-25%, depending on the level of profits.

Taxable Profits and Allowances

Taxable profits are the profits that are subject to Corporation Tax. These profits are calculated by deducting allowable expenses from the company’s total income. Allowable expenses include costs that are incurred wholly and exclusively for the purposes of the trade.

The amount of taxable profits can be reduced by claiming various allowances, such as capital allowances, research and development (R&D) relief, and patent box relief. It is important to note that not all expenses are allowable for Corporation Tax purposes, and the rules surrounding this can be complex.

HMRC and Tax Compliance

HM Revenue and Customs (HMRC) is responsible for collecting Corporation Tax. Companies are required to file a Corporation Tax return and pay any tax due within nine months and one day after the end of their accounting period.

It is important to ensure that your company is fully compliant with HMRC’s rules and regulations. Failure to comply with these rules can result in fines and penalties. So, seek professional advice to ensure that your company is fully compliant with the tax system.

Optimising Business Expenses

Critical to reducing your corporation tax is the strategic management of business expenses. Identifying and claiming allowable expenses directly impacts your taxable profits. For comprehensive guidance, refer to the expenses guide for limited companies and directors, which outlines deductible expenses, from employee salaries to annual investment allowances.

Identifying Allowable Expenses

Identifying allowable expenses is the first step towards minimising your corporation tax bill. Allowable expenses are those that are incurred wholly and exclusively for the purpose of your business. These expenses can be deducted from your company’s taxable profits, thereby reducing your corporation tax liability.

Allowable expenses can include:

• Salaries and wages: You can claim a deduction for the salaries and wages paid to your employees, including bonuses and commissions.
• Business expenses: You can claim a deduction for expenses that are incurred wholly and exclusively for the purpose of your business, such as rent, rates, and utility bills.
• Machinery and equipment: You can claim a deduction for the cost of machinery and equipment that you purchase for your business.
• Annual Investment Allowance: You can claim a 100% deduction for the cost of qualifying plant and machinery up to the AIA limit of £1 million per year.
• Capital Allowance: You can claim a deduction for the cost of assets that you purchase for your business, such as vehicles, computers, and office furniture.

Maximising Deductible Costs

Maximising deductible costs is another way to reduce your corporation tax liability. Deductible costs are those that can be deducted from your company’s taxable profits, thereby reducing your corporation tax liability.

To maximise your deductible costs, you can:

• Claim all allowable expenses: Make sure that you claim all allowable expenses that are incurred wholly and exclusively for the purpose of your business.
• Claim capital allowances: Make sure that you claim capital allowances for the cost of assets that you purchase for your business.
• Claim research and development (R&D) tax relief: If your company carries out R&D activities, you may be able to claim R&D tax relief, which can reduce your corporation tax liability.
• Claim losses: If your company makes a loss in a tax year, you can carry the loss forward to offset against future profits, thereby reducing your corporation tax liability.

Utilising Tax Reliefs and Allowances

Leveraging tax reliefs and allowances offers another avenue to reduce your tax bill. Consider making pension contributions, an efficient strategy not only to lower your corporation tax but also to secure your and your employees’ future. Detailed insights on making pension contributions through a limited company can guide you through the process.

Annual Investment Allowance (AIA)

The AIA is an allowance that allows you to deduct the full cost of qualifying plant and machinery from your profits before tax. The current AIA limit is £1 million per year, so if you invest in new equipment or machinery for your business, you can use the AIA to reduce your corporation tax bill. Keep in mind that not all assets qualify for AIA, so check with your accountant to confirm which assets qualify.

Research and Development Tax Credits

If your company is involved in research and development, you may be eligible for R&D tax relief. This relief allows you to claim back a percentage of your R&D costs as a tax credit or a reduction in your corporation tax bill. The percentage you can claim back depends on the size of your company and whether you’re claiming under the SME or RDEC scheme. SMEs can claim up to 33% of their R&D costs, while large companies can claim up to 13%.

Capital Allowances on Assets

Capital allowances allow you to claim tax relief on certain types of assets, such as equipment, machinery, and vehicles. There are different types of capital allowances, including the AIA mentioned above, but also other types such as first-year allowances and writing-down allowances. The type of allowance you can claim depends on the asset and how it’s used in your business.

Effective Tax Planning Strategies

Reducing your corporation tax bill can be achieved through effective tax planning strategies. Here are three tax planning strategies that can help you reduce your company’s corporation tax bill:

Pension Contributions and Tax

Making pension contributions can be a tax-efficient way to reduce your company’s corporation tax bill. By making employer contributions to your pension scheme, you can reduce your company’s taxable profits. Furthermore, the contributions you make to your pension scheme are also tax-deductible, so you can reduce your personal tax bill too.

Utilising Dividends and Payments

By utilising dividends and payments, you can create an effective payment strategy that can help you to reduce your company’s corporation tax liability and your personal tax liability. For example, you could pay yourself a salary up to the personal allowance threshold, which is currently £12,570 (as of the 2023/24 tax year), and then pay yourself the rest of your income in dividends. This can help you to reduce your personal tax bill, as dividends are taxed at a lower rate than salary payments.

Tax-Efficient Investment Schemes

Another way to reduce your company’s corporation tax bill is by investing in tax-efficient investment schemes, such as Enterprise Investment Schemes (EIS). These schemes offer a range of tax benefits, including income tax relief, capital gains tax relief, and inheritance tax relief. By investing in an EIS, you can reduce your company’s corporation tax bill and benefit from the potential returns of the investment.

Employee Considerations

When it comes to reducing your company’s corporation tax, employee considerations are important to take into account. By making smart decisions regarding salaries, benefits, and allowances, you can save money on your tax bill.

Salaries and National Insurance

One way to reduce your corporation tax is to pay yourself a tax-efficient remuneration. As the owner or a director of a limited company, you can reduce your Corporation Tax liability by paying yourself a salary or a combination of salary and other types of remuneration that are allowable as business expenses.

However, it’s important to keep in mind that salaries are subject to income tax and national insurance contributions (NICs). You can reduce your NICs by keeping your salary below the NICs threshold. This threshold is £9,568 per year for the 2023/24 tax year.

Benefits and Allowances

Another way to reduce your corporation tax is to provide benefits and allowances to your employees. One popular benefit is the work-from-home allowance. If your employees work from home, you can provide them with a tax-free allowance of up to £6 per week to cover the costs of their home office expenses.

You can also provide your employees with tax-free travel expenses. If your employees need to travel for work, you can reimburse them for their travel expenses tax-free. This can include the cost of public transport, mileage, and parking fees.

Engaging Professional Services

The complexity of tax planning often necessitates professional guidance. Accountants and tax advisors play a crucial role in identifying savings, ensuring compliance, and strategic business structuring. Whether you’re a sole trader, part of a small business, or running a limited company, professional accounting services can provide tailored advice to maximise your tax efficiencies.

The Role of an Accountant

An accountant can play a vital role in reducing your corporation tax bill. They can help you identify tax-efficient ways to structure your business, ensure that you’re claiming all the deductions you’re entitled to, and help you plan for the future.

For example, your accountant can help you take advantage of tax reliefs such as Research and Development (R&D) tax credits, which can significantly reduce your tax bill. They can also help you structure your business in a way that minimises your tax liability, such as by incorporating or forming a limited liability partnership (LLP).

Seeking Professional Advice

In addition to engaging the services of an accountant, you may also want to seek professional advice from a tax specialist. A tax specialist can help you identify ways to reduce your corporation tax bill that your accountant may not be aware of.

For example, a tax specialist can help you take advantage of tax-efficient investments, such as the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). They can also help you structure your business in a way that takes advantage of tax reliefs and exemptions, such as the Patent Box or the Business Premises Renovation Allowance (BPRA).

Advanced Tax Considerations

Reducing your company’s corporation tax liability is not always straightforward. There are some advanced tax considerations that you should be aware of to ensure that you are not only minimising your corporation tax bill but also complying with the tax regulations.

Transfer Pricing and Tax

If your company is part of a group that operates across different countries, you need to be aware of transfer pricing regulations. Transfer pricing refers to the price that one company within a group charges another company within the same group for goods or services. HMRC has strict rules around transfer pricing, and if you don’t comply with them, you could face penalties.

To ensure that you are complying with transfer pricing regulations, you should:

• Conduct a transfer pricing study to determine the appropriate pricing for goods and services
• Document your transfer pricing policies and procedures
• Keep accurate records of all transactions between group companies

By doing this, you can ensure that you are not only reducing your corporation tax bill but also complying with transfer pricing regulations.

Mergers and Acquisitions

If your company is considering merging with or acquiring another company, you should be aware of the tax implications. Mergers and acquisitions can have significant tax implications, including capital gains tax.

To ensure that you are minimising your tax liability, you should:

• Conduct due diligence on the target company to determine any potential tax liabilities
• Consider the tax implications of different deal structures
• Seek professional tax advice before completing any merger or acquisition

By doing this, you can ensure that you are minimising your tax liability and complying with the tax regulations.

Staying Informed on Tax Legislation

As a business owner, it’s important to stay informed on tax legislation to ensure that you are taking advantage of all the available tax reliefs and allowances. Keeping abreast of changes can help you make informed decisions that can positively impact your financial position. Here are some tips to help you stay informed:

Keeping Abreast of Changes

HM Revenue and Customs (HMRC) is responsible for administering the UK’s tax system. They regularly update their website with the latest tax information, including changes to tax legislation. You can sign up for email alerts from HMRC to receive updates on changes that may affect your business.

It’s also a good idea to consult with a tax advisor who can help you navigate the complex tax system. A tax advisor can provide you with advice on how to structure your business to take advantage of tax reliefs and allowances.

Anticipating Future Tax Developments

It’s important to anticipate future tax developments so that you can plan accordingly. For example, if you anticipate that your annual profits will increase in the coming years, you may want to consider investing in capital assets such as property or equipment to take advantage of capital allowances.

You should also keep an eye out for new tax reliefs that may become available. The government regularly introduces new tax reliefs to encourage investment in certain industries or to promote certain behaviours. For example, the Patent Box relief provides a lower corporate tax rate of 10% on earnings from patented inventions.