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How to reduce Corporation Tax?

You pay a corporation tax rate of 19% on the profits made by your limited company and this is due to increase to up to 25% from 1 April 2023 following the Spring Budget.

Profit is defined by HMRC, in the strictest sense, as whatever is left from your revenues after you’ve paid for everything you had to purchase and every person you had to employ (including yourself, salaries, not dividends).

In this article, we look at 18 perfectly legitimate and legal ways to reduce the amount you pay in corporation tax, assuming they are wholly and exclusively for the purpose of your trade.

Remember that being tax efficient makes good business sense. The less you have to pay to HMRC, the more you can invest into the stability and future of your business.

Black and White helps hundreds of small company owners and corporate clients across the UK to reduce their corporation and personal tax bills. To find out more, please call us on 0800 140 464 or click here to email us.

18 ways to reduce your corporation tax bill

1. Claim against all allowable tax deductible business expenses possible

Every tax deductible business expenses included on your CT600 return reduces what you need to pay HMRC. These are legitimate business expenses you’ve incurred in the course of providing your clients with the goods and services you provide and you’re entitled to claim back on them.

Be careful however as there no hard-and-fast rules on which expenses you can and cannot claim so you should always seek professional advice from an accountant on what you can use to lessen your corporation tax liability. Not only is there tax legislation but there is tax cases to consider too.

To qualify as allowable expenditure, each item or service your business purchases has to comply with the “wholly and exclusively rule” otherwise it’s unlikely that HMRC will allow it.

Tax is a complicated subject so your accountant will apply HMRC’s “wholly and exclusively rule” when considering each item of potentially allowable expenditure to assess whether you’re actually able to claim for it legitimately.

2. Claim on your research and development costs (R&D tax credits)

For over 20 years now, the government have encourages business to invest in R&D. So much so that you can claim for R&D tax credits which will roughly reduce your corporation tax bill by 25% of the cost of the project (even more if you lost money during that financial year), which can literally be a game-charger for your business.

Although it’s best to make R&D tax claims as soon as possible, you do actually have two years from the end of your accounting period to make a claim if it’s better for you.

Black and White note – get in touch with us and let’s discover whether you had a valid claim for R&D tax credits which you did not know about at the time. We can make R&D tax claims for your previous two accounting periods on your behalf.

3. Do you make money from patents?

If your company profits from the exploitation of…

  • Patented inventions;
  • Patents you own or have exclusively license in; and/or
  • Work your company did which led to the creation of a patented invention

…you can use the Patent Box to lower the amount of corporation tax you pay on those profits from 19% to 10%.

4. Claim the capital allowance on property transactions

You can claim capital allowance for expenditure on commercial buildings, fixtures, and chattels owned by your company. Depending on your current situation, you may be entitled to one or more of the following:

  • enterprise zone allowances;
  • structure and buildings allowances;
  • fit-out allowances for leased commercial properties; and
  • capital allowances on a property sale or purchase.

Black and White note – this is a complicated area for which we recommend you seek professional advice.

5. Offer a share scheme to your staff

Corporation tax charged against your company’s profits may be reduced if your offer a share scheme to your employees.

In addition to saving money, they’re very effective for motivating staff and gaining their longer-term loyalty.

Ask us about Share Incentive Plans, Save As You Earn (SAYE), Company Share Option Plans, and Enterprise Management Incentives (EMIs).

6. Use as much of your Annual Investment Allowance (AIA) as possible to bring down your tax bill

Each year, every company can use its Annual Investment Allowance (AIA) to invest in plant and machinery and costs related to them.

Capital allowance claims can also be made against expenditure on the following items and activities:

  • ‘know-how’ (intellectual property about industrial techniques);
  • dredging;
  • mineral extraction;
  • patents;
  • renovating business premises in disadvantaged areas of the UK;
  • research and development; and
  • structure and buildings.

You can deduct the full value of these items/activities and the associated costs from your profit to lessen your tax bill.

On 1 January 2019, AIA was increased to £1 million but AIA was then reduced in value to £200,000 in January 2021.

One of the bits of good news from the Spring Budget was the so called Super-Deduction. Whilst we are awaiting further details here, there will be further tax allowances here from April 2021 on certain classes of assets where the company can reduce their company tax by around 25p for every pound invested in qualifying new equipment (similar to the R&D tax credit regime mentioned here).

7. Claim any work from home allowance you’re entitled to

You can benefit from further corporation tax relief by working from home.

You can allocate a proportion of the business-related expenses you incur by working from home to you company – for example, telephone calls, insurance, internet access, and more.

8. File and pay your tax bill on time…

There are a series of fines and penalties for late filing and payment of Corporation Tax which your company will avoid completely if you hit HMRC’s deadlines.

9. …better still, pay ahead of time

Very few companies want to pay HMRC but early payment and being this tax efficient has its benefits.

If you make early payment of your corporation tax (six months and 13 days after the start of your accounting period), HMRC will pay you interest of 0.5%. Every little helps (sorry)

10. Use your personal tax allowance effectively

Everyone in the UK earning under £100,000 has an annual personal tax allowance of £12,500.

Many limited company directors pay themselves mainly in dividends but this is often not the most efficient way to do so.

If you pay yourself a salary up to your personal limit, you won’t pay any income tax but you and your company will have to pay some National Insurance (NI). Or you can pay yourself up to the primary NI threshold and you will pay no income tax and neither you nor your company will pay NI.

Either way, the amount you pay yourself as a salary will provide tax relief to your limited company because salary paid via the PAYE system is a tax deductible expense.

11. Make pension contributions

Likewise, pensions are also tax deductible expenses for limited companies but this is a more complicated area on which you should take professional advice. We work with some great strategic partners who would love to help you further with this.

12. Creative industry relief scheme

If your company is in the creative industry and more specifically involved in producing or developing animated television, children’s television, films, high-end television, museum or gallery exhibitions, orchestral concerts, theatrical productions, or video games, there are various tax reliefs available which permit you a higher level of allowable annual capital expenditure – a kind of special AIA scheme for creative companies.

Incentives are also available for companies involved in the decision making process in these productions and/or if your company directly negotiates, contracts and pays for rights, goods, and services for these productions.

13. Business mileage tax reliefs

If your staff use their personal car for business purposes, they can claim mileage rate expenses from your limited company – this is one of the most popular ways to lower company tax bills.

For the first 10,000 miles you travel in an accounting year, your employees can claim 45p per mile. For travel over 10,000 miles, the amount they can claim is 25p per mile.

There are also similar allowances for travel and subsistence which you should consider.

14. Tax free staff party or parties

One popular way to reduce your tax bill is to pay for an annual staff party – or parties throughout the year.

You need to make sure that you keep your annual spending per head to no than £150 per year otherwise HMRC will consider as a “benefit in kind” and each employee’s share of the costs of the parties will be considered by the taxman as part of their pay packets.

Spending more than £150 a head means that you and your employee will have to pay tax on the party or parties you hold for them.

Black and White note – a benefit in kind is non-cash benefit which small business owners can provide to their employees but whose monetary value must be reflected in an employee’s wages. Its inclusion in employee wages means that it is taxable.

15. Tax free parties and treats for yourself

“Trivial benefits” are tax-saving perks which you can reward your directors and employees with instead of extra pay with without the monetary value of those rewards being subject to tax or NI.

No gift can cost more than £50 including VAT and the total value of gifts awarded to directors under the scheme cannot exceed £300 per year.

All gifts, if wholly and exclusively are treated as expenses and therefore qualify for corporation tax relief.

16. Use a company mobile phone

With more of us working from home than ever before (even before Coronavirus), many small business owners are giving their staff company mobile phones to make and receive calls. Line rental and call charges incurred by your use and your staff’s use of mobile phones is a legitimate business expense you can claim against as long as the phone remains the property of your limited company at all times.

17. Claim subscriptions and training costs against your tax bill

Any training you purchase for yourself or your staff and any professional subscriptions to trade bodies are claimable providing an opportunity for further tax relief for your limited company.

18. Claim tax relief for previous annual losses

One of the most commons ways to reduce your corporation tax bill is to claim back all available loss reliefs.

You can either carry back a loss to a previous year or you can carry them forward to reduce future tax liabilities. There will also be a temporary improvement in these rules, as announced in the Spring Budget.

How to reduce your corporation tax Quick FAQ

What is corporation tax?

Corporation tax is a tax on company profits. Who has to pay corporation tax? Every private and public limited company.

The due date for payment is nine months and one day after the end of your accounting period and the due date for the filing of your corporation tax returns is 12 months after the end of the accounting period. For example, if your accounting period ends on 31st December, you must pay your tax by the following 1st October and file your corporation tax return by the following 31st December.

Is trying to reduce your corporation tax legal?

Yes. All limited companies are legally entitled to tax relief on each allowable business expense they’ve incurred in the course of their business.

Do dividends reduce corporation tax?

No – dividends are redistributions of cash from a company to its shareholder after corporation tax has been deducted.

There are no tax reliefs related to the payment of dividends

What does lower corporation tax mean?

It means that you have more money to invest in your business now and in the future.

The money you save you might keep in the bank for a healthier cash flow or you might want to employ extra staff or purchase new plant and machinery to give your business a competitive advantage.

Keep more of what you earn – use every way to reduce corporation tax relief available to you

We’ll use our experience and knowledge of the tax system to legitimately reduce the amount of corporation tax your business pays.

Black and White helps hundreds of small business owners and corporate clients in the South of England and across the UK to reduce their corporation tax bill through the efficient and accurate use of each available tax relief. To find out more, please call our tax saving team on 0800 140 464 or click here to email us.

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