How to reduce corporation tax bills using simple practices?
You should pay Corporation tax to HMRC on the profits, investments, and gains on selling assets if you are a limited company, foreign company with a UK branch or office, Co-operative, Club, or other unincorporated association.
For the year 2020-21, the Corporation Tax rate applicable is 19%. As per the new budget with effect from 1st April 2023, the headline rate will increase to 25% for companies with profits over £250,000. A nineteen per cent small profit tax rate will be applicable for companies with profits of £50,000 or less.
Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief subject to a gradual increase in the effective Corporation Tax rate.
Do you feel what you pay as corporation tax is higher than what you must? Here are some simple tips which would help to bring down your corporation taxes:
Pay yourself a salary
By taking out salaries from your company, you can reduce the corporation tax you pay. This is because salaries to employees and directors are tax-deductible expenses which reduce the profit of your company. However, it would benefit you if you were cautious while doing so. Bear in mind that any salary withdrawals you make from your company are subject to income tax.
On the other hand, the dividends you withdraw do not reduce your Corporation Tax but plays a significant role in making salary withdrawal decisions. You will be benefited only when you draw a tax-efficient level of salary and dividends. It is helpful for you to get the advice of your accountant while making such decisions.
Claim Research and Development tax relief
Any limited company that engages in research and development activities can claim this Small or Medium-sized enterprise Research and Development tax relief. HMRC allows you to deduct an extra 130% of your qualifying cost annually, in addition to the standard 100% deduction. However, your project must meet the following criteria to qualify for this tax relief.
- It should be aimed to build an advancement in the overall field.
- Show that there was uncertainty.
- Explain how you worked to overcome this uncertainty
- Professionals in the field should not be able to work this out quickly.
Claim capital allowances
HMRC allows you to claim capital allowances when you purchase assets such as plant and machinery, business vehicles and equipment for business purposes. This reduces your profit by a part of the total value of the item you bought and thereby reduced the corporation tax you pay. Annual Investment Allowance (AIA) allows you to deduct the total cost of the plant and machinery you invested from the profits up to a certain threshold.
Currently, the maximum limit stands at £1,000,000. This will remain unchanged till 31st December 2021. Say, for an example, you had invested £500,000 in plant and machinery during a particular year. Your corporation profit would reduce by the same amount, having said that it is an AIA qualified asset.
Contribute towards Pension schemes
This is one of the best ways to reduce the corporation tax. As the director of the company, you can pay the pension contributions through your company funds. This not only saves money for your post-retirement period. This also reduces your corporation tax immensely. The contributions should be made before the end of the accounting period.
Claim Patent Box tax relief
This relief encourages companies to keep and commercialise intellectual property in the UK. Companies that elect to the Patent box can apply the lower rate of Corporation Tax which is 10%. To benefit from this relief, your company should own exclusively licensed-in patents granted by the UK Intellectual property office, European Patent Office, or certain countries in the European Economic area.
Claim travel mileage
You can reduce your Corporation tax by running your vehicle for business purposes and claiming back fixed-rate mileage expenses. If the vehicle is used for business purposes, then, for the first ten thousand miles, you can claim 45p per mile, and every mile above goes at 25p. Alternatively, if you use a motorcycle, you can claim 24p per mile.
Pay for a staff party
You can spend £150 per head annually for staff parties such as Christmas parties. These are tax-free for your staff and tax-deductible for your company. This reduces your corporation tax and, at the same time, strengthens the employer-employee relationship.
Purchase company mobile phones
Though this sounds simple, many do not purchase mobile names on their company name. By purchasing mobile phones in the name of your company, you can deduct the related cost from your company profit.
Other allowable expenses
In addition to the expenses explained above, you can also claim the below allowable expenses, which reduces your corporation tax bills,
- Train ticket
- Parking fees
- Office equipment
- Printing and stationery
- Company website-related expenses
- Business-related accommodation
- Fuel expenses
- Foods and drinks (Subsistence)
- Training costs
- Subscription costs
See our recent post about reducing home office working expenses!
Do not miss deadlines
you should make sure that you claim the full entitlement of the reliefs before the deadline. Generally, you have two years post your accounting period to claim certain reliefs like Research and development and capital allowances explained above.
Pay your tax bill on time
Now, this is important. Do not miss the deadline, always ensure you make the corporation tax payment on or before the due date. Mainly by making the Corporation Tax payment early, you would be better off. In doing so, not only do you minimise the risk of missing due dates and incurring penalties, but also you get the opportunity to earn credit interest on such early payments.
HMRC rewards a 0.5% interest for those who make the Corporation Tax payment before the due date. Six months and 13 days after the beginning of your accounting period is the earliest date you can make the corporation tax to HMRC and earn interest.
You should always maintain and record accurately all the business expenses you incur instantly to claim the maximum and reduce your corporation tax bills. As a business, you should be watchful for any changes in the tax system, taxes, and tax reliefs.
It would be best if you get advice from your accountants before making any major business-related expenses, as they might impact your corporation tax most of the time. By following the simple and basic practices mentioned in this blog, you can eliminate the complexity of taxation and reduce your corporation tax.