As a Limited Company owner, you’ll be all too familiar with Corporation Tax.
If you make a profit, the government will claim 19% of that profit. It is a sizeable chunk, so understanding the ways in which you can reduce your corporation tax liability, whilst still benefiting your business is crucial for businesses of all sizes.
We’ve gathered some tips for reducing Corporation Tax. All tips are legal and so won’t get you in any bother further on down the line.
1. Claim Your Business Expenses
Rule number one is to ensure that you record and claim for every single business-related expense. Even if you think the expense is a tiny one, as a well-known supermarket says, every little helps. These small expenses will build up throughout the year, and you could be paying an unnecessary amount of Corporation Tax should you not record them.
As long as the expense is solely for business use, you’ll be able to claim it as an expense. This includes:
- Travel costs
- Clothing expenses such as uniforms that are only worn for work
- Office Costs
- Financial Costs
- Business Premise Costs
- Marketing Costs
2. Ensure you pay yourself a Salary
Whilst as a Company Director you’ll likely pay yourself in Dividends, don’t forget to make use of the Salary allowance too. Unlike Dividends, a Salary is classed as a business expense, which means it’ll be taken off your overall profit, leaving you with less Corporation Tax to pay. Taking £732 per month will mean you won’t pay any additional income tax or national insurance, yet still qualify for state pension, so it’s well worth taking!
3. Make Pension Contributions
You can also make Pension contributions directly from your company. In a similar way to paying yourself a salary, pensions are classed as a business expense, so you can pay in up to £40k a year and reduce your Corporation Tax.
4. Claim Business Mileage
If you or an employee use a personal car for mileage, ensure that the trip is recorded. There’s a wealth of apps to help you do this, such as Xero Expenses or Tripcatcher. You can put in your start and end point, and they’ll convert the trip into the correct distance plus the amount you can claim. If you use Xero Accounting, then Xero Expenses will also submit your expense claim to your accounting system for payment.
Claims are based on a per mile basis, so you’ll get 45p a mile if you travel less than 10,000 business miles per annum, and 25p a mile for anything above 10,000 miles.
5. Work From Home Allowance
In the current climate, this could apply to quite a number of businesses. HMRC allows you to claim a small portion of your home expenses if you work from home. Starting from £4 a week, ensure you claim this per employee to reap maximum corporation tax benefits.
6. Claim For A Staff Party
You’ve had a great year, made profit, so it’s time to reward the staff with an end of year party! Good news, you can claim for this too! You can claim up to £150 per head to pay for a staff party, which should be enough to cover them for drinks and food. Just make sure you invite all your employees, or there could be a benefit in kind charge.
7. Make Use Of The Annual Investment Allowance (AIA)
HMRC wants you to re-invest your profits into your company, to help you to continue to grow into the next year. To encourage this, it provides you with an allowance to spend on company equipment, such as laptops, phones or other business-related assets.
At the time of writing, the allowance is £1,000,000, so bear that in mind when finalising your accounts. Rather than paying the tax man, why not re-invest your profits into company equipment that will benefit your next financial year.
8. R&D Tax Reliefs
Is your company in the business of innovation? Then you could be due some tax relief.
To qualify for tax relief on your profits, you must be able to demonstrate that your company is developing an advancement in science or technology. If you can prove this, then you could be due a sizeable rebate or tax relief.
9. Pay Your Tax Early
HMRC encourage businesses to pay their tax early by offering an interest rate on early payments.
This is known as Credit Interest, with the rate currently at 0.5%. HMRC will pay interest from 6 months and 13 days after the start of the accounting period and is accumulated from the date you pay your corporation tax to the payment deadline. Ensure you have the funds though before paying early!
Ensuring that your business is taking advantage of all the tax reliefs available is crucial to long-term success. Recording business expenses and claiming for absolutely everything might seem like a tedious task, but can add up to a sizeable amount of Corporation Tax saved if done properly. If you need support from an experienced Accounting team that will help roadmap your financial future and provide a proactive approach to business financial management, then get in touch with iFinance Department today.
Reducing Corporation Tax FAQs
There are many ways you can reduce your corporation tax from claiming business expenses to paying yourself a salary or even throwing a staff party.
As long as the expense is solely for business use, you’ll be able to claim it as an expense. Learn more about what expenses you can claim.
Corporation tax is paid by businesses in the UK, and is calculated on their annual profits. Corporation tax rate has been 19% since April 2016.