Now, more than ever, companies are searching for ways to reduce their expenses, including Corporation Tax. Most company directors consult a corporate tax advisor in London and Walsall to help minimise their tax liabilities and pay as less tax as possible.
For business owners, their company’s finances, including taxes, can be quite daunting. When they start digging deeper, they will realise that it’s an expense they can not avoid. Corporation tax takes up a huge chunk of any organisation’s trading costs.
You will have to deal with harsh penalties if you don’t pay the right amounts. Sadly, not all businesses raise the question of reducing corporation tax until they are 11 months deep into the financial year and have to deal with annual profits.
Investment strategies and long-term financial planning should be employed so business owners can mitigate or offset corporate tax. While not all businesses understand the importance of long-term visibility, in this guide, we’ll discuss the strategies you can use to allow flexibility in your annual corporate taxes. Visit IBISS & CO. to find the best tax accountants.
What is Corporation Tax?
All limited companies in the UK have to pay corporation tax. Partnerships and sole traders are not liable to pay this tax. However, they have to file tax returns and pay income tax on their earnings.
Besides limited companies, some other organisations may also need to pay corporation tax. These organisations are as follows:
- Membership organisations
- Housing associations
- Co-operatives
- Societies and clubs
Corporation Tax Rate
The rate for corporation tax in the UK is 19% for business profits. In April 2020, there was a government pledge to reduce this rate to 17%. However, the current rate has been in place for two years.
From April 2023, a 25% tax rate will be applied to taxable profits above £250,000. If an organisation’s taxable profits are £50,000 or lower than this figure, a 19% tax rate will apply. If the profits are in the middle of the figures we mentioned, the marginal rate of 26.5% will apply.
How to Reduce Corporation Tax?
Since a company’s corporation tax is based on its profits, an obvious answer would be to reduce the profit to minimise the tax payable. However, if you’re operating a business and are considering minimising your expenses, you don’t want to sacrifice your profits.
Making a profit is not the real challenge but keeping the money in your business or distributing it to your shareholders tax-efficiently is. It can be tricky, but we have figured out ten ways to reduce the corporation tax while maintaining the profits you’ve earned. For business and tax advice in London and Walsall, we recommend you consult our chartered tax advisors.
Claim Each Business Expense
An easy and effective way to mitigate your company’s corporation tax is to claim all the business expenses. Regardless of how small the expense is, if you’re allowed to claim it, you should be doing so.
Businesses incur various expenses while executing their daily operations, such as electricity bills, telephone bills, insurance, internet fees, travel costs, etc. These are allowable expenses that can reduce the company’s profit and help you reduce the tax bill.
Make sure you record and claim each legal business expense. Sometimes, businesses can get carried away and not record each penny they have utilised for their business.
For example, £5 for a train ticket or £3 for paper pads might seem small expenses. However, in the long run, once you add up these expenses, they will reduce your business’s profit and increase the corporation tax.
To claim allowable business expenses, record everything so you can claim the expenses incurred for your business.
Here are some expenses you can claim:
- Salaries
- Business accommodation and travel expenses
- Employee expenses
- Business entertainment costs
- Interest on bank loan
- Cost of stationery and equipment
- Cost of assets and asset disposal
- Professional accountancy fees, legal consultancy fees, etc
- Utility bills
- Cost of raw materials and stock
- Insurance payments
- Business license expenses
- Childcare
Pay Your Salary
Remember that your business is a limited company and, therefore, a separate legal entity. One of the expenses your company has to bear is your salary. Since your finances are separate from this legal entity, the profit your business earns isn’t yours.
If you withdraw any money, it will be deducted from your salary. All employee salaries are allowable business expenses you can claim for tax reduction. This will help reduce the company’s profit, decreasing the corporation tax.
HMRC allows salaries as tax-deductible expenses a business incurs. Directors of a company can pay themselves, as this is a tax-efficient way of reducing corporate tax. Dividends paid to shareholders aren’t tax-deductible.
Since they are taken out of a company’s profit, the profit is presented to the HMRC, and dividends are only issued. If you also want to pay yourself a dividend, it’s possible that HMRC would consider it as your salary, and you would have to pay income tax on it.
Reward Your Staff Annually
Since staff expenses are allowed tax-deductible expenses, you need an excuse to celebrate and reward your staff. HMRC rules allow staff entertainment to be deducted from the company’s profits, thereby reducing the corporation tax.
You must have seen limited companies in the UK holding various team-building activities and throwing Christmas or New Year’s parties. This doesn’t just boost employee motivation levels and morale but also reduces corporation tax. You can reduce the profit for each employee or guest and claim up to £150 (including VAT).
In addition, businesses can also claim relief from corporation tax on the event’s total cost. This won’t be added to any employee’s salary, so it won’t be considered benefit-in-kind for anyone.
Companies can also claim the VAT if no additional guests are invited besides the employees. If there are no employees, directors can hold an event for themselves and benefit from the tax-deductible expenses.
Get a Business Mobile Number
Many people in the UK are still working from home ever since the COVID-19 pandemic hit. Employees need to make calls to contact clients, customers, or anyone else for business. If you run a limited company, you can provide each employee with a mobile phone number that they can use strictly for business calls.
Putting each employee’s mobile phone under your company’s name will make all the phone-related costs tax-deductible. However, make sure the mobile phones are not being considered as benefit-in-kind. They have to be treated like an asset which doesn’t add to the employee’s salary. Each staff member should have a work phone.
Once you meet all these conditions, any contracts and all phone-related costs will be added to the company’s business expenses. These allowable expenses can help you minimise the corporation tax.
Invest in R&D To Claim Tax Relief
Most businesses that operate in an innovative sector invest in research and development. From food & beverage to technology to automotive, your business can benefit from R&D, and you can also claim tax relief on this.
This relief is a great incentive for companies in the UK to invest in research and development and stimulate growth. It encourages them to spend more on R&D as HMRC will eliminate either a lump sum or the whole amount from the corporation tax amount.
R&D tax relief has amazing tax-saving potential. However, many businesses are still not aware of this. The tax relief amount will depend on your company’s size and not its profitability. If you want to ensure you understand this, consult with the best tax accountants in London and Walsall.
Leverage AIA
AIA or Annual Investment Allowance is a scheme introduced by the government which allows companies to reduce each asset’s full cost. This means you won’t have to show the cost at which you purchased the asset in your balance sheet. This will greatly reduce the amount of corporation tax.
It also encourages UK businesses to invest in machinery, plant, equipment, fixture, or even freehold premises. They can reduce their taxable profits and sometimes even claim the annual allowance. From January 1st, 2022, till March 31st, 2023, the AIA limit has been increased to £1,000,000.
Here are some capital allowances businesses can also claim:
- Enhanced Capital Allowances (ECA)
- Writing Down Allowance (WDA)
Contribute to Employees’ Pensions
You can also make regular payments and contribute to each employee’s pension funds. This is a great way to give your employees money and also reduce the company’s taxable profit. You must declare this expense before the financial year ends, and the pension payments must be in cash.
Pension schemes can help you cut down on your corporation tax. The directors can also use the company profit to pay for their pensions instead of their salaries. This will also be their safeguard for post-retirement.
Early Payments
You can also surprise the HMRC and pay your company’s corporation tax bill early. HMRC will reward you and give you some tax back as interest for the early payment. Hence, hire a corporate tax advisor to manage all the taxes to ensure you get this advantage.
Look for Various Tax Reliefs
If your business is operating in a creative industry, you can find various tax reliefs that can help reduce the corporation tax. You can claim tax relief on Theatre Tax, Film Tax, Animation Tax, Orchestra Tax, Video Games Tax Relief, High-End Television Tax, Children’s Television Tax, Galleries Exhibition and Museums Tax.
This is a great step by the UK government to encourage investors and companies to produce British films. To be eligible for any of the tax reliefs we mentioned, you need to produce a video game TV programme, film, theatrical production, animation, or anything similar.
Claim WFH Tax Relief
Have your employees been working from home or have a flexible work structure? Then your business can claim the Work From Home (WFH) tax relief. According to HMRC, businesses using personal homes, including utilities and space, can mitigate their corporation tax by claiming those allowable expenses.
You can either let some space or a room in your house to the limited company or get an annual allowance worth £312.
What Are Allowable Expenses?
Your corporation’s allowable expenses can help reduce the tax bill greatly. Anything you will to the company’s profit when calculating the corporation tax will be an allowable expense. All expenses you incur from client entertainment to corporate hospitality will be exempted from your taxable profit.
To reduce your tax liabilities, it’s best to contact a professional and speak with corporate tax advisors in London or Walsall to understand more about corporate tax and where your company’s profit goes.
Hiring a Good Accountant
If you’re concerned about your limited company’s finances, you must deal with bookkeeping, accounts, and VAT. However, most business owners can not waste too much time, effort, and energy handling such things.
It’s better to let an accountant manage everything efficiently and accurately. Yes, paying additional fees for an accountant will be an added expense. But as we mentioned, each added expense will help you reduce your corporation tax.
In conclusion, you must maintain your company’s profit, keep the corporation tax minimum and ensure your shareholders receive their dividends. We have discussed several ways you can reduce the tax bill. Make sure you are not letting your taxes pile up.
Visit IBISS & CO.
An ideal way of reducing and minimising corporation tax is to work with reliable tax consultants. IBISS & CO. is a chartered accountant firm in London and Walsall, and we have the best personal and corporate tax advisors in the UK.
We can help you strategise your company’s financial goals and pay the right numbers when they’re due. Taxes are incredibly intimidating. A lot goes into consideration, and we don’t want you to drown in documents and receipts.
Our corporate tax advisors can work out an efficient tax structure for your company, identify tax reliefs, and give you relevant business and tax advice to lower your corporate tax bill. We will be on the lookout for any industry-specific tax relief opportunities for efficient tax planning.
Want to reduce your corporation tax liability? Contact us today!
