How to Reduce Corporation Tax: 8 Ways
We’d all like to pay less taxes.
But wanting to and actually doing so are two very different things. The ability to reduce the amount of tax you pay is a tricky concept. Most people will want to pay their fair share of taxes without paying an excessive amount.
Luckily, there are a number of legal ways to reduce your corporation tax liability.
But what exactly is corporation tax? We’ll take a closer look at the definition and the 8 ways to reduce your corporate taxes.
Here’s What We’ll Cover:
What Is Corporation Tax?
Corporation tax is a form of tax paid by UK limited companies. It is based on the annual corporate profits that a business or company generates.
For a limited company, corporation tax specifically applies to the following:
- Trading Profits: Earnings generated from doing business
- Investments: Any profit made from business investments
- Selling Assets: Any asset such as land, property, shares and machinery that is sold for a chargeable gain.
The corporate tax rate in the UK is currently set at 19% for all business profits in the 2021/2022 tax year. This would mean if a business has a taxable income of £100,000, then their corporate tax bill will come to £19,000.
From April 2023, the Chancellor announced a change in the corporate income tax rate. If your profits are above £250,000 then you’ll be subject to an upper limit corporate tax rate of 25%. But if your profits are £50,000 or less then you’ll still be taxed at the lower limit corporate rates of 19%.
8 Ways to Reduce Your Corporation Tax
There are a number of ways to reduce your business taxes. Some of these include:
1. Claim R&D Tax Relief
If your business pays technical staff to solve technical problems, then you can claim a research and development tax relief. This can be as much as £25,000 for every £100,000 that is spent on innovating.
2. Invest in Plant & Machinery
Any company can benefit from the Annual Investment Allowance, or AIA. This allows businesses to claim immediate tax relief on purchases of certain business assets.
The limit of AIA is currently set at £1,000,000. This means businesses investing in qualifying items are able to write off a significant amount of the outlay against their profits.
3. Capital Allowances on Property
Companies can claim a 3% allowance on new commercial building expenditure as of April 2020. Any building bought before this date can review the purchase to determine whether it qualifies for capital allowances.
4. Claim All Business Expenses
It may seem obvious, but businesses often overlook some expenses from their accounting records. It’s important to keep a list of all business expenses so that you can claim them back at the end of the tax year.
It may seem tedious to keep track of every single expense, but over the course of a year those items you’ve purchased can really add up.
5. Pay Owner Salaries
If you are running your own business, don’t forget to pay yourself an ordinary income. It can be easy to forget that your business is a separate legal entity. So make sure that you pay yourself a salary which will reduce your profit. This in turn means that your Corporation Tax will be reduced.
6. Stay On Top of Payments
If you are able to pay your Corporation Tax bill early, then HMRC may give you some of it back in the form of interest on your original return.
7. Pension Payments
Paying into your or your employees pensions through a limited company is an allowable expense. It’s also a tax-efficient way to save for your retirement so it makes sense to make the most of this tax break.
8. Claim Business Mileage
If you or any of your employees use their personal car for business purposes, you can claim expenses from the company on a tax-free basis.
There are a number of ways to legally reduce your corporate income taxes. The only issue is that they do require a lot of work and organisation.
But through the use of an organised accounting department and a top-notch accounting software, you can ease the strain and end up saving a lot of money.
Are you looking for more business advice on everything from starting a new business to new business practices?
Then check out the FreshBooks Resource Hub.