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How To Legally Reduce Your Corporation Tax Bill

As a small business owner, staying on top of your finances can seem difficult, especially when you’re just starting out.

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Planning ahead with taxes could save you money in the long run.

One of the crucial areas to focus on are your taxes, which can be a tricky issue. As a a business owner, you’d probably want to reduce your tax bill as much as possible while still remaining in HMRC’s good books.  

Below, we will share five easy tips that you can use to reduce your Corporation Tax. Keep in mind that these strategies generally apply to businesses, and depending on your situation or industry, other tax deductions may apply.

How Much Corporation Tax Do Limited Companies Pay?

The Corporation Tax rate for business profits in the 2021/22 tax year is 19%, so a company with an annual profit of £500,000 will pay a corporate tax of £95,000.  

The key to ensuring that your Corporation Tax does not exceed the amount you owe is to apply for all allowable deductions and expenses to get an accurate picture of your revenue.  

If you paid £5,000 for a new machine but forgot to claim the capital allowance to which you are entitled, your profits may be inflated by £5,000, so you will pay an additional £950 in Corporation Tax. So it really pays you to stay ahead of these things.  

However, every situation is different, and there may be allowances or deductions for your particular business (as always, if you are not sure, please consult a tax expert), but every business owner should know some basics to make sure they don’t pay more taxes than necessary. 

1: Claim All Allowable Business Expenses 

This is the easiest way to lower your Corporation Tax bill because the allowable expenses will reduce your business profits.  

Recording each £3 bus ticket and each £2 ream of paper may seem cumbersome, but in a year’s time, these expenses will add up.  

You will also have industry-specific items to claim. There are no hard and fast rules for what you cannot claim, just remember that anything you declare must be used for commercial purposes only.  

Therefore, you can claim for the cost of a business phone, as long as it is in the name of your limited company, and you can even claim for business miles that you travel (even if you are riding a bicycle).  

In addition, you can claim certain expenses for working from home, or even renting a room at home to your limited company so it can be used as an office. If you travel away from home or office for work, you may be able to claim lunch expenses and business travel costs.  

Some other expenses that you might have not considered include pension contributions and professional insurance. Both can be paid by your company instead of you personally. You can even claim for annual employee events, whether they are summer parties or Christmas parties (within the limits) and rewarding employees by giving them small gifts. 

2. Pay Yourself A Salary 

When operating a separate limited company, it is sometimes easy to forget that your business is an independent legal entity which means that your business funds are not yours! So, if you wish to put those funds in your pocket, then you must pay yourself a salary.  

Salary is a business expense that will reduce your income, which in turn reduces your Corporation Tax. Therefore, before paying taxes on your profits, pay yourself!  

However, a word of warning. Several business owners pay themselves with a combination of salary and dividends; dividends are made from earnings, so you need to be able to prove that you have available profits before paying out dividends. Otherwise, HMRC will most likely reclassify your dividends as wages, and you will have to pay income tax and national insurance contributions.  

Don’t forget to ensure that your limited company has a separate bank account. Check out our article to find out why you may need to open a business bank account

3.  Surprise HMRC By Paying Early 

Did you know that paying Corporation Tax early can not only reduce the risk of missing deadlines and incurring fines, but also earn you interest? 

HMRC rewards those who pay Corporation Tax in advance with a small interest rate of 0.5%. You can pay Corporation Tax as early as 6 months and 13 days after the start of your accounting period.  

making online payments
Paying your tax early can help save you money in the future!

4. Reinvest in your Business

You can make claims if you need technical manuals and books that are particularly related to your work activities. However, do not buy books or magazines for your own personal interests (or ones that won’t help you develop new skills, as items like these are not tax deductible.  

If you need a new laptop or a phone for your business, buying it through your company is the most tax-effective way to get new equipment.  

If you need a larger equipment, new property, or other assets, you can use the Government’s Annual Investment Allowance. In this allowance, companies can currently write investments under “Plant and Machinery” (commercial vehicles, architectural equipment, office equipment, etc.).  This has been temporarily increased to £1 million until December 31, 2021. After that, the allowance will be reverted to £200,000.  

For example if your business makes £1 million in profits. You can use £400,000 on “Plants and Machinery” for your business and subtract that from your full amount of your profit and you will remain with £600,000. Then, that remaining £600,000 is what you will pay Corporation tax on.   

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Reinvesting profits in your business may reduce corporation tax.

5. Claim R&D Tax Credits By Investing In Research And Development 

Many companies wrongly deem that they cannot make use of the R&D tax credits since they are not working in a conventional innovation industry.  

Although, in most cases, whenever the company is investing in the creation of new products, processes, or services, or is investing to substantially improve existing products or services, which need to overcome a key factor of uncertainty, then may be able to claim the qualifying expenses.  

When a company is eligible to claim R&D tax credits, some normal tax-deductible business expenses, such as salaries, materials, software, etc., can not only reduce a company’s Corporation Tax bill, but some of it can be repaid back to the company in the form of tax credits. The amount you can get depends on the size of your business and whether the business is losing money or making a profit.

To Wrap Up

Having some diligence, a little understanding of the tax system, and a few minutes each month to ensure that your business expenses are properly recorded is the key to lowering your Corporation Tax bill.  

Getting the right advice at the right time is the most important thing. As a company that specialises in bookkeeping, accounting and tax services, Count is always here to help you and your business. Check out our services here

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