A guide to reducing UK corporation tax
Managing your corporation tax liability legally is crucial not only for financial compliance, but also for improving profitability.
Here, we'll explore various strategies and considerations to help you minimise your corporation tax.
Corporation Tax: What is it?
All profits made by UK corporations, including those from trading, investments, and capital gains, are subject to corporation tax. Cooperatives, foreign companies with a UK office, and limited companies are subject to it.
Current Corporation Tax Rates
The current rates for Corporation Tax for 2024 are as follows:
Small profits rate (companies with profits under £50,000) - 19%
Main rate (companies with profits over £250,000) - 25%
Main rate (all profits except ring fence profits) –
Marginal Relief lower limit - £50,000
Marginal Relief upper limit - £250,000
Standard fraction - 3/200
Special rate for unit trusts and open-ended, investment companies - 20%
Legal Strategies to Reduce Corporation Tax
Maximising Allowable Deductions
You can reduce your corporation tax by maximising your deductions. There are a wide range of business expenses that can be deducted from your company's profit before tax is calculated.
There are many expenses that are deductible, such as employee salaries, office costs, business travel expenses, marketing and advertising expenses, and legal and financial expenses. To prove your expenses in case of a tax audit, you should keep accurate and detailed records. If all legitimate business expenses are accounted for, your taxable profits can be significantly reduced.
The use of capital allowances
Corporation tax can be reduced by capital allowances as well. Your business can deduct the costs of capital assets, such as equipment, machinery, and vehicles, from its taxable income.
An item's full value may be deducted up to a certain limit under the Annual Investment Allowance (AIA). Particularly for businesses that require large investments in capital goods, this can result in substantial tax savings. Taxes can be drastically reduced if you understand and apply these allowances.
How to Take Advantage of Corporation Tax Reliefs
Research and Development (R&D) Relief
R&D tax reliefs can reduce corporations' tax bills significantly if they engage in qualifying R&D activities. It allows companies to deduct 130% of qualifying costs on top of the normal 100% deduction, making a total deduction of 230%.
The costs associated with R&D include employee salaries, materials, utilities, and software. Aiming to ease the financial burden of developing new products, processes, or services within the UK economy, this relief is designed to promote innovation and growth.
Relief from taxation for the creative industry
Businesses in the creative industries can benefit from specific tax reliefs that reduce corporation tax. The reliefs are available to a variety of industries, including film production, animation, high-end television, and video game development.
A Film Tax Relief (FTR) rebate of up to 25% is available to eligible companies for UK qualifying production expenditures. For businesses within these sectors to benefit from these deductions, they must know the criteria for these reliefs.
Donation relief for charities
Corporation tax reductions are also possible because of charitable donations made by companies. It is possible to donate money, equipment, or trading stock to registered charities. Donations can be deducted from total profits before tax, reducing your corporation's tax burden.
As a result, you are not only supporting good causes, but you are also aligning your business practices with corporate social responsibility.
Advanced Tax Planning Strategies
Group Relief for Losses
Tax relief for losses is a valuable tax strategy for businesses that operate multiple companies within a corporate group. A company's profits can be offset by losses in another, effectively reducing the group's overall corporation tax liability.
In order to qualify for group relief, the companies involved must be part of the same group for accounting purposes, which means either one company has a majority stake in the other, or a third party controls both. It is possible to significantly improve cash flow and financial efficiency within your corporation by using group relief.
Disincorporation Relief
When small businesses transition from a corporation to sole proprietorship or partnership, disincorporation relief can provide tax benefits. It was designed to protect small business owners from potential tax charges when dissolving a company.
Small businesses with assets under £100,000 are eligible for the program. As a result of the relief, certain assets can be transferred without being subject to corporation tax charges. As a result, businesses may be able to scale down or alter their operations in scenarios where a sole proprietorship or partnership might be more appropriate.
A Practical Guide to Reducing Corporation Tax
Timing of Expenditure
You can manage your corporation tax bill by strategically timing expenditures. You can reduce your taxable profit for the year if you buy significant assets or incur substantial expenses near the end of your financial year.
When executed correctly, this strategy can provide immediate relief from your tax liabilities, but careful planning is essential to ensure that it aligns with your business's cash flow and operational needs.
Dividends versus salaries
Choosing between dividends and salaries involves significant tax implications and should be considered as part of your overall tax strategy. You can reduce your corporation tax by deducting salaries and bonuses, but you will also have to pay National Insurance contributions when you receive them.
As dividends are paid out of after-tax profits, dividends do not reduce corporation tax, but are taxed at a lower rate on individual tax returns than salaries. Depending on the business's profitability, the shareholder's tax bracket, and other circumstances, the choice between the two may vary. Choosing the most tax-efficient method for distributing profits within your business requires consulting a tax professional.
Legal ways of reducing corporation tax
Transfer Pricing and Tax Efficiency
Transfer pricing refers to the rules and methods for pricing transactions between companies under common ownership or control. Taxation of multinational corporations depends on the proper management of transfer pricing.
OECD Guidelines can help businesses align their operational practices with tax efficiency. By setting inter-company transaction prices at arm's length, profits are reported fairly in jurisdictions with differing tax rates, thereby minimizing overall tax burdens.
Business Structures for Tax Efficiency
Tax obligations can be significantly affected by how a business is legally structured. A sole proprietorship, partnership, limited liability company, or corporation has different tax consequences.
Limited companies, for example, have lower corporation tax rates than sole traders in the UK. In addition to strategic use of holding companies, choosing the right domicile for different parts of the business can also result in substantial tax savings.
Tax Planning with Zyla Accountants
Corporation tax makes up a significant part of your trading costs. Due to increasing reporting obligations, robust investigation policies, and harsher penalties for non-compliance, staying compliant can be a heavy burden.
That's why we offer a range of services to minimise your corporate tax exposure and alleviate your administrative burden. Some of these include:
Choosing the most tax-efficient structure for your business
Making the most of tax reliefs and opportunities
Tax planning that maximizes capital gains or revenue
Optimising acquisition and disposal tax relief
Making the most of your industry's tax opportunities
Complying with the rigorous requirements of compliance, including corporation tax self-assessment
Negotiating with the tax authorities on your behalf
Our team at Zyla Accountants can assist you in minimising your tax liability today.