How to Reduce Corporation Tax for your business
Choosing the right tax relief depends on your situation. This list discusses ways to reduce corporation tax on your business. The following are 10 ways to reduce corporation tax for your company.
A limited company is required to pay corporation tax on its profits every year if it is incorporated. Currently, the main corporation tax rate in the UK is 19%. Your business can reduce this tax by finding ways to reduce it. Knowing your tax relief options is important. Below are some tips for reducing corporation tax on your business.
RATES
You pay Corporation Tax at the rates that applied in your company’s accounting period for Corporation Tax.
If your company made more than £250,000 profit, you’ll pay the main rate of Corporation Tax.
If your company made a profit of £50,000 or less, you’ll pay the ‘small profits rate’, which is 19%.
You may be entitled to ‘Marginal Relief’ if your profits were between £50,000 and £250,000.
The £50,000 and £250,000 profit thresholds are proportionately reduced for short accounting periods and by the total number of ‘associated companies’ your company has.
Expenses relating to your business can be claimed
The best way to reduce corporation tax is to claim every business expense you're entitled to. No matter how small, keep track of every single expense you incur during the tax year (6th April to 5th April). Over time, the expenses associated with office supplies and travel can add up.
You may also be able to claim items related to your industry. In the case of a production company, you can claim allowable business expenses for costumes. In addition to professional insurance, your limited company can also pay pension contributions.
Keep in mind that HMRC's (His Majesty's Revenue and Customs) rule only allows you to claim expenses incurred for your trade, profession, or vocation.
Take advantage of your company's purchasing power
In addition to making purchases through your limited company, you can reduce corporation tax on your business. You can claim business expenses for technology purchases you make through your company if they are needed for your business, such as a new mobile phone or laptop.
The UK government offers capital allowances tax relief to businesses that purchase expensive items, which is discussed later in this article.
Be sure to pay yourself a salary
Limited companies can reduce corporation tax by paying themselves a salary. Owners of limited companies often forget that their business is separate from themselves. Business money is not considered your own. Salaries are deductible as business expenses, which can reduce your profit and corporation tax if you pay yourself a salary.
Make the most of capital allowances
Businesses can reduce their corporation tax bill with capital allowances. Capital allowances allow you to deduct some or all of an item's cost from your profits before paying taxes.
For more expensive business purchases, such as new premises, assets, or expensive equipment, you can take advantage of the UK Government's Annual Investment Allowance (AIA). Plant and machinery items can currently be deducted in full by businesses under this allowance. Your business's plant and machinery includes items such as cars, solar panels, and office equipment.
Develop and train employees
Training and development courses are another way a limited company owner can reduce corporation tax. By paying for externally led training courses or by facilitating internal training programs for yourself and/or other employees, you can deduct any expenditure related to training and development from your profit calculations as business-related expenses.
In addition to tax benefits, investing in training will benefit your business in the long run by developing better skills and a better skilled workforce.
Research and development are important
As with training and development, investing in research and development (R&D) can also reduce corporation tax for your company. As a result, your business will also benefit in the future. R&D expenses can be tax-relieved by HMRC for a wide range of limited companies.
It is required that R&D projects be part of a specific project to advance science or technology to qualify for R&D tax relief. Additionally, it must relate to your company's trade or one that you intend to start based on your research, as well as meet several other HMRC requirements. Expenses made on assets and materials, licences, copyrights, and franchising rights, as well as research staff, are examples of actions that can be tax-deferred during the R&D process.
Different types of businesses can receive R&D relief in different ways.
Research and development (R&D) is essential for the future of your business, and it also offers valuable Corporation Tax benefits. You can claim tax relief for a wide range of R&D-related costs through HMRC, including:
Investing in assets and materials
Research-related overheads
Copyright, licensing, and franchising
Development of software
Staffing costs for research, depending on how much time is spent on research
Personnel associated with external research
Services for contracted research
You are entitled to work from home allowances
You can deduct work-from-home allowances from your business's profits if you or other directors work from home, even just occasionally.
Tax relief is only available if you work from home because your job requires you to live far from your office or you do not have an office.
Your business can claim tax relief on a fixed allowance if you or another director work from home occasionally.
If you want to claim more, you do not need to provide HMRC with evidence of costs. In case you regularly work from home, you should keep receipts for business costs like lighting, broadband, and phone calls.
Depending on your tax rate, you will receive tax relief.
Set up a pension plan for your company
A company pension fund, in which both employees and employers contribute, can also reduce corporation tax. Contributions to the fund benefit employees, but they can also be deducted from profits as allowable expenses.
Establish an employee share plan
In order to reduce corporation tax, a limited company director may consider establishing an employee share plan. The costs of setting up and operating certain types of share schemes that are approved and recognised by HMRC can be deducted from your corporation tax.
The benefits of a share scheme go beyond taxation as well. Employees can be rewarded and talent can be attracted. By providing shares rather than salary increases or other benefits to loyal employees, you can also reduce the overall cost of remuneration.
Ensure that your assets are disposed of at the appropriate time
You will be liable for capital gains tax on profit if your limited company sells an asset that provided capital allowances, which only increases your overall tax liability. You can, however, reduce your business' tax bill if you decide not to dispose or sell the asset until the next tax year.
You can reduce your corporation tax for the current tax year if your business makes a loss when selling an asset. Losses are deducted from profits in your tax return when you report them to HMRC.