As business owners, we all need to pay our way. This includes setting aside 19% of our yearly profits towards our corporation tax bills.
But with the headline rate of corporation tax set to rise to 25% from April 2023, more of us are now reviewing the way in which we use the available allowances and deductions to make sure we’re not paying more than we should be.
Here’s what you need to do to keep your corporation tax bill to a minimum – legally, of course!
5 ways you can reduce your corporation tax bill:
1. Claim every allowable business expense
From car park fees and taxi journeys to salaries, rent costs, utility bills, every single claimed company expense can help to reduce your overall tax bill at the end of the year. This is because business expenses are deducted from your income when calculating your taxable profit, meaning that you don’t need to pay tax on them.
Make sure you or your bookkeeper keep an accurate record of these expenses, including any invoices or receipts.
2. Pay yourself a salary
As a company owner, you should be looking to use your personal allowance effectively by taking out a tax efficient combination of salary and dividends from your business (although you will need to plan your approach to account for things like income tax and National Insurance contributions).
Plus, a salary is classed as a business expense, so by paying yourself regularly, you will be able to reduce your corporation tax liability, too.
3. Use your tax free allowances
Paying into a pension via your limited company is an allowable expense, so organise regular contributions to take advantage of this tax break (and set yourself up for a secure retirement).
Any premiums you pay on business protection insurance – including policies that cover loss of income or incapacity – will also help to bring down your tax bill.
4. Claim R&D tax relief
Not every business is eligible for R&D tax relief. However, if you are developing new products, processes or software, you should investigate your options, as you could be getting up to £24,700 back on every £100,000 you invest in these areas.
Other initiatives are available, such as the Patent Box, which will enable your company to pay a reduced rate of 10% corporation tax on all profits earned from patented inventions. To qualify for the relief, you will need to own or be licensed in the patents or have undertaken qualifying development of the patents. Bear in mind that your R&D claims will affect how your benefits are calculated.
5. Make the most of the government’s Annual Investment Allowance (AIA)
If you need to purchase assets to keep and use within your business – for example, fixtures, fittings, commercial vehicles, and/or plant and machinery – you can currently get 100% relief on the purchase price of such equipment, up to a total spend of £1million.
Any type of business can claim AIA, from sole traders and partnerships to limited companies.
Please note that the government is planning to reduce the AIA back down to £200,000 as of 31st March 2023.
These are perhaps some of the better-known means of lowering your corporation tax bill and retaining as much profit as possible within your business.
In our next article, we’ll talk you through some of the less obvious techniques that can make all the difference when it’s time to submit your figures to HMRC.
Feel free to contact Dartcell directly for further tax planning advice.