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“Reducing” the amount of tax you pay is a tricky concept. Most responsible individuals and businesses want to pay the correct amount of tax that they owe – but equally, don’t want to pay more than they have to.
How much is Corporation Tax for a limited company?
The Corporation Tax rate for company profits for the 2023/24 tax year is 19-25% – a business with £100,000 in annual profit will pay £22,750,000 in Corporation Tax - profits between £50,000 and £250,000 pay Corporation Tax of 25% reduced by the marginal relief rate.
The key to making sure you pay no more Corporation Tax than you have to is to claim every allowable deduction and expense to give an accurate picture of your profits.
If you paid £5,000 for a new piece of equipment but forgot to claim the capital allowance you’re entitled to, your profits may be overstated by £5,000 – so you’ll pay £950 extra in Corporation Tax. It literally pays you to stay on top of these things.
Every situation is different, and there may be allowances or deductions for your specific industry (as always, check with a tax expert if unsure), but there are a few basics every business owner should know to make sure they’re not paying more tax than they need to.
Tip One: Claim every business expense you're allowed
Not sure about the basics? Watch the video below.
Now make sure you’re claiming everything. It may seem like a hassle to record every £3 bus ticket and £2 pad of paper, but over the course of a year those items add up.
You’ll have industry-specific items to claim too – there are no hard-and-fast rules on what you can’t claim. What might be a clearly-excessive luxury for one business could be a run-of-the-mill necessity for another. Just remember HMRC’s “wholly and exclusively” rule; anything you claim must be entirely for business use.
Some other expenses you may not have considered include pension contributions and professional insurance. Both of these can be paid through your company, rather than by you personally.
Tip Two: Don’t forget to pay yourself a salary
When running a limited company solo it can sometimes be easy to forget that your business is a separate legal entity – your business’ money isn’t yours! So, to get it into your pockets, you need to pay yourself a salary.
Salaries are business expenses, which reduce your profit and, in turn, your Corporation Tax. So before it’s time to pay tax on your profits, pay yourself!
A word of caution though. Many business owners pay themselves with a mixture of salary and dividends – dividends are drawn from profit, so you need to be able to show you have profits available before issuing dividends. Otherwise, HMRC will most likely reclassify your dividends as salary and you’ll need to pay Income Tax and National Insurance Contributions.
Check out our article to learn how and why to open a business bank account.
Tip Three: Go shopping
If you need a new laptop or phone for business use, buying them through your company is the most tax-efficient way to get your new kit.
If you’re in need of a slightly heftier piece of equipment, new premises or other assets, you can take advantage of the Government’s Annual Investment Allowance.
This allowance currently lets businesses write investments in “Plant and Machinery” (things like commercial vehicles, building fixtures and office equipment) for tax purposes. This is set at £1 million permanently.
Let’s say your business has profits of £1 million (you lucky thing). If you spend £400,000 on plant and machinery for your business, currently, the full amount can be subtracted from your profits, reducing them to £600,000. You’d then only pay Corporation Tax on £600,000.
Tip Four: Surprise HMRC with an early payment and they’ll owe you interest
That’s right – if you stay on top of your tax affairs and are able to pay your Corporation Tax bill early, HMRC will actually give you some of it back in the form of interest. Find out more in our ‘Benefits of paying Corporation Tax early’ article.
The secret to lowering your Corporation Tax Bill
So the big secret to lowering your Corporation Tax is that there is no secret – it just takes diligence, a bit of knowledge of the tax system, and a few minutes every month making sure your business expenses are properly recorded.
