“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. So what are the (legal) ways to reduce your Corporation Tax bill?
How much is Corporation Tax for a limited company?
The Corporation Tax rate for company profits for the 2021/22 tax year is 19% -so, a business with £100,000 in annual profit will pay £19,000 in Corporation Tax.
At the March 2021 budget, the Chancellor announced plans for a rise in the headline rate of Corporation Tax to 25% from April 2023. From that date, there will be a new small profits rate of 19% for companies with profits of less than £50,000 with a tapered increase to the rate as profits increase. Businesses with profits over £250,000 will pay the main rate of 25% from April 2023.
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 are 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
This is the easiest way to reduce your Corporation Tax bill, as allowable expenses reduce your company's profits. Not sure about what you can and can't claim as a business expense? We've got an article explaining business expenses for your limited company, you can download our handy business expenses pdf guide, or watch our 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.
So you can claim for the costs of a business mobile phone, provided it's in the name of your limited company, and you can claim for any business miles you travel (even if it's by bicycle). You can claim certain costs for working from home or even renting out a room at home to your limited company as an office. If you're travelling for work away from home or the office you may be able to claim the cost of lunch as well as the business travel costs.
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. You can even claim costs for an annual staff party whether a summer party or a Christmas party (within certain limits) and small gifts to employees (if they meet the trivial benefit rules).
Using great accounting software (like Crunch) makes it so much easier to record and claim all your expenses, with handy apps for uploading expenses at the snap of a photo or recording business mileage. Our great value limited company accountancy packages even come with all the advice and support you need from our expert accountants and superhero client managers to take care of Companies House and HMRC for you.
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. We've got a great article on how to maximise your tax-efficiency and how much to take as a salary from your limited company.
Don't forget you need to make sure you have a separate bank account for your limited company, 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 until 31st December 2021. The allowance is scheduled to reduce to £200,000 afterwards.
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 the remaining £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.
Tip 5 - Use your Tax-Free allowances
As we mentioned, paying into a pension through your limited company is an allowable expense. It's also a very tax-efficient way to save for your retirement so it makes sense to take advantage of this tax break for you, as a company director, and your employees if you have any.
You could also consider protecting yourself and your business against loss of income, incapacity, or even death. It's not nice to think about, but it's important to think ahead and prepare, and, with the right advice you can save money on certain types of business cover, that protect you, your business and any loved ones. By paying the premiums from your company, not your taxed personal income, you'll pay less tax and save money.
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. The most important thing is to get the right advice at the right time, and as small business experts with over 10 years of experience and having helped over 50,000 people Crunch is here for you and your business.