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“Reducing” tax is a tricky concept. Most responsible individuals and businesses want to contribute the tax that they owe – but equally, don’t want to pay more than they have to.
Technically it’s impossible to reduce your tax, as everyone is charged the same rate, set by HMRC. In the case of Corporation Tax, the applicable rate is paid on your profits (that’s the money left after all allowable deductions for expenses, salary etc.), and is set depending on your profit level.
Most freelancers, contractors and small businesses pay the Small Profits Rate (20% at the time of writing), and large corporates pay the Main Rate (21%). So a small business with £100,000 in annual profit will pay £20,000 a year in Corporation Tax. The key to making sure you pay no more Corporation Tax than you have to, therefore, is making sure you take advantage of 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 it, your profits will be overstated by £5,000 – so you’ll pay £1,000 extra in Corporation Tax. It literally pays 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 an expert if unsure), but there are a few basics every business owner should know off by heart to make sure they’re not paying more tax than they need to.
Not sure about the basics? Have a read or 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.
When running a limited company solo it can sometimes be easy to forget that you and your business are different legal entities – 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 pony up for the taxman, 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 some before issuing dividend payments. Otherwise HMRC will most likely reclassify your dividends as salary and you’ll be on the hook for outstanding Income Tax and NIC payments.
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 off up to £500,000 of investments in “Plant and Machinery” (things like commercial vehicles, building fixtures and office equipment) for tax purposes.
Lets say your business has profits of £1 million (you lucky thing). If you spend £400,000 on a big piece of industrial machinery, the full amount can be subtracted from your profits, slashing them to £600,000. You would then only pay Corporation Tax on that amount.
The Annual Investment Allowance is due to be cut back from £500,000 currently to just £25,000 from January 2016 – so if you’ve got plans to buy a hefty piece of business kit, make sure it’s before 2016.
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.
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 everything is recorded.
Over the last few months of 2017 and the whole of January, client managers are busy reminding people of upcoming deadlines and things they’ll need to do to make it easy for them to keep on top of their Self Assessments.