10 Ways to Reduce Corporation Tax
It’s important to be aware of the different types of tax relief available to you. In this list, we discuss how to reduce corporation tax on your business. Here are 10 ways you can reduce your company’s corporation tax.
2nd December 2022
If you own a limited company, then your business is liable to pay corporation tax on its profits every year. The current UK corporation tax main rate, which most businesses pay at, is set at 19%. Fortunately, there are ways to reduce this tax on your business. It’s important to be aware of the different types of tax relief available to you. In this list, we discuss how to reduce corporation tax on your business. Here are 10 ways you can reduce your company’s corporation tax:
Claim a wide range of business expenses
Claiming every business expense that you’re allowed is one way of reducing corporation tax. Make sure to record every single expense of your business over the tax year (6th April to 5th April), no matter how small. From office supplies to bus tickets, the costs of those items add up over time.
Also make sure to take advantage of industry-specific items which your business may be able to claim too. For example, if you own a production company, you can claim allowable business expenses for costumes for actors or entertainers. Other expenses which you can claim include professional insurance and pension contributions, which are both paid by your limited company.
Just be sure to remember HMRC’s (His Majesty’s Revenue and Customs) rule that states only expenses incurred “wholly and exclusively for the purposes of the trade, profession or vocation,” may be claimed.
Make purchases through your company
Another effective method of reducing corporation tax on your business is by making purchases through your limited company. If you need to purchase technology like a new mobile phone or laptop to benefit your business, buying these goods through your company and claiming them as business expenses is the most tax-efficient way to do so.
If you need to purchase an expensive item or items for your business, you can take advantage of the UK government’s capital allowances tax relief, which is discussed later in this article.
Remember to pay yourself a salary
If you are running a limited company, another way which you can reduce corporation tax is by paying yourself a salary. Many limited company owners run their business by themselves and forget that it is a separate entity. Take note, your businesses’ money is not classed as your own. You can reduce your company’s corporation tax bill by paying yourself a salary because it is classed as a business expense, which can reduce your profit and your corporation tax.
If you choose to pay yourself the minimum salary of £12,571, you will pay no income tax as it is below the designated personal allowance for the 2022/23 tax year. If you pay yourself (or others) a salary, you will be able to claim it as an allowable business expense in your self-assessment tax return.
Maximise capital allowances
Capital allowances offer business owners another opportunity to reduce their corporation tax bill. Essentially, capital allowances enable you to deduct the cost of some or all of an item from your profits before you pay tax.
If you need to make more expensive purchases for your business, like new premises, assets or expensive equipment, you can avail of the UK Government’s Annual Investment Allowance (AIA). This allowance currently allows businesses to deduct the full cost of ‘plant and machinery’ items. ‘Plant and machinery’ consists of items that you keep to use in your business such as cars, solar panels, and office equipment. As of January 2019, the AIA amount was temporarily increased to £1 million until March 2023.
In practical terms, this means that if your business has profits of £1 million and your company spends £400,000 on plant and machinery, under current rules, 100% of that spend can be subtracted from your profits. This means your profits will be reduced to £600,000 and you would only pay corporation tax on that figure of £600,000.
The Super-Deduction tax policy is also available to businesses until March 2023. This allows companies to claim a tax relief of 130% on qualifying plant and machinery purchases. A 50% first-year allowance (FYA) for special rate (including ‘long life’) assets is also available until 31 March 2023 for companies purchasing integral features like lighting and ventilation equipment as well as other items classed as long-life assets (expected to have an economic life of at least 25 years).
Invest in development and training
Investing in training and development courses is another way a limited company owner wondering how to reduce corporation tax might do so. If you set up programmes to facilitate training and development, either by paying for externally led courses or facilitating internal training programmes for yourself and/or other employees, you can deduct any related expenditure from your profit calculations as a business-related expense.
Investing in training will not only reap you tax benefits but also help you develop better skills or a better skilled workforce to benefit your business in the long run.
Invest in development and research
Similar to investing in training and development, having your company invest in research and development (R&D) is also effective when it comes to reducing corporation tax. It also benefits the future of your business too. HMRC allows limited companies to claim tax-relief for a wide range of expenses related to R&D.
According to the UK government, projects that count for R&D tax relief “must be part of a specific project to make an advance in science or technology.” It must relate to your company’s trade or one which you intend to start up based on the results of your research and meet several other criteria outlined by HMRC. Examples of actions available for tax-relief during the process of R&D include expenses made on assets and materials, licences, copyright and franchising rights and research staff.
Different sized businesses can avail of different types of R&D relief. Small and medium sized enterprises with less than 500 staff and turnover of less than £100 million can deduct an extra 130% of their qualifying costs from their profit, as well as the normal 100% deduction, to make a total 230% deduction. Larger companies above the threshold can receive a tax credit based on 13% of their qualifying R&D expenditure.
Claim your work from home allowance
If you or other directors of your company are working from home, even just occasionally, you can claim work-from-home allowances as a deduction from your businesses’ overall profit.
According to the UK government, you can only claim tax-relief if you work from home because your job requires you to live far from your office or you do not have an office.
If you or another company director only works from home occasionally, your business can claim tax relief on a fixed allowance set by HMRC. This is currently a maximum of £6 per week or £26 a month.
You do not need to provide HMRC with evidence of costs unless you want to claim more. You may want to do this if you work from home regularly, so you must record and keep receipts as evidence of business costs like lighting, broadband and phone charges.
You will receive tax relief based on the rate at which you pay your tax. For example, if you pay the basic rate of 20% tax and claim tax relief on £6 a week, you will receive £1.20 per week in tax relief.
Set up a company pension fund
You can also reduce corporation tax by setting up a company pension fund, in which both employees and employers make contributions. Your contributions to the fund not only benefit employees but are classed as allowable expenses that can be deducted from your businesses’ profits.
Create an employee share scheme
A limited company director looking at how to reduce corporation tax may look to set up an employee share scheme. Certain types of share schemes that are approved and recognised by HMRC can reduce your company’s corporation tax because you can claim the costs of setting up and operating the scheme as a business expense.
A share scheme can benefit your company in several ways outside of tax too. It can help your company to attract talent and reward employees. Offering shares to loyal employees rather than salary increase or other benefits can also reduce your overall remuneration costs.
Dispose of your assets at the correct time
If your limited company sells an asset that provided capital allowances, you will be liable for a capital gains tax charge on the profit, which only increases your overall tax liability. However, if you choose to not dispose or sell the asset until the next tax year, you can reduce your business’ tax bill.
If you make a loss when your business sells an asset, you can use that sale as a method of reducing your corporation tax for the current tax year. When you report a loss to HMRC in your tax return, the amount is deducted from the profits you made in the same year.
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