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10 Ways to Reduce Your Corporation Tax

Reduce Corporation Tax

Corporation tax is a significant financial burden for limited companies and other organisations in the UK. Depending on the profits made, up to 25% of profits over £50,000 need to be set aside to settle this bill with HMRC, but there are plenty of ways to reduce your corporation tax.

  • Use corporate allowances & reliefs
  • Make use of tax loss carry-back and forward rules
  • Claim R&D tax credits
  • Incentivise Employees through tax-free benefits
  • Reinvest profits back into the business
  • Review accounting periods and choices
  • Pension contributions for directors and staff
  • Make the most of capital allowances
  • Consider business structure
  • Get professional tax planning advice

Read on for more information on how these simple steps could legitimately reduce your tax bill and release funds that can be put back into your business.

What Is Corporation Tax?

Corporation tax is a tax paid by limited companies on the profits made in any given tax year or accounting period. These profits come from business transactions, investments, asset selling and more.

How Much Is Corporation Tax?

The current corporation tax rate for 2022/23 is 19% for businesses with profits of £50,000 or less and 25% for profits between £50,000 and £250,000. From the 1st of April 2023, companies with profits between 50,000 and 250,000 will pay tax at 25% but can use marginal relief to reduce their tax bill.

There is a marginal relief calculator available to work out how much they can claim on their corporation tax. There is no marginal relief available for profits over £250,000 and the full 25% rate applies.

Why Reduce Tax Bill?

Companies will rightly want to reduce their tax burden if they can and the good news is that there are plenty of entirely legal ways to do so. Reducing your tax bill means that you will have more cash available to reinvest into your business, employment efforts and dividend payments.

Taxable profit is the amount of profit that is used to calculate how much tax is due.

To work out your taxable profit:

  • Deduct your business expenses and deductions from your total income or sales revenue.
  • Add back any non-allowable expenses claimed
  • Deduct capital allowances on equipment assets
  • Offset any loss relief being carried forward
  • Exclude shareholder dividend payments already shared
  • Factor in deductions like R&D credits or patent box

After the adjustment above has been made you will have your final taxable profit figure. It’s this figure that corporation tax applies against.

Be sure to work with qualified accountants for the best chance of using all the marginal relief and tax efficiencies available to you without being considered as a tax avoidance tactic.

  1. Reduce Corporation Tax By Using Allowances & Reliefs

Companies can claim expenses and deductions which are known as allowances. These work to reduce the taxable profit figure and therefore the overall corporation tax amount owed.

Some of the biggest allowances are capital allowance, loss relief and research and development relief.

Capital Allowances

Capital allowances relate to assets and equipment purchased. This could include company cars, IT systems, machinery, and office furniture. This allowance allows you to remove some of the cost of these purchases from your pre-tax profits up to £1 million per year.

Loss Relief

This helps unprofitable companies to reduce their tax burden by offsetting their obligations against future profits. Trading losses can be carried back one year or carried forward indefinitely to set against future profits up to £5 million per company.

Research and Development Relief (R&D)

This relief allows a 230% reduction on qualifying innovation and R&D expenditure. This is a relief designed to encourage research and development activities to advance science and technology like new software, manufacturing processes, food production medicine etc.

The strategic use of these kinds of allowances means that companies can make significant tax savings. An accountant will be able to ensure that you’re using your full allowance available and claiming correctly.

  1. Make Use of Tax Loss Carry Back & Forward Rules

Companies can offset their losses against past or future taxable profits. This helps to reduce corporation tax liability.

Losses can be carried back one year. For example, if you made a loss in the 2023/24 tax year, this could be offset against tax already paid in the 2022/23 tax year. The upper limit for carried-back losses is £200,000.

Losses can also be carried forward indefinitely up to the upper limit of £5 million in total. This means that you could carry your 2023/24 losses forward and apply first against 2024 profits. Any unused amount (up to £5 million) could then be carried forward in 2025 etc.

This technique means that you can maximise tax relief being claimed in line with your most profitable years.

3. Claim R&D Tax Credits

Research and Development (R&D) credits are available on qualifying expenses and are a form of tax allowance.

Qualifying projects include; engineering new products or manufacturing processes, food manufacturing and recipe improvements, agricultural science and trials, and medical advancements.

For SMEs with less than 500 staff and a 100 million turnover, a 130% deduction is allowed meaning that 100k of qualifying costs results in a £230k tax relief. For larger companies outside of this bracket, there is RDEC which allows 130% on R&D costs.

There are strict rules around what is and isn’t R&D, so consult with your accountant or follow the advice on HMRC’s website to determine if your activities can legitimately be claimed against this tax reduction.

4. Employee Incentives & Tax-Free Benefits

Providing tax-free employee benefits is considered a deductible business expense which means your taxable profit figure is reduced. These handy staff perks also serve the dual purpose of creating happier team members so it’s a win-win scenario!

For example, if your business spends £5000 on private medical insurance (employee benefit), this gets deducted from the profit figure at the end of the year. This lowers the overall profits and therefore lowers the corporation tax bill too.

Popular tax-free employee perks are:

  • Company cars
  • Cycle-to-work schemes
  • Private Health Insurance
  • Childcare Vouchers
  • Mobile Phones

For every £500 employee benefit claimed as a deduction, you could save £175 in corporation tax.

Reinvest Profits Back into The Business

One easy way to reduce corporation tax is to reinvest a portion of your profits back into the business on deductible expenses as opposed to taking the profit as dividends.

Popular areas to reinvest profit are research and development activities, new equipment, software and tools. Training and development for staff, marketing and improved office facilities too.

For example, if you have £100k post-tax profits, you could reinvest 50k into an office upgrade. The £50k reduction in taxable profits would save you around £9,500 in corporation tax whilst also improving your infrastructure for happier staff!

 

 6. Review Accounting Periods and Choices

This corporation tax reduction technique works by aligning your accounting period to your business cycles and revenue trends to manage your tax more efficiently.

Each year companies have to file a tax return but they can choose when their accounting period runs from including the cut-off date for reporting their profit and tax liabilities.

For seasonal businesses, it could therefore make sense to choose a tax year-end date in a quieter trading period so that profit can be held when it suits cash flow better. Accounting periods can also be extended beyond 12 months to defer tax due on spike years.

For example; a small business with a 31st Dec year-end date always makes a loss in Q1 before peaking in Q2 and Q3. If they moved their year-end date to 31st March, the first profitable 9 months are included which allows more time for reinvesting profits before the next tax reporting period. This gives them time to reduce their tax bill by lowering their taxable profits.

 7. Pension Contributions for Directors & Staff

Boosting pension pots for staff (both directors and employees) counts as deductible business expense, thus lowering taxable profits and corporation tax due.

There are rules on the amounts that can be contributed though. Up to 20% of annual salary can be contributed per director, up to a maximum of £40k.

For example – if you have 3 directors on an £85,000k salary with a standard 5% pension contribution, this could be raised to the full 20% allowance making a £51,000 additional contribution. This could save approximately £9,690 in corporation tax making it a tax-efficient move.

Additional benefits of this tax efficiency are that a good company pension scheme can help to attract and retain key staff. If you can offer flexible packages based on age, retirement plans and salaries of your staff, then you’re setting yourself apart from competitors as well as reducing your corporation tax liabilities.

8. Make the Most of Capital Allowances

Capital allowances apply to certain business assets purchased like equipment, machinery and vehicles. These costs, or a portion of them, can be deducted from profits, therefore reducing the amount of corporation tax owed.

The annual investment allowance (AIA) offers a 100% deduction on the first £1 million spent on most assets in a year and if you time your major equipment purchases carefully with the end of the accounting year, you can claim the deductions in that period. Using the maximum AIA allowances each year offers major tax savings.

 9. Carefully Consider Your Business Structure

Some business structures are more tax-efficient than others. So you may be able to change yours to lower your overall tax liability.

  • Self-employed business structures offer the benefit of simple business admin surrounding accounting and start-up costs, but owners will be subjected to higher income tax rates of profits than incorporated businesses.
  • Partnerships offer similar flexibility to self-employed businesses for a small group of people. Partners are taxed personally, like self-employed people but they also have lower audit requirements than limited companies.
  • LLPs or limited liability partnerships combine partnership flexibility with some of the benefits of limited companies. Personal tax is still used though.
  • Limited companies offer the most beneficial business structure for organisations where profits are over £35,000. In this example, corporation tax of 19% would apply rather than 45% on personal tax. There are additional admin and reporting obligations to be aware of though.

If in any doubt over which business structure is most tax efficient for your current business turnover, consult with a business advisor or accountant to determine when incorporating will become most beneficial to you.

10. Get Professional Tax Planning Advice

Corporation tax rules are often updated and new rates are applied in the Government’s budgets so it pays to have an experienced tax professional on your side to ensure that you’re up-to-date and getting the most tax efficiency out of your business.

Chartered tax accountants and advisors will stay in the loop about the latest allowances, reliefs, case laws and changes issued by HMRC and can offer a personalised review of your company accounts to provide tailored advice.

 

Conclusion

It’s entirely legal to reduce a business corporation’s tax burden through careful planning and available allowances. It’s an essential part of good business management that will free up cash flow, reward shareholders and enable future reinvestment into the business.

To recap, the main tactics covered in this article include:

  • Using corporate allowances and reliefs like capital allowances and loss relief
  • Carrying trading losses backwards and forwards against profits
  • Claiming Research & Development tax credits
  • Providing tax-free employee benefits
  • Reinvesting profits back into the company on deductible costs
  • Reviewing accounting year-end dates to optimise tax timing
  • Making pension contributions for directors and staff
  • Fully maximising Annual Investment Allowances
  • Assessing if business structure changes may assist
  • Getting expert tax planning advice tailored to your company

 

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