Reducing how much corporation tax you pay can be a complex issue.
No one should try and illegally avoid tax, but businesses want to legally pay as little as they can.
The good news is that you can reduce this tax, and we’ll explain how.
What is corporation tax?
Corporation tax refers to the tax you pay on the profits earned by your business.
You don’t get billed for this every year, it’s something your company has to work out by taking various things into account.
What are the current corporation tax rates?
As of right now, the corporation tax rate for company profits is 19%.
You pay this rate based on profits earned within the financial year.
Who has to pay corporation tax?
HMRC states that you must pay this tax if you’re operating as a:
- Limited company
- Club
- Co-operative
- Other unincorporated association (such as a sports club)
- Foreign company that has UK branches or offices.
When is the due date for paying corporation tax?
Corporation tax doesn’t have a specific due date, it depends on your business.
If your taxable profits are up to £1.5 million, then you need to pay tax precisely 9 months and 1 day after the end of your accounting period.
This tends to be the financial year for your business.
If your taxable profits exceed this amount, then they’re paid in instalments.
Strategies for reducing corporation tax
For those of you wondering how to reduce corporation tax, pay close attention to this section.
Below, we’ll outline a handful of different strategies that will help you decrease your business tax bill.
Business Expenses
The best place to start is by deducting your business expenses.
All companies are allowed to deduct costs for things that have been used to aid your business.
For example, train tickets to client meetings, office desks, paper, pens, and other industry-specific supplies.
You’ll be surprised to see how many things you can claim, and there are almost no real exceptions to this.
What one business sees as rubbish, another may see as essential.
Just ensure you only claim things that are 100% used for your business alone.
Annual Investment Allowance (AIA)
You can purchase items for your business and then deduct the full value of them under your annual investment allowance.
The current AIA is £200,000 – meaning you can deduct up to that amount from your final corporation tax bill.
There are loads of things that qualify for this, such as machinery and equipment for your business.
However, it’s important to note that cars don’t qualify, and you can’t claim this on things gifted to your business.
R&D Tax Relief
Research and development tax reliefs are available to businesses that work on projects relating to science and technology.
You could potentially deduct a bonus 130% from your yearly profit, along with the standard 100% deduction.
What’s more, you can claim tax credits if your company is making a loss.
To qualify, you have to prove that your business is part of a project relating to developments in science and technology.
There are many other requirements, so it’s worth reading up on all of this via the HMRC website.
EIS Tax Relief
The Enterprise Investment Scheme allows you to take advantage of various tax reliefs if you’re invested no more than 30% into your company.
You need to hold this investment for at least 3 years, and you can earn up to £1m in tax relief per year from this.
It works by allowing you to reduce your tax liability by up to 30% of the amount invested in the company.
SEIS Tax Relief
Similarly, you have the Seed Enterprise Investment Scheme, which also offers potential tax relief benefits.
The aim is to encourage seed investment during the early stages of a company starting up.
If you invest in a company, you can get a 50% tax relief up to £100,000, along with Capital Gains Tax exemption for any gains in the shares you own.
If you’re the director of your company, then you can use this to reduce your tax bill.
VCT Tax Relief
VCT’s are Venture Capital Trusts, which is essentially a company that’s undergone HMRC approval and lends money to unlisted companies.
If you invest in a VCT, they use your money to invest in other companies.
As a result, you can claim certain tax reliefs.
You can claim up to 30% on your investment, with a maximum relief amount capped at £200,000.
Mileage Allowance Relief
If you use your own vehicle to carry out business work, then you can claim tax relief on the mileage rate.
This refers to the costs of owning and running the vehicle.
For the first 10,000 miles you travel in the tax year, you can claim 45p per mile in cars and vans, 24p in motorcycles, and 20p for bicycles.
The rate for cars and vans drops to 25p after you hit 10,000 miles.
Add up your mileage, and deduct the costs from your corporation tax bill.
Salaries
Salaries count as a business expense, so they should be added up when you’re figuring out all your other expenses.
However, most people forget that they have to pay themselves a salary as well.
Your business money isn’t your personal money, so pay yourself a salary, and you can deduct it as an expense.
Petty Cash
Petty cash tends to be small sums of money that are kept around the workplace to pay for certain things.
Often, you forget to log these when adding up all your business transactions.
As such, you could have loads of extra tax-deductible business expenses going under the radar.
Make sure you log all petty cash transactions so you can claim them as an expense.
Creative Industry Relief
If your business operates in the creative industry, then you get special tax rules.
You have to pass a test to see if you qualify for this, and there are 8 different types of tax relief you can gain, depending on what type of creative work you do.
As one example, if you work in film production, you could claim film tax relief to get an additional 100% tax deduction on enhanceable expenditure.
Patent Box Scheme
If you earn profits from any intellectual property rights that you own, then you qualify for a reduced corporation tax on that income.
This is set to 10% instead of the standard 19%.
The profits must come specifically from your patent rights and nothing else.
So, if your business makes the majority of its earnings from patents that you own, then you can save a fortune in corporation tax every year.
Pensions
Did you know that you can receive corporation tax relief if you make contributions to a pension via your company?
Instead of putting your own money in a pension pot, you can use company profits to do this.
As a result, the amount you contribute can be taken off your overall profits, giving you less tax to pay.
It’s similar to paying yourself a salary, only you’re contributing funds to a personal pension that you can access later in life.
This is both a smart way of planning for the future and an incredibly easy way to reduce corporation tax.
Payment On Account
Payment On Account means that you’ve set up an account with HMRC where you pay your tax in advance, based on your previous tax bill.
It’s a smart way to ensure you don’t forget to pay tax, but you can also reduce your bill as well.
All you have to do is figure out your tax bill for this year, and see if it’s less than what you paid previously.
If it is, and you’ve got a payment on account set up, then contact HMRC, and you can reduce your payments.
This means you don’t pay more than you should for this year.
Understandably, this only applies to companies that are paying their tax this way.
Pay Early
If you pay your tax much earlier than expected, HMRC almost ‘reward’ you with some of the tax back as interest.
It’s really that simple, all you have to do is make an early payment, and you reap the benefits, which reduces your overall tax bill.
The secret to doing this is ensuring you’re well on top of your tax throughout the year.
This is why it’s so beneficial to ensure you’re managing the ins and outs of your business.
If you kept everything nice and organised, it’s much easier to work out your tax months in advance of your due date.
Therefore, you open the door for some tax relief.
In summary
All businesses need to pay corporation tax every year.
Having said that, there are ways in which you can reduce this tax amount and pay as little as can be.
If you need help with any of these ideas, or just want general tax advice, then please feel free to contact us today.