Staying on top of your finances as a small business owner can seem overwhelming, especially when you’re just starting out. One of the most important things to keep an eye on is your company’s tax, which can be a difficult subject to navigate. You want to reduce your corporation tax bill as much as possible while staying out of HMRC’s way. Consequently, we’ll go over a few strategies to reduce your Corporation Tax as a UK limited company in the sections below.
Keep in mind that these are general business tactics, and depending on your situation or industry, you may be eligible for additional tax breaks.
And, as your company grows, there may be additional allowances or deductions that you now qualify for but did not apply for previously. As a result, we strongly advise you to consult with eligible accountants to clarify any tax issues you are unsure about.
The Fundamentals of Corporation Tax
Before we get into the strategies you can use to reduce your Corporation Tax bill as a limited company, let’s go over the fundamentals of Corporation Tax:
What is Corporation Tax?
Corporation Tax is a tax that must be paid by all limited companies and is levied against the profits made by the company. Profits are defined as any money left over after deducting costs and expenses, or the amount of money your business makes after overheads, salaries, and costs incurred in the course of running a business, such as raw materials or marketing costs. Corporation Tax is the tax you pay on your company’s profits.
You must register for Corporation Tax within three months of beginning business.
Who is responsible for paying Corporation Tax?
Limited companies are required to pay Corporation Tax at a rate of 19% (for the 2021/22 tax year).
When is Corporation Tax due?
Your Corporation Tax is due nine months and one day after the end of your accounting period.
That means that if your accounting period ends on March 31, 2021, your Corporation Tax must be paid by January 1, 2022. For businesses with annual profits of less than £1.5 million, the payment is made once a year. Companies with profits in excess of £1.5 million will pay in installments.
How To Reduce Your Corporation Tax Bill as a Limited Company
Here are some tips on how to reduce your corporation tax bill in the UK:
#1. Claim your business expenses.
It may appear tedious to keep track of minute business expenses that amount to only a few pounds – but it pays to be meticulous because these costs can add up over time.
You’ll need to keep accurate records of your purchases, and apps like Xero, BizXpenseTracker, and Expensify can help.
Just keep in mind HMRC’s rule, which states that all revenue expenses claimed must have been incurred “wholly and exclusively” for the purposes of running the business.
#2. Pay yourself a salary.
Salaries are classified as business expenses.
By paying yourself a salary, you reduce your profit and, as a result, your Corporation Tax.
#3. Make an early payment to HMRC.
HMRC will pay you credit interest if you paid your tax early.
Also, HMRC will typically pay interest from the date you pay your Corporation Tax to the payment deadline, with the earliest date being six months and 13 days after the start of your accounting period.
Here’s an example:
If your accounting period begins on January 1, 2021 and ends on December 31, 2021, you can pay your Corporation Tax at any time between July 13, 2021 (six months and thirteen days after the start of your accounting period) and October 1, 2021 (HMRC’s deadline).
HMRC will typically pay you interest from the 13th of July 2021 to the 1st of October 2021.
#4. Annual Investment Allowance (AIA)
If an item qualifies for the AIA, you can deduct its full value from your pre-tax profits.
You can then claim AIA for most plant and machinery up to the AIA limit. This amount was temporarily increased to £1 million until December 31, 2021, and it is set to revert to £200,000 in 2022.
It’s worth noting that if you own more than one business, you only get one AIA.
#5. Business rate relief
The small business rates relief scheme reduces the amount of business rates that small business owners must pay.
The scheme is always open to small business owners who own a single property with a rateable value of up to £15,000.
#6. R&D Assistance for Small and Medium-Sized Enterprises
Companies working on science and technology projects can take advantage of R&D tax breaks.
It also allows businesses to deduct an additional 130 percent of their qualifying costs from their annual profit or claim tax credits if the company is losing money.
#7. Tax relief under the Patent Box
Companies that profit from patented inventions can take advantage of the Patent Box tax break. So, you could seek Patent Box tax relief and pay an effective corporation tax rate of 10% on those profits.
#8. Make a claim for R&D tax credits.
Is your company making sure it doesn’t miss out on government-backed tax breaks for innovation?
If your company pays technical staff to solve technical problems, such as developing new or improved processes, products, or software, you could save around £25,000 in corporation tax for every £100,000 spent on innovation. Tax breaks may also be available for R&D allowances (RDAs), which are used to pay for research facilities or equipment.
These reliefs are extremely generous, and so our Radius team has a simple and proven track record (100 percent success rate with R&D tax relief applications submitted) in making these claims for our clients.
#9. Make sure you don’t miss any deadlines.
Companies typically have two years from the end of an accounting period to claim certain tax breaks, such as R&D tax breaks, capital allowances, and patent box relief. Companies should ensure that they have claimed their full entitlement to these reliefs before it is too late.
#10. Invest in plant and machinery.
Companies can benefit from the “Annual Investment Allowance” (AIA), which allows them to claim immediate tax relief on purchases of certain business assets up to a certain limit. The AIA was raised to £1m on January 1, 2019, thereby allowing businesses that invest in qualifying items to deduct a significant portion of their investment from their profits.
#11. Property Capital Allowances
From October 29, 2018, companies can claim a 2% straight-line writing-down allowance on new commercial building expenditure.
Prior to this, companies should review their expenditures to see if any of them qualify for capital allowances in their own right. Because the claim does not have to be made at the time the costs were incurred, it is possible to claim missed allowances going back several years, often to when a property was originally acquired, in the majority of cases.
#12. Don’t forget to deduct all business expenses.
It may seem obvious, but don’t leave any expenses out of your accounting records. We frequently see Directors incur expenses on behalf of the business but fail to claim them back through the accounting records.
#13. Directors Salaries
Company owners should also look to maximize their personal allowance by drawing a tax-efficient combination of salary and dividends from the business.
#14. Contributions to pensions
Pension contributions put into pension systems on behalf of employees or directors are typically deductible from a company’s profits. Payments must be made before the end of the accounting period to qualify for relief. This is a simple way to reduce corporation tax, but before making contributions, individuals should consider their personal tax situation.
#15. Using business mileage
If they use their personal car for business, any employee can claim tax-free expenses from the company, based on statutory rates per mile of; up to 10,000 miles per year @ 45p
Above 10,000 miles at 25p
#16. Allowance for work from home
Where homeworking is done, HMRC will allow you to claim a portion of your home expenses to cover the additional costs of heating and lighting the work area. There may also be increased fees for internet access, insurance, or phone calls, among other things. As a starting point, a weekly payment of £4 from the employer is acceptable.
#17. Relieve for the creative industries
This refers to a set of eight Corporation Tax Reliefs available to certain types of businesses in the creative industries.
Depending on the circumstances, qualifying companies may be able to claim a larger deduction or a payable tax credit.
There are several generous tax breaks available for video games and other creative industries. Video Games Tax Relief (VGR) is one of eight tax reliefs available to qualifying companies in the creative industries, allowing them to benefit from lower Corporation Tax rates. Video Games Tax Relief works in a similar way to SME R&D Relief in that it provides an additional deduction against taxable profits.
#18. Planned giving
When companies offer share schemes to their employees, they can often obtain a corporation tax deduction. This can also be a good way to incentivize and reward them. There are numerous schemes available, so seeking advice is essential to ensure you use the best one for your business.
#19. Losses
Make certain that your company is claiming all available loss reliefs. There are various types of losses that a company can incur. However, in certain circumstances, they can be carried back to a previous year (to generate a tax refund), carried forward against future profits, or even surrendered to a fellow group company.
#20. Subscriptions and training expenses
Training and subscription costs can be paid for by the company as long as they are related to the company’s activity and do not result in income taxation for the benefiting employee. The costs may be tax deductible for the company, resulting in tax-free staff development.
#21. Paying for a Staff Party
Employees can deduct up to £150 per head for an annual staff party (such as a Christmas party) and the company can deduct up to £150 per head. This can be a tax-efficient way of rewarding employees while also building goodwill throughout your workforce.
In Conclusion
Companies in the UK are always looking for ways to reduce their corporation tax liabilities. And we frequently advise clients on how to pay the least amount of tax possible. There are numerous basic strategies that can be used because people frequently do not want to pay more than they have to.
Frequently Asked Questions
Do dividends reduce corporation tax?
Dividends do not reduce your corporation’s tax bill. Companies pay Corporation Tax on their income before distributing dividends, therefore paying a dividend has no effect on your company’s corporation tax bill. Salaries, on the other hand, are classified as company expenses.
How do i avoid paying tax on dividends?
Use tax-sheltered accounts. Consider starting a Roth IRA if you want to save for retirement but don’t want to pay taxes on dividends. A Roth IRA is funded with pre-tax dollars. Once the money is in there, you do not have to pay taxes on it as long as you withdraw it in compliance with the laws.
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