Every business owner’s primary focus is on growing the entity, enhancing profits, and consistently delivering exceptional products and services. But just as important as these goals are, it is equally significant to ensure that the company operates efficiently from a tax perspective. Paying the right amount of tax is of utmost importance. As the owner of an incorporated entity, it’s crucial to avoid overpaying Corporation Tax for Limited Company while ensuring compliance with HM Revenue and Customs (HMRC) regulations.
In this blog, we’ll explore several ways to reduce your corporation tax bill legally, while still adhering to tax laws. Whether you’re running a small start-up or a large enterprise, these strategies can help you mitigate your tax liability and maximize your business’s financial potential.
Corporation Tax for Limited Company
Corporation tax is levied on taxable profits and chargeable gains of companies. The rates are:
- 25% for higher profits above £250k
- 19% for small profits below £50k
- Marginal relief applies to companies with profits between £50k and £250k
Now, let’s look at effective ways to reduce your corporation tax.
Ways to Reduce Your Corporation Tax for UK Limited Company
Paying Salary to Yourself
As a director, paying yourself a salary is a tax-efficient way to reduce your company’s taxable profits. Director salaries are deductible expenses, lowering the overall tax payable. It’s important to balance the salary level to optimize both your personal income tax and National Insurance contributions.
Utilize Tax Allowances and Reliefs (Annual Investment Allowance, First year Allowance and others)
Maximize available tax allowances to reduce your corporation tax. The Annual Investment Allowance (AIA) provides full tax relief on up to £1 million spent on qualifying assets in the year of acquisition. Additionally, 100% or 50% First Year Allowances (FYA) can also be claimed on eligible Business Assets. Further to this, , businesses can also claim other capital allowances on vehicles, IT equipment, and machinery, significantly reducing taxable profits.
Take Advantage of Government Tax Relief Schemes
Several government schemes help reduce corporation tax:
- Research and Development (R&D) Tax Relief: Companies can claim tax relief on R&D activities, covering expenses like wages, utilities, and software. This can significantly reduce the taxable profits of companies investing in innovation.
- Creative Industry Relief: Provides tax incentives for companies involved in qualifying creative sectors, including film, animation, and video game production.
- Patent Box: Companies that generate income from patented inventions or processes may qualify for the Patent Box Relief, which reduces the corporation tax rate on profits from patents to just 10%, well below the standard rate.
Make Pension Contributions
Employer contributions to employee pension schemes are tax-deductible. For example, contributing £100 to a pension fund costs your company only £75, taking advantage of the 25% corporation tax rate. This reduces taxable profits and provides long-term retirement benefits for employees.
Claim Allowable Business Expenses
Ensure that you are claiming all allowable business expenses that are incurred exclusively for business purposes. These expenses can be deducted from your taxable profits. In addition to the commonly deductible business expenses, there are certain other deductible expenses too which are as follows:-
- Business mileage
- Charitable donations
- Professional subscriptions
- Advertising and marketing fees
Properly tracking and claiming these expenses will reduce your taxable income and your corporation tax liability.
Offset Losses Against Future Profits
Tax losses can be carried forward to offset future profits, reducing future tax liabilities. The rules for loss relief have become more flexible since April 2017, allowing businesses to offset losses more efficiently between trade as well as non-trade profits and potentially claim a tax refund in certain cases.
Optimize Your Company/Group Structure
As your business grows, reviewing your company structure is crucial for tax efficiency. Options include:
- Group Structure: Create a holding company to own subsidiaries, maintaining tax benefits while separating activities. This will allow for group losses to be surrendered and claimed within the intercompany structure, provided certain conditions are met.
- Individual Company Ownership: For some, owning individual companies directly may be more tax-efficient, especially if you plan to sell one in the future.
Consulting with a tax advisor will help determine the most tax-efficient structure for your business.
Reinvest Proceeds on the Sale of Business Assets to Defer Gains
Reinvesting proceeds from the sale of business assets into replacement assets allows you to defer capital gains tax liability. This reduces immediate corporation tax liability and provides tax planning opportunities for future years.
Conclusions
Reducing your corporation tax for limited company liability requires careful planning and a proactive approach to ensure that you’re taking advantage of all available reliefs, allowances, and deductions. Whether it’s paying yourself a tax-efficient salary, utilizing government tax relief schemes, or optimizing your company structure, there are various strategies that can significantly lower your tax bill.
By working closely with an experienced accountant and regularly reviewing your business’s tax position, you can ensure that your company remains tax-efficient and compliant with the law, ultimately allowing your business to retain more of its hard-earned profits.
Take the time to assess these strategies, implement them effectively, and watch your tax burden shrink while your business grows!
