How to reduce your Corporation Tax bill
Posted on 9th March 2022
Making sure you take advantage of all the allowable deductions and expenses is a legitimate way to reduce the Corporation Tax bill for your limited company.
The Corporation Tax rate for the 2021/22 and 2022/23 tax years is 19% on your company profits. From 1 April 2023 the rate will increase to 25% if your profits are over £250,000. However, it will remain at 19% for companies with profits of £50,000 or less, known as the Small Profits Rate (SPR). For companies with profits between £50,000 and £250,000 there will be marginal relief so that your tax bill will increase gradually to the 25% rate.
How to reduce your Corporation Tax bill
It’s important to have an accurate picture of your profits so you must make sure that all the costs of running your business are properly recorded and allocated. Accounting software in the cloud like Xero is a really good way to store your records and to keep track of your expenses. Even small amounts for parking when you visit a client or for stationery can mount up over the year.
Allowances or deductions can vary by industry sector so it’s always worth checking, but some apply to almost every business. The HMRC’s rule is that the expense must be ‘wholly and exclusively’ for business use.
Here are some things you can claim for:
Telephone costs – you can claim for a landline telephone, provided that the contract is for your business use only. You can also claim for your mobile phone unit and bill if the contract is between your company and provider.
Travel – you can claim business miles, even if you travel by bicycle, and travelling expenses. If you’re travelling for work you can claim the cost of your lunch or dinner and accommodation if you’re away overnight. You can’t claim for travel between home and your normal place of work, or fines.
Home working – you can claim some expenses if you’re working from home; imagine you’re renting a room in your house to your company.
Pension contributions – this is a tax-efficient way to use your company’s profits and prepare for your retirement. You can potentially claim tax relief for both the employer’s contribution and your personal contribution. The limit is currently a maximum of £40,000 or 100% of your income, whichever is lower.
Insurance and protection – you can claim business insurance from your company account, including your professional indemnity insurance. You can also pay for policies to protect yourself and your business against loss of income, incapacity, or death.
Staff rewards – an annual staff party, within limits, and small gifts for employees can also be claimed as expenses.
Director’s salary – even if you’re the sole director of your company you can pay yourself a salary which will reduce your company profits and the tax you must pay. Remember, however, that you will pay personal tax and National Insurance on your income above the minimum limits, which you must declare in your Self Assessment Tax return.
Dividends – many company owners pay themselves with a mixture of salary and dividends. However, dividends are paid from profits and you must pay tax due on your profits before you can award yourself dividends.
Other options to reduce your Corporation Tax
If you need to upgrade equipment, move to new premises, or acquire other assets for your business, you can use your Annual Investment Allowance.
For example, if you pay £10,000 for a new piece of equipment for your business you can deduct all or some of the cost from your company profits. This is known as the capital allowance for plant and machinery, such as commercial vehicles, building fixtures and equipment. If you forget to claim your capital allowance your profits would appear to be £10,000 higher than they should be and you could pay £1,900 extra tax.
The Allowance of £200,000 has been temporarily increased to £1 million for qualifying expenditure and will continue between 1 January 2022 and 31 March 2023.
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