It’s likely that one of the reasons you registered your business as a limited company was because of the tax saving. You naturally want to keep as much of your hard earned income as possible, in order to pay yourself a decent salary and invest back into the business.
At Ascott Blake we can ensure you keep your Corporation Tax bill as low as possible.
There are several ways to reduce your corporation tax bill as a limited company, including claiming expenses, capital allowances and R&D tax relief. All of these tax reliefs can be deducted from your company’s profits, thus reducing the amount of tax your company owes.
We have put together this short guide to help you identify tax efficiencies for your business. It is of course a time consuming task, so the help of a good accountant can be a very valuable investment.
Ascott Blake work with many small business owners to ensure that their Corporation Tax bill is as lean as possible. Our highly professional team use techniques honed from their years in accountancy to pinpoint tax efficiencies that otherwise might have been missed.
Allow us to demonstrate our expertise and help your limited company save money.
Does a limited company have to pay corporation tax?
If you run a limited company registered in England, you are required to pay Corporation Tax to HMRC on your business profits. This includes your trading income, as well as any profit made from the sale of assets, eg. property, equipment, shares and intangible assets, such as intellectual property.
A limited company must pay their Corporation Tax bill nine months and one day following the end of their accounting period, or else they will be subject to late payment interest from HMRC.
The rate of Corporation Tax is currently 19% for limited companies, and 20%-45% on income tax for sole traders. This tax reduction is one of the reasons that many small business owners choose to transition to limited company status, along with protecting their personal liability.
There are ways to become even more tax efficient, which is where the professional advice of an accountant is very valuable.
How can I reduce my limited company corporation tax bill?
As a limited company, you no doubt have ambitions to grow your business and become more profitable. It is essential, therefore, to be as tax efficient as possible, to enable you to invest back into your business.
Some tax deductions are well known, like claiming business expenses, which we will take a look at here, along with lesser known ways to reduce your tax bill.
An accountant’s guide on how to reduce your Corporation Tax bill
Ascott Blake has vast experience in managing the tax affairs of small businesses, so read on for our top tips on how to reduce your corporation tax bill.
Pay yourself a salary
To save your limited company money, you may choose to pay yourself a salary, as salaries are tax deductible before company profits.
To increase your personal wealth and extract money from your business, you could also consider paying yourself in dividends. This is a popular way for small business owners to reduce personal tax bill.
Dividends are not subject to National Insurance and can, therefore, be a more tax efficient way of remunerating yourself.
You could even consider paying yourself a combination of salary and dividends. It all depends on the profitability of your company and your reinvestment ambitions.
Your accountant can provide advice on which solution is best for you.
Pay your Corporation Tax early
If you pay Corporation Tax early, HMRC will usually pay you interest on the refund, known as “credit interest”. If you overpay, it’s called “repayment interest”.
Repayment or credit interest is paid at 0.75% (as of August 2022) from the payment date until the due date. HMRC will only pay interest on early payment from 6 months and 13 days after the start of your accounting period.
Keep in mind however, that the interest itself is taxable so must be included in your company accounts.
Research and Development (R&D) Tax Credits
If your company undertakes any sort of research, then you may be able to claim R&D Tax Credits.
You must be able to prove that your research and development activities are unique and could benefit your industry as a whole. If so, then you can claim relief on the associated costs, such as overheads, equipment, staffing and contractors.
It’s a common misconception that in order to claim R&D tax relief your company must be in the scientific or engineering fields. This is simply not true.
Any company that sets out to create new products, processes or software are eligible, including in the fields of IT, video games and the creative industry.
Your accountant can help you identify eligible R&D activities and expenses, if you are unsure.
Take advantage of the temporary increase on Annual Investment Allowance (AIA)
The Annual Investment Allowance (AIA) allows limited companies to claim back 100% of the cost of allowable assets in the tax year they were acquired. Allowable assets are defined as “plant and machinery”, which includes vehicles, equipment, fixtures and fittings.
The cap on AIA was previously £200k, but has been temporarily raised to £1million until 31st March 2023, with the aim of encouraging business investment.
In addition, there is currently a super-deduction tax policy in place until April 2023, allowing you to claim 130% back on certain allowable assets.
These temporary policy changes give small businesses a great opportunity to acquire assets tax free.
Pay pension contributions
Paying into a registered pension scheme is a great way to save on tax. Pension contributions are tax free and, what’s more, they are an allowable expense that you can claim Corporation Tax relief on.
Just how valuable this is depends on your level of income, but for those in the higher tax bracket, it’s definitely worthwhile.
Stay on top of tax deadlines
The most basic way to avoid unnecessary expense is to make sure you don’t fall foul of HMRC. The late payment interest on Corporation Tax is 4.25% as of August 2022, so it pays to have a firm grasp on your accounts to avoid being penalised.
The government have yet to announce a date for the roll out of Making Tax Digital for Corporation Tax, and it will be no earlier than 2026. If you are already registered for MTD for VAT, you will be familiar with the process.
Your accountant can keep you up-to-date with progress to ensure that you are ready for the changes as the deadline approaches.
Claim allowable expenses
Every business knows the benefit of claiming tax back on business expenses, but it is easy to let some slip through the net without an accountant’s scrupulous attention to detail!
Allowable expenses are defined as those purchases that are “wholly and exclusively” for business purposes.
For more information on what constitutes a business expense, see the section below.
Salary sacrifice schemes
A salary sacrifice scheme involves offering benefits to employees in lieu of extra wages. Tax free benefits include things like phones and childcare vouchers. Whilst this won’t reduce your tax bill per se, you will save on the amount of National Insurance you need to pay.
Make the most of capital allowances
In a similar way to business expenses, an investment in assets can reduce your Corporation Tax bill.
You can claim tax relief on purchases that fall within the government’s definition of “plant and machinery”. The value of the tax deduction will decrease each year, to account for the depreciation of the asset, meaning that you can write off the cost of over time.
Can I reduce Corporation Tax by paying dividends?
The short answer is, no you can’t reduce Corporation Tax by paying dividends. You pay Corporation Tax on profits before dividends are distributed.
Paying yourself in dividends in lieu of salary can save on your National Insurance contribution however, reducing your personal tax bill.
What business expenses can a limited company claim tax relief on?
Most allowable business expenses are known and understood, but some businesses fail to take advantage of certain allowable expenses.
Here is our rundown on what expenses you should be claiming tax relief on to reduce Corporation Tax:
- Employees salaries, including your own
- Pension contributions for you and your staff
- The cost of contractors and freelancers
- Telephone and broadband charges
- Rent and rates for your business premises
- Maintenance and cleaning
- Energy and utility charges
- Insurance premiums
- Bank charges, interest and loan repayments
- Office consumables like stationery
- Professional fees such as solicitors and accountants
- Travel costs, including train fares and business mileage
- Company car repayments and maintenance
- Tax relief on cost of sales – if you either manufacture or buy products in the course of your business, then you can claim relief on the associated costs. This includes operational costs, such as materials, storage, distribution and logistics. It also includes any costs associated with marketing and promoting your products. You an even claim tax relief on the discounts you offer to retailers and distributors.
How can Ascott Blake assist with your Corporation Tax?
We hope that this article has been helpful to you in identifying ways in which to reduce your limited company’s Corporation Tax.
If you would like to talk to a professional about how to be more tax efficient, such as which business expenses you can claim for and what other tax reliefs are available, Ascott Blake would be pleased to help.
Ascott Blake is a trusted chartered accountant for many small businesses throughout Hertfordshire and Essex. We offer all of the accountancy services you would expect, but we go way beyond that, acting as a trusted financial partner to help our clients achieve their business goals.
If you are looking to register as a limited company, we can provide professional advice to help you make the transition. We can also scrutinise your finances to help you find tax savings, in order to make you more profitable.
To arrange a free consultation, please get in touch.