9 Ways to Reduce Your Corporation Tax as a Limited Company
Most business owners want to pay the right amount of tax; however, the UK tax system is complex, and most contractors don’t want to pay more than they should. In this article, we’re taking a look at legal ways for individuals to cut down their corporation tax, which helps them to save hundreds, if not thousands, on their business.
And, no matter the specialist sector you work within, we can help, so contact Gorilla Accounting if you want professional advice to reduce your corporation tax.
To reduce your corporation tax, you can do the following:
One thing that should be obvious – although many contractors end up overlooking it – is the fact that you shouldn’t forget to claim your business expenses. It can be easy to forget about some expenses you incur on behalf of your business when you’re so busy running its day-to-day, but, by not claiming them, you’re missing out on tax relief and paying more corporation tax than you should.
And, while you may think that some expenses are so small that they’re probably not worth to claim, such as a £4 notebook, they will quickly add up, so keep track of every single expense. Our FreeAgent accounting software can make this a thousand times easier.
If you work at a temporary workplace, you should also claim car mileage, as it can be more tax-efficient for company owners and employees to use their own vehicles but claim mileage back through HMRC’s programme. Each member of your staff can claim up to 10,000 miles per year for business travel, at a rate of 45p per mile. If they go above 10,000 miles, the rate drops to 25p. This value will then be deducted against the company’s profits.
Paying yourself a salary will reduce your corporation tax bill. This is seen as a business expense, considering the limited company is a separate legal entity, so the money you make through it is not yours. Paying yourself a salary will reduce your profits, meaning you’ll pay less tax on them.
Assuming you are not caught by the IR35 legislation, you can also pay yourself a combination of salary and dividends, with the dividends taken out of your profit – however, you have to ensure that your profits are available before the dividends are issued.
If you are able to pay your corporation tax bill early, then HMRC will give you back some interest. This may seem daunting but it’s not impossible if you stay on top of your taxes and keep track of all your incomings and outgoings. As contractor accountants, we can help you keep up to date with the ins and outs of the tax system, so don’t hesitate to contact us if you’d like to learn more about this.
Another way to reduce your corporation tax bill is to contribute to pension schemes on behalf of staff or directors. You have to make these pension payments before the end of the accounting period in order to get it deducted from your profits and, therefore, to get a lower corporation tax bill.
This means making use of the government’s Annual Investment Allowance (AIA). AIA allows the company to buy tools and equipment required for business, including computer equipment, and consider them ‘Plant and Machinery’ investments for tax purposes. While AIA is currently set at £1 million, it’s expected to come down to £200,000 again on 1st January 2021.
If your profit is £500,000 but you purchased £200,000 worth of plant and machinery items for the company, you will only pay corporation tax on the remaining £300,000.
If your business is developing new products or processes, then your company may be able to claim tax relief on research and development. If you are eligible for this relief, the rate of tax credit is now 13%, as it rose from 12% in 1 April 2020. There are several qualifying factors you need to meet in order to be able to get this relief, including having fewer than 500 employees, but clearly this isn’t going to affect most people.
Claimant businesses will see their corporation tax liability cut down because of this.
You may also be able to claim tax relief if you work in a creative sector. We’re accountants for creatives as well, so we understand the ins and outs of claiming tax relief and reducing your corporation tax when you don’t do ‘conventional’ work.
Whether you work in video game development, in TV programmes, in theatre productions, in orchestras or even in museums via exhibitions, you may be eligible for this relief. There are several schemes for creatives that will allow you to get an additional deduction, but their conditions vary, so seek advice if you’re unsure what to apply for and if you qualify.
Of course, one of the most important things you can do in order to reduce your corporation tax is to find a good accountant. Limited company accountants, such as Gorilla Accounting, are aware of the many intricacies and complexities of the UK tax system, so we can assist in making your business more tax efficient.
Contact us today on 0330 024 0406 to get specialist advice or to enquire about any of our many accounting services. You can also use our contractor tax calculator, which allows you to figure out your take-home pay.