One of the most common and important questions many company directors ask is this — how to reduce Corporation Tax Bill through allowable expenses?
For many business owners, dealing with your company’s finances can be incredibly daunting, especially when taxes come into the picture. When they dig deeper into their taxes and expenses, they will always bring up the perennial question we mentioned above.
This is often discussed around ten to 11 months into the financial year when your annual profits and tax payables are in better view.
If you want a quick answer right now, here it is — dealing with your corporation tax bill and allowable expenses ten to 11 months into the year is too late for you. With that being said, long-term tax planning and investment strategies should be considered so you can mitigate and offset your taxes.
But sadly, not all businesses have long-term visibility to plan beyond a year to three years. Fortunately, working with reliable tax consultants in London and following some strategies will allow some form of flexibility for your annual in-year tax mitigation.
Rely on ACCOTAX – Accountants in London to get bespoke accounting and tax services at a competitive price. Give us a call on 0203 4411 258 or request a callback.
How to Reduce Corporation Tax Bill? Top 10 Tips
Now let’s learn how to reduce Corporation Tax bill. Since corporation tax is based on your company’s profits, the obvious answer to how to reduce corporation tax is to reduce your profit. However, that sounds a bit contradictory, considering you’re running a company and you want to remain profitable, right?
The real challenge here is to make profits but keep the money in the business or getting it to shareholders in an effective tax-efficient manner.
This can seem a bit tricky on the surface, but you’d be happy to know that there are ten ways to reduce corporation tax while keeping the money you earned.
1) Claim Every Business Expense You’re Allowed
One of the easiest ways to mitigate your corporation tax bill is to claim all business expenses that are allowable – no matter how small. Every business incurs expenses while carrying out its business operations like travel costs, internet fees, insurance and telephone bills, etc. As allowable expenses reduce your company’s profit, hence the corporation tax bill, you should ensure that you are recording and claiming all the legitimate business expenses.
It can sometimes be a hassle to record every penny you utilised for your business, like a £5 train ticket and £3 pad of paper, but all those small expenses add up over the long run. Therefore, you should claim them as expenses to reduce your company profit that will cut your corporation tax bill.
To do it, you just need to be a bit organised by being on top of all the business expenses. Remember the HMRC’s rule that all the business expenses to be claimed must be wholly and exclusively used for business purposes and not for personal use. Here are some of the examples of allowable business expenses that you shouldn’t forget to claim:
- Business entertainment expenses
- Business travel and accommodation expenses
- Salaries and employee expenses
- Bank loan interest
- Cost of equipment and stationery
- Assets and cost of asset disposal
- Legal and professional fees (accountancy etc)
- Utility bills
- Professional license expense
- Cost of stock and raw materials
- Insurance payments
- Childcare
2) Don’t Forget to Pay Yourself a Salary
Bear in mind that your limited company is a separate legal entity that has its own existence separate from your personal finances: the money it has is not yours. So, to withdraw money from the limited company, you need to pay yourself a regular salary. Salaries are considered allowable business expenses. They will cut down your profit and subsequently your corporation tax.
HMRC takes the salaries as tax-deductible business expenses that directors can pay themselves in a tax-efficient way. On the other hand, dividends are not tax-deductible, as they are taken out of a profit. Many business owners prefer to pay themselves both salary and dividends. So they need to provide evidence to HMRC that profits are received before the issuance of dividends. If not, HMRC may consider them as salary that will increase your income tax and National Insurance Contributions.
3) Celebrate and Reward Staff Annually
If you need an excuse for a party, staff entertainment can be an allowable expense to reduce your cooperation tax as per the HMRC rules. For this reason, many limited companies hold Christmas parties, team-building events and others. It will not only reduce the corporation tax but will boost the employees’ morale. Holding a party or similar social function will allow you to claim up to the amount of £150 for each guest (also adding VAT).
Along with that, you can also claim corporation tax relief on the total cost of the event without being targeted by the benefit-in-kind charge. The company can even reclaim the VAT on costs for the party/event provided if only employees attend it and without any external person.
Even, if you don’t have an employee, directors can still benefit from this to treat themselves.
4) Get a Company Mobile Number
Due to COVID-19, now Omicron, or with flexible working on the rise, many people are working from home. To contact their clients or customers, they need to make business calls. So, the limited company should provide them with a company mobile phone so that they will avoid using their personal phones for business purposes.
By putting their mobile phones in the business name, every phone-related cost will be tax-deductible. However, you need to ensure that the mobile phone does not meet the conditions of a benefit in kind. Like it needs to be a business asset, cannot be exchanged for a higher salary, and for each staff member, a work phone should be given.
So, if it meets these conditions, all mobile related costs and contracts made through that phone under a company’s name will be considered allowable expenses that can help mitigate corporation tax.
5) Invest in Research and Development to Claim R&D Tax Relief
If your business is involved in any type of research, development or innovation, you could be missing out on the government R&D tax relief. This relief aims at stimulating and encouraging growth and development in the UK. With this relief, businesses can significantly mitigate their corporation tax bill, eliminate it as a whole or even request to get a cash lump sum from the HMRC.
The R&D tax relief scheme has a larger scope, yet there are still many businesses that are not aware of its potential tax savings benefits. The amount you receive will be based on the company’s size and whether it is profit or loss-making.
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6) Take Advantage of the Annual Investment Allowance (AIA)
The UK government has introduced Annual Investment Allowance (AIA) that allows you to reduce the full cost of assets from the profit in the year of purchase, so it will significantly reduce the corporation tax bill. Investing in machinery, plant, fixture, or freehold premises is a fantastic way to reduce taxable profits, and in some cases, there is an annual allowance that you can fully utilise.
Currently, there is a temporary increase in the limit of Annual Investment Allowance (AIA) from £200,000 to £1,000,000 (1st January 2022 to 31 March 2023).
Other capital allowances you can claim are:
- Writing Down Allowance (WDA)
- Enhanced Capital Allowances (ECA)
7) Pay into Your Employee’s Pension Scheme
Once you’ve utilised your personal allowance, a great way to get money to the people behind the business is by making regular one-off payments to your employee’s pension schemes. However, you need to declare and pay cash into pensions before the year-end.
Pension schemes help businesses to reduce their taxable profit that subsequently cut down the corporation tax. Directors can also choose to pay their pension contribution through the company profit instead of their salaries. It will not only reduce the company’s tax but will also safeguard their post-retirement period.
8) Surprise HMRC with an Early Payment
If you can pay your tax bill early, go for it to get a reward from HMRC. You’ll be given some of the corporation tax back in the form of interest for making early payments. So you need to stay on top of your tax affairs to get the advantage.
9) Look for Creative Industries Tax Relief Schemes
If you are associated with any creative industry there are many tax reliefs available to cut down your corporation tax bill. There are around eight reliefs available for the creative industry:
- Film Tax Relief
- Theatre Tax Relief
- Orchestra Tax Relief
- Animation Tax Relief
- High-end Television Tax Relief
- Video Games Tax Relief
- Children’s Television Tax Relief
- Museums and Galleries Exhibition Tax Relief
To qualify for the mentioned tax reliefs, you must be producing a TV programme, animation, film, video game, theatrical production or need to be associated with a similar role.
10) Claim Work From Home Tax Relief
Many of the businesses that are currently working from home due to Covid-19 or for flexible working on regular basis can take advantage of this tax relief. HMRC allows those businesses to use space and utilities of personal homes as tax allowable expenses to mitigate the corporation tax liability. You can choose from the two options to claim:
- Let a room or space in your own house to your limited company
- Flat rate of £6 per week (an allowance of £312 per year)
Bonus Tip: Hire a Good Accountant!
Whether you are concerned about your accounts, VAT, payroll or bookkeeping, stop wasting your time and energy handling them by yourself and let an expert manage everything accurately and efficiently. Yes, you need to pay for the accountant fee but it is worth your money as you can save thousands more by taking the services. An accountant will help you claim everything you are entitled to and can help you save more on taxes.
Our Chartered Accountants can help you sort out your tax, accounting, and payroll concerns. Call us at 0203441 1258 or send us an email at [email protected].
What Is Considered Not an Allowable Expense for Corporation Tax?
Now that you know how to reduce Corporation Tax bill, let’s move on to the next section. While the list of allowable expenses is not definitive, there is a common theme that can help reduce your corporation tax liabilities, and it’s through your allowance.
A few items are added to your profit when calculating your corporation tax, and the most obvious is corporate hospitality or client entertainment. Any money that you spend on entertaining your clients automatically goes to reduced cash and not taxable profit.
Seeing that there is no ceiling in allowances, it is best to speak to tax consultants in London to understand where your profit is going, how you can keep it, and reduce your tax payables.
How Do You Calculate It?
Although higher accountants and tax consultants should deal with your taxes, it pays to know exactly how you calculate corporation tax.
Fortunately, corporation tax has been simplified over the last decade. As a result, the trend sticks around the 19 percent mark, thanks to the more straightforward process and long-term rate.
Basically, you want to calculate the sum of your gross sales, deduct allowable expenses, and then divide the result by five. This will give you a ballpark figure for strategizing your purposes.
The Bottom Line: There Are Ways to Keep Your Hard-Earned Profit and Keep Them Away from Your Corporation Tax Bill
When you own a business, your main goal is to ensure that your company remains profitable. Thankfully, there are several ways to reduce the corporation tax bill and get it to your shareholders and other owners instead of being piled up on taxes.
Ideally, you want to work with credible tax consultants in London so you can properly strategize your financial goals and hit the right numbers while paying what is due.
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Taxes can be incredibly intimidating, especially if you run a company. You need to consider a plethora of things that you might find yourself drowning in receipts and documents. But thanks to Accotax, taxes are now much easier to deal with.
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