Tips to Reduce Corporation Tax for a Limited Company
If you're a limited company owner, you may be looking for ways to reduce your corporation tax bill. There are several legal ways to do this, and in this article, we'll explore some of the most effective tips to help you save money.
One of the most straightforward and common ways to reduce your corporation tax bill is to make use of legitimate allowable expenses. These are expenses that are incurred wholly and exclusively for the purposes of your business throughout the tax year. Examples of allowable expenses include rent, salaries, and office supplies. By deducting these expenses from your profits, you can reduce the amount of corporation tax you owe.
Another way to reduce your corporation tax bill is to make use of capital allowances. These are allowances that are available on the cost of certain assets used in your business, such as machinery or vehicles. By claiming capital allowances, you can reduce your taxable profits and therefore your corporation tax bill.
It's important to know that the rules around capital allowances can be complex; but with over two decades of experience working with limited companies across the UK, the team at Blue Skies are on hand to help you reduce your tax burden while staying on the right side of HMRC. For more information, speak to our team on 01767 699996 or thecrew@blue-skies.tv.
Understanding Corporation Tax
When you operate a limited company in the UK, you’re required to pay corporation tax on your profits. This is a tax that is calculated on the profits that your company makes after deducting any allowable expenses.
The Legal Framework for Corporation Tax
The legal framework for corporation tax is set out in the Corporation Tax Act 2010. This act provides the rules for calculating, paying and reporting corporation tax. It also sets out the penalties for non-compliance with the tax laws.
To trade as a limited company, you are required to register your business immediately with Companies House. Here you can also register for corporation tax with HM Revenue and Customs (HMRC). Once registered, you will be given a Unique Taxpayer Reference (UTR) which you will use to file your company tax returns.
Current Corporation Tax Rates
The current corporation tax rate for small unassociated companies with profits up to £50,000 are taxed at 19%, this is called the small profits rate. Any profits between £50,000 and £250,000 are then taxed at 26.5% in this example.
For companies with profits over £250,000, the corporation tax rate is fixed at 25%.
These rates were introduced on 1 April 2023 and are subject to change in the future.
The above rates and allowance differ based on the business, its owners and size, so please check with a professional what tax rate your company should pay.
However, there are various reliefs and allowances available to help reduce your corporation tax bill. For example, you can claim capital allowances on certain types of expenditure, such as plant and machinery. You can also claim tax relief on research and development (R&D) costs.
Alongside this, you may also be able to reduce your corporation tax bill by making pension contributions for yourself as a director and also your employees. Pension contributions are tax-deductible for the company and are not subject to income tax or national insurance contributions. However, as this can be a complex matter, we recommend that you seek professional advice before making any decisions about pension contributions.
Strategies to Reduce Your Corporation Tax
As a limited company, there are several strategies that you can adopt to reduce your corporation tax bill. Including:
Utilising Allowances and Reliefs
One way to reduce your corporation tax bill is to utilise any available allowances and reliefs. These are tax breaks that allow you to deduct certain expenses from your taxable profits. Some examples of allowances and reliefs include:
Capital allowances: These allow you to claim tax relief on capital expenditure, such as buying equipment or machinery.
Annual investment allowance (AIA): This allows you to claim tax relief on capital expenditure up to a certain limit.
By taking advantage of these allowances and reliefs, you may be able to significantly reduce your corporation tax bill.
Effective Financial Planning
When it comes to reducing corporation tax for your limited company, effective financial planning is crucial. Here are some tips to help you plan your finances more efficiently:
Timing of Expenditure
One of the best ways to reduce your corporation tax bill is to time your expenditure effectively. By delaying certain expenses until the next financial year, you can reduce your taxable profits for the future and therefore reduce your corporation tax bill. However, you have to be careful with this route to ensure that this doesn't negatively impact your business operations.
Choosing the Right Business Structure
Choosing the right business structure can also have a significant impact on your corporation tax bill. For example, if you're a sole trader, you'll be taxed on your profits at the same rate as income tax. But, if you set up a limited company, you'll only pay corporation tax on your profits, which can be a significantly lower rate of tax. HOWEVER, although the tax rates on profits are less, you must consider how much you plan on paying yourself from the company and therefore how much tax you need to pay on your salary and dividends.
As you can see, setting up a limited company can result in significant tax savings. Although this may sound great, it's important to consider the additional administrative and legal responsibilities that come with this structure to determine if it’s suitable for you and your business.
By implementing effective financial planning and choosing the right business structure, you can reduce your corporation tax bill and keep more of your hard-earned profits.
Compliance and Record-Keeping
When it comes to reducing your corporation tax, compliance and record-keeping is essential. You need to make sure that you are keeping accurate and up-to-date records of all your financial transactions. This includes all income, expenses, and receipts.
One way to ensure compliance is to partner with experienced accountants who can help you understand which of your costs fall under the allowable expenses category, which aren’t allowable, and what else you can do to minimise your corporation tax.
In addition to this, it’s important to make sure that you are aware of all the tax laws and regulations that apply to your business. This can include things like VAT, PAYE, and Corporation Tax. You should also make sure that you are filing your tax returns on time and paying any tax that is due.
For more information, or to speak to a member of our team to find out how we can help you and your business, contact us today on 01767 699996 or thecrew@blue-skies.tv.