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With the recent surge in Corporation Tax rates from 19% to 25% in the UK (for companies earning over £250,000) effective from April 2023, many business owners are now feeling the pressure and searching for legal ways to reduce Corporation tax bills. Paying Corporation Tax is mandatory, but overpaying it isn’t. With the right strategies, you can save your hard earned money by paying only what you legally owe. In this guide, we are going to reveal 11 smart and legal ways on how to reduce your corporation tax bill, maximise your profits, and keep more cash in your pocket.
What is Corporation Tax and How Much you Have to Pay?
Corporation Tax is a tax that UK limited companies have to pay on their taxable profits. These are profits from trading, investments, and disposing of assets for a profit (capital gains). In contrast to personal tax, there’s no tax-free allowance for companies, all profit pounds are taxable.
As of April 2023, the UK rate of Corporation Tax had changed. Firms making profits of up to £50,000 continue to pay 19%. If your firm’s profits exceed £250,000, the tax rate increased from 19% to 25%. Firms whose profits range from £50,001 to £250,000 pay a tapered rate somewhere in between, depending on precise profits.
This hike from the old flat 19% rate has left numerous business owners with higher tax bills than they had before. That’s why effective tax planning is more crucial than ever, allowing companies to minimize their taxable profits legally and not pay more tax than needed.
11 Ways To Reduce Corporation Tax Legally
1. Maximising Allowable Deductions:
Maximising allowable deductions is one of the most effective ways to legally reduce your corporation tax liability. These deductions include a wide range of business expenses that can be written off before calculating taxable profits.
Common deductible expenses include:
- Employee wages
- Office overheads
- Business travel expenses
- Marketing and advertising costs
- Legal and financial fees
It’s crucial to maintain accurate and detailed records of every expense, especially in the event of a tax audit. Ensuring that all eligible business costs are claimed can significantly reduce your taxable profits.
2. Use Capital Allowances:
An effective strategy for lowering company tax is the capital allowance. These enable your company to deduct capital asset expenses from taxable income, including those for machinery, equipment, and company cars.
For example, you can deduct the entire cost of an item within the tax year that it was purchased, up to certain limits set by HMRC, using the Annual Investment Allowance (AIA). This can lead to substantial tax savings, particularly for businesses investing in large capital assets. By comprehending and utilising these benefits, you can significantly lower the annual tax burden on your company.
3. Research and Development (R&D) Relief:
Enterprises that participate in eligible research and development endeavours stand to gain from R&D tax exemptions, which have the potential to drastically lower corporate tax obligations. This relief allows businesses to claim an additional 130% on top of the standard 100% deduction, resulting in a total deduction of 230% of qualifying R&D costs.
Employee expenditures, supplies, utilities, and software utilised for research and development are all considered qualifying costs. This relief is intended to lessen the financial burden of creating new goods, procedures, or services, which will promote innovation and growth within the UK economy.
4. Creative Industry Tax Relief:
Certain tax breaks that lower corporation tax may be applicable to companies operating in the creative industries. Film, animation, premium television, and video game creation are just a few of the industries that can use these reliefs.
A payable cash rebate of up to 25% of UK qualified production expenditures, for instance, is available to qualifying enterprises under the Film Tax Relief (FTR). It’s essential for companies in these industries to understand the qualifying criteria to maximise available tax relief.
5. Relief on Charitable Donations
Corporations may also receive a corporation tax reduction for their charitable contributions. To be eligible, donations must be made to organisations that are registered; they may be in the form of cash, machinery, or trading stocks. You can reduce your corporation tax liability by deducting the value of these donations from your total profits before taxes. This not only helps worthy causes but also aligns your business with corporate social responsibility goals.
6. Group relief for losses:
Businesses that run several firms under a corporate group structure can benefit from group relief for losses as a tax tactic. Group relief allows profits from one company to be offset against losses from another within the same corporate group, thereby reducing the overall tax liability.
The companies in question must be included in the same group for accounting reasons in order to be eligible for group relief. It typically means that one company has to control the greater part of voting rights in the other, or a third party has to control both. Your corporate group’s financial efficiency and cash flow can be greatly enhanced by using group relief.
7. Paying Salaries to Directors and Employees
One of the simplest ways to reduce your corporation tax is by paying a salary to directors and employees. Since salaries are treated as an allowable business expense, they directly reduce your company’s taxable profit. Plus, things like employer National Insurance and pension contributions are also tax-deductible.
On top of saving tax, paying a salary gives directors and employees a steady income and access to state benefits like pensions and maternity pay. It also keeps everything clean and compliant with HMRC, making it a smart and practical way to manage your company profits.
8. Timing of expenditure
Choosing when to make purchases can be very important for controlling your business tax liability. You can lower your taxable profit for a given year by timing the acquisition of large assets or incurring significant expenses at the end of the fiscal year.
When properly implemented, this method can immediately reduce your tax payments, but it does involve careful planning to make sure it fits with your company’s cash flow and operational demands.
9. Employee Share Schemes (EMI Schemes)
Offering employees shares through an Enterprise Management Incentives (EMI) scheme is a great way to reduce Corporation Tax while rewarding and retaining key staff. When employees exercise their share options, the company can claim a tax deduction on the difference between the market value and the price paid by the employee. It’s a win-win situation, employees feel valued, and the business benefits from tax relief.
9. Transfer Pricing and Tax Efficiency:
The guidelines and procedures for setting the price of business-to-business transfers involving entities with shared ownership or management are known as transfer pricing. For international companies, carefully managing transfer pricing is essential since it influences the taxation of profits.
Businesses can operate more efficiently with respect to taxes by following legislative frameworks like the OECD Guidelines. To guarantee that profits are declared equitably in jurisdictions with varying tax rates and so lawfully minimise the overall tax burden, this entails setting arm’s length intercompany transaction prices.
10. Patent Box Regime
If your company earns profits from patented inventions or intellectual property (IP), you could benefit from a reduced Corporation Tax rate of as low as 10% on qualifying profits under the UK Patent Box scheme.
Ideal for: Tech, Pharma, Manufacturing, Engineering, R&D-focused businesses.
11. Business Rates Relief
If your business operates from commercial property, you may be eligible for Business Rates Relief schemes like Small Business Rates Relief, Rural Rates Relief, or Enterprise Zone Benefits. These schemes can significantly reduce your property-related costs. While this doesn’t directly cut corporation tax, lowering your overheads improves cash flow and profitability, which can indirectly reduce your taxable profits and support business growth. It’s worth checking eligibility with your local accountant.
What assistance may CoxHinkins Accountants provide?
The topic of UK taxation is intricate and dynamic. Depending on the specific conditions, each corporation may have a different tax liability. Thus, hiring a qualified tax accountant in the UK can assist businesses in understanding how to lower corporate tax, increase revenue, and make necessary savings.
To reduce your Corporation Tax Bill, CoxHinkins provides corporation tax services to businesses and makes sure they abide by HMRC’s rules and regulations. Our staff provides affordable solutions for all of your tax plans and is made up of specialists with a thorough understanding of all tax regulations. When it is feasible, we assist clients in minimising their tax obligations and optimising their tax situation. Get in touch with us for any kind of tax assistance or to lower your corporate tax.
We provide a variety of services in order to lessen your company tax liability and free you from the hassle of keeping up with tax laws. Among them are:
- figuring out which tax structure is best for your company
- Utilising all available tax breaks and opportunities
- Reaching the ideal revenue or capital tax treatment
- Minimising acquisition tax relief and lowering disposal tax
- Maximising tax opportunities unique to your business.
Frequently Asked Questions
Who Needs to Pay Corporation Tax in the UK?
In the UK, Corporation Tax applies to all limited companies, foreign companies with a UK branch or office, and certain unincorporated associations like clubs or charities. These businesses must pay tax on their taxable profits, which include trading income, investment gains, and profits from selling assets. It’s a legal obligation for registered companies operating within the UK to file and pay Corporation Tax.
What Are the Charges for Late Corporation Tax Payment?
If a company fails to pay Corporation Tax on time, HMRC applies daily interest on the overdue amount and additional penalties for late filing. Penalties start from £100 for being even one day late and can increase significantly over time, including 10% of the unpaid tax if the delay exceeds six months, along with further penalties and possible HMRC investigations.
Is It Legal to Reduce Your Corporation Tax?
Yes, it is completely legal to reduce Corporation Tax by using HMRC-approved tax planning strategies. Businesses can lower their tax liabilities by claiming allowable expenses, capital allowances, R&D relief, pension contributions, and charitable donations. These methods are within the law. However, using illegal tactics or falsifying records to avoid tax constitutes tax evasion, which carries serious legal and financial penalties.
Do Small Businesses Pay Less Corporation Tax?
Small businesses in the UK may benefit from a lower Corporation Tax rate depending on their level of profits. Companies with profits up to £50,000 pay 19%, while those earning over £250,000 pay 25%. For profits between £50,000 and £250,000, marginal relief applies. Additionally, small businesses can take advantage of various deductions and reliefs to reduce their overall tax liability legally.
What Happens If Someone Uses Illegal Ways to Avoid Corporation Tax?
Using illegal methods to avoid Corporation Tax, such as underreporting income or inflating expenses, is considered tax evasion and is a criminal offence. HMRC can impose hefty fines, charge interest on unpaid taxes, initiate audits, and prosecute offenders. Convicted individuals or businesses could face serious consequences, including reputational damage, financial loss, and in extreme cases, imprisonment.
Disclaimer: Kindly note this blog provides general information and should not be considered financial advice. We recommend consulting a qualified financial advisor for personalised guidance. We are not responsible for any actions taken based on this content.
