How to reduce your corporation tax

How is Corporation Tax calculated?

Corporation tax is paid on the profits. Each year when the Company Tax Return is submitted, the profit is calculated (turnover minus costs.)

How much is Corporation Tax?

There are two main bands for Corporation Tax. Companies with a taxable profit of £50,000 or less pay 19%. Those companies with a taxable profit of more than £250,000, pay 25%.

Those with a taxable profit between £50,000 (known as the small profit rate) and £250,000 (known as the main rate) benefit from Marginal Relief.

Who is liable for Corporation Tax?

Corporation Tax is paid by all UK limited companies, foreign companies with local branches and profit-making unincorporated entities.

How to reduce your Corporation Tax liability

To reduce your Corporation Tax payment, the level of profit needs to be reduced.

1. Be organised with your business expenses claims

Make sure that you claim for everything you can legally claim for. We can help advise you on what you claim. The expenses need to be “wholly and exclusively” for business use. The trick here is to be organised to make sure you have a system that makes it as easy as possible to log every expense – however small. With Digital Tax, there are systems which will allow receipts to be logged by taking a photo on your mobile, making the record-keeping nice and simple. The odd stationery purchase, or underground ticket, may not seem much but over twelve months it will all add up.

2. Remember to claim for assets

If you have purchased plant, machinery or property, you can use the Annual Investment Allowance (AIA) to reduce the full cost from the profit in the year of purchase. This can be up to £200,000 a year.

3. Be clever with pension contributions

A great way of rewarding staff is making regular one-off payments to your team’s pension schemes, or paying Director pension contributions through the profit instead of the salary.

4. Think about giving yourself a pay rise

As a Director, you can pay yourself a salary and dividends. Your salary is taken out of the company before the profits are calculated whereas the dividend is paid after profits (and corporation tax) is worked out. By giving yourself a pay rise you reduce the level of profit in the company.

5. Have a party

You can claim up to £150 per employee for a staff event. Whether a Christmas party or summer team building BBQ, it is a great way to not only say thank-you to your team but also reduce your corporation tax payment. Don’t have any employees? Treat yourself!

6. Pay early

Yes, you read that right! If you can pay your tax bill early, then HMRC will give you interest back for making an early payment.

7. Get a great accountant ????

Have a chat with us about how we can help you get organised to claim all the expenses you can claim, get clever with pensions and salaries, and reduce your corporation tax burden. We understand the HMRC rules and can make sure you have the right systems in place to make the most of your turnover.