How to Reduce Your Company’s Corporation Tax
Businesses would not want to have any trouble with their taxes so, as much as possible, they pay what is due. On a similar note, they also do not want to pay more than what is due. But who wouldn’t want to have their taxes reduced? While this sounds “dishonest”, there are legitimate ways to reduce the company taxes that a company has to pay.
How Much is Corporation Tax for a Limited Company?
For the 2020/21 and 19/20 tax years, the rate of corporation tax for company profits is 19%. So, if a business has £100,000 of profits annually, then the Corporation Tax due is £19,000.
As a company owner, you want to make sure your business only pays the amount of tax it is required to pay by calculating profits accurately. One way this can be done is by claiming all deductions and payments you are allowed to claim.
What impact does it make? Imagine overlooking a capital allowance when you spent £5,000 for a new equipment. If you don’t claim it, there will be a £5,000 excess in your profits. This means that, applying the 19% tax rate, you would have to pay an extra £950 of Corporation Tax. Think about how much you could save by simply making sure you claim all allowances you are entitled to claim.
However, it is also important to remember that these deductions and allowances are different for every industry. It is always best to check with an expert on taxes. Nonetheless, there are still a few tips and tricks that business owners can learn on their own to avoid paying taxes they’re not supposed to pay.
How to Reduce Your Corporation Tax?
Tip 1: Claim all your expenses
When we say claim ALL your expenses, we mean ALL. This means that you should never forget to claim EVERYTHING, and this includes even the £2 – £3 spent on bus tickets or pad paper. Doing a tedious task for such petty spending may not sound like a practical idea, but, if you think about how much these amounts could add up to after a year, you would want to sit down and record them.
Now, about the claims that are specific to your industry, check with a tax expert to know what items you can file a claim for as there really aren’t any set rules on what you cannot claim. Not all businesses are the same and what may seem as a necessity in one may be considered a luxury in another. But one thing that’s clear is, everything must be business-related.
Tip 2: Pay yourself
One important rule to remember is, when you have your own limited company, you and your business are treated as two separate legal entities. This means that you cannot just take something out your company without it being recorded. Of course, this includes money. You can only get money from the company if it comes in the form of your salary.
Business expenses help reduce the Corporation Tax that the company has to pay because these expenses also reduce the company’s profit. Salaries are considered businesses expenses. This is why before your company taxes are due, make sure you’ve paid yourself.
But, if you decide to pay yourself with salary and dividends, as some company owners do, keep in mind that dividends are also from the company profits. This means that HMRC may treat your dividends as salary where you will be required to pay Income Tax and National Insurance contributions. So, before giving out dividends, make sure that your company is profitable.
Tip 3: Shop
The Government has an Annual Investment Allowance that allows businesses to invest in office equipment, vehicles, and fixtures for the office building, or other items under “Plant and Machinery”. This allowance is for purposes of tax filing and is set to be reduced to £200,000 on 1st January 2021. One significance of the Annual Investment Allowance is that, any amount spent on purchasing additional equipment for plant and machinery may be deducted from the company profits. For instance, your company has £1 million in profit and you make a purchase of £400,000 on plant and machinery. The £400,000 will be deducted from your total profit, reducing your taxable profit to £600,000. In other words, the 19% Corporation Tax will only be applied on the £600,000 recorded. So, if you need new office equipment, there is actually a way to purchase them that will allow you to get a few tax reduction benefits.
Tip 4: Make an early payment and HMRC will owe you interest
By keeping up with your tax duties and paying your taxes early, you can have some of your payment refunded. HMRC may give back some of your Corporation Tax, through interest, if you make an early payment.
The above are simple techniques to lower your Corporation Tax. But if you really want to see things work in your favor when it comes to paying taxes, then you need to familiarize yourself with how the tax system works, and do your part in making sure your business records are updated.