Corporation tax is a tax on the profit gained by any business. So, the higher the profit the higher will be the corporation tax. Currently the corporation tax on the business profit is 19%.
This means that for every £100 gained in business profit the company will be paying £19 to HMRC as a corporation tax. 19% might seem like a tremendous amount when your business grows and you are gaining maximum profit.
However, not everyone loves to pay 19% tax, so we have got a complete guide on how a business can reduce the corporation tax at maximum. If you are a beginner and have zero knowledge regarding corporation tax then no need to worry about simply go through a guide on how to pay corporation tax.
Keep Record of Expenses
The first and foremost thing regarding a business is to keep a record of all the expenses. Businesspersons should always consider high costs while keeping track of more minor expenses will surely help you reduce corporation tax. For example, during a business meeting in the restaurant, food bills might not be seen as a significant expense, but many meetings held like that will make a considerable number in a month.
There is no need to pay from your pocket or personal account. Keeping a business account and a personal account is a primary key to reduce corporation tax. It is surprisingly a shock that companies overpay corporation tax just because of the lack of proper records!
Paying a Directors Salary
It might be possible that you will be a director and a shareholder of your limited company. There may be multiple directors and shareholders, and the good news is that you have an option to pay yourself a salary or dividends or a combination of both. Dividends are paid out to you, the shareholder from profits post corporation tax.
So, they do not obtain corporation tax relief, whereas director’s salaries are on allowable expenses and will reduce the overall corporation tax bill. The more you pay yourself, the increased income tax and national insurance liability will eventually outweigh any corporation tax saving. As a director and shareholder, it is common for you to pay yourselves an optimum salary, with the rest of your income being produced by dividends through profits.
“The directors’ salaries are on allowable expenses and will reduce the overall corporation tax bill”
This will ensure maximum tax efficiency and tax savings for both your company and you. The salary you as a director should be paid would depend on your circumstances and any other income source in a particular tax year.
Invest in your Business
When you invest in your business, especially the hardware such as part machinery and fixtures and fittings, there is a way to reduce corporation tax. The typical way to account for the new asset is to spread its cost over several years, as its value depreciates. Machinery relates to heavy industrial plants and incorporates modern hardware such as laptops, printers, and other system units.
Fixture and fittings include desks, tables, office chairs, book racks, and fitting items. In addition, for tax purposes, your company can utilize a form of capital allowance called the Annual Investment Allowance –ALA. It will allow your company to deduct the total cost of the asset from profits when the purchasing year comes, reducing the corporation tax bill.
“Annual Investment Allowance allow your company to deduct the total cost of the asset from profits!”
The Annual Investment Allowance is £1000,000 but from January 1st, 2022, it will fall to £200,000, which is still sufficient for many businesses. For example, suppose an XYZ limited company makes pretax profits of £100,000 for the ending year. The owners of the company are considering buying some hardware equipment for £60,000.
The estimated life of hardware shall be three years. So, according to the XYZ limited company, the depreciation will be spread over three years. That comes out to be £20,000 per year through the income statement. However, before December 31st of that year, XYX limited company will deduct the total cost by taking advantage of Annual Invest Allowance that will provide them with £40,000 as a taxable profit.
Your company can make pension contributions on behalf of the directors, and your PAYE that is a pay as you earn employees. Pension contributions are allowable for corporation tax purposes. For every £100 contributed to a pension scheme directly, that is gross from your limited company, into an approved pension scheme, it will save £19 of corporation tax.
In the following year, you can receive a total contribution of £40,000 to an approved private pension plan without encountering a pension savings tax charge. Excess contributions are subjected to pensions saving tax charges, which businesses should consider when making any contributions.
Claim Allowable Expenses
Finally, claim legitimate and allowable expenses. Don’t go off a spending spree to save your corporation tax. Being a company director shareholder, you will have to face an array of legitimate expenses that you can claim for your company that can eventually reduce your corporation tax bill. Costs are wholly and solely for your business. HMRC does not appreciate all the business expenses to be allowable. Like client entertaining, but it must be added back to profits when calculating the corporation tax liability.
”You can claim your company legitimate expenses to reduce your corporation tax bill”
It is always helpful to keep numbers in your mind and shuffle them when needed. For example, corporation tax is 19%, but there are many ways to rearrange this 19% into some other forms. So, you don’t have to pay corporation tax as demanded. Keeping the record, taking advantage of AIA, transferring money to pensions, knowing the benefits of being a shareholder, and finally claiming legitimate expenses will help you reduce corporation tax and help you be more tax efficient.
There is no need to pay extra money and tax bills when your tax consultants, such as LegendFinancial, have got so many doors for you to reduce the corporation tax. So, start saving today and invest them somewhere else but don’t worry about the tax on other profits because we will manage that also. So, start thinking of some expanded business without considering any extra tension regarding tax because we got you!