Tax reduction is an interesting concept. Although responsible individuals and companies are keen to pay their dues. They also don’t want to have to hand over any more than they need to.
The Corporation Tax rate for company profits for the 2020/21 and 19/20 tax year is 19% – a business with £100,000 in annual profit will pay £19,000 in Corporation Tax
Most small businesses are keen to discover legal ways to reduce their corporation tax bill. An in-depth knowledge of the overly complicated UK tax system is not required to achieve this. Any business owner with a little time and organisation can make savings, while keeping HMRC happy, by implementing the following simple steps
Do check out our resource on other tax topics for more information at https://libabunaccountancy.com/blog/
SIMPLE WAYS TO REDUCE YOUR CORPORATE TAX
Pay yourself a salary
Some limited company owners often ignore this basic Corporation Tax saving tip. As a genuine business expense, paying a salary will reduce your profit – and Corporation Tax bill. Find out more about Salary Vs Dividends in another of our blogs.
It’s not for everyone, particularly if you’ve got income from elsewhere. Also, you should consider a combination of salary and dividends payments to minimise your personal tax bill. But it can be a tactic that’s worth having up your sleeve.
Contribute to a pension pot
Paying into a pension is extremely tax efficient.
Unfortunately, lots of business owners fail to make the most of pension savings. It saves you tax now and will help support you later in life (hopefully).
If you employ at least one member of staff. Then you have to sign up the government’s Automatic enrolment – workplace pension scheme anyway.
Review your VAT method
It’s important to occasionally review the VAT method used by your company; this will both help you to stay on top of VAT rate changes and keep your tax bill as low as possible. For example, consider if you would be better moving away from flat rate VAT to the standard or cash accounting scheme or vice versa
Surprise HMRC with an early payment and they’ll owe you interest
That’s right – if you stay on top of your tax affairs and are able to pay your Corporation Tax bill early, HMRC will actually give you some of it back in the form of interest
Get tax-free income protection
Income protection insurance can be invaluable for small business owners.
Should the worst happen and you’re unable to work, it can safeguard your family and allow you to maintain the lifestyle you’re accustomed to.
Paying the premium out of your company (not your taxed income) is a perfectly legal way to reduce corporation tax – and protect your income!
Make purchases through your company
If you need something new for your business like a new desk, phone or laptop then avoid the temptation to simply buy them yourself – buy them through the company instead.
Looking to make a bigger purchase like a large piece of equipment or new business premises? It’s worth taking advantage of the Government’s Annual Investment Allowance. It’s essentially a way of businesses writing off investments in “Plant and Machinery” for tax purposes (things like big pieces of office equipment, vans, machinery and building fixtures). This is due to increase temporarily to £1 million until 31st December 2020.
For instance, let’s imagine your company has profits of £1 million (sounds amazing!). But if you spent £600,000 on plant and machinery for the business, the entire amount can be deducted from your profits. This then brings these profits down to £400,000, meaning you’d only then need to pay Corporation Tax on £400,000.
Claim ALL expenses you’re allowed
If you’re failing to claim expenses, you’re basically throwing money down the drain.
Recording every £1 parking fee or £2 notepad can be a hassle, but over a year those little expenses will add up – so it pays to stay on top of things.
Using a cloud accounting software such as Xero supported by Receipt Bank automated expense app will make it simple to ensure everything is properly recorded at the time of purchase!
There no hard-and-fast rules on what you can and cannot claim – because what may seem like a luxury to one business may be essential to another.
To stay compliant with HMRC, simply remember their “wholly and exclusively” rule and make sure you only claim for items which are entirely for business use.
Another claim that can be easily missed is car mileage. It can be more tax-efficient for business owners and staff to use their own cars and claim their mileage back using the HMRC’s official authorised mileage rate.
Any employee at the company can claim up to 10,000 miles per year for business travel at 45p per mile. For anything over 10,000 miles it is 25p. The company will get a deduction against its profits for the amounts it pays out to employees.
Get a company mobile
Sounds simple, but you’ll be amazed how many people don’t put their mobile phone in the name of their business. If you do, every phone-related cost is tax deductible.
Buy some books or magazines
If you need a technical manual or book which relates specifically to the activities of your work, it can be claimed. But don’t buy a book or magazine which is for your own personal benefit (or that won’t help you develop a new skill) as an item like this WON’T be tax deductible.
Be nice and give some gifts
Have you considered making the use of business gifts as a marketing tool? The cost of the gifts is tax deductible if the gift.
Consider an employee share scheme
Companies can obtain a deduction in corporation tax if they offer shares to their employees. Not only does the company benefit from this tax saving but offering shares can also increase staff retention and motivate employees at the same time. There are several schemes available to choose from, so it is imperative get advice on which one will suit your business best
One final way, and it’s a good one, to save on your corporation tax bill is to:
Throw a party!
If you own a limited company, you can treat your team members to an annual ‘party’ (doesn’t have to be at Christmas). And reclaim up to the value of £150 for each guest – including VAT.
Because the limit applies to each guest, you could invite your partner to enjoy a night out completely tax free. But don’t get carried away and invite all your family and friends because HMRC will not view this as a ‘staff’ party.
You’ll also be able to claim Corporation Tax relief on the overall cost without being hit by a ‘benefit in kind’ charge. So, you can eat, drink and be merry – at the same time as you’re saving tax!
So the big secret to lowering your Corporation Tax is that there is no secret! It just takes diligence, a bit of knowledge of the tax system. And a few minutes every month making sure your business expenses are properly recorded.
If you have questions on your corporate tax and how to legally reduce them , please give us a call on +44 01234 712840.
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