How to minimise corporation tax
Guide: how to save on corporation tax
As trusted chartered accountants, our clients often ask us how to minimise corporation tax in a legal and legitimate way.
In this guide, we will provide an overview, including how and when corporation tax is paid. We will then discuss how to save on corporation tax with a range of compliant approaches, such as reliefs and allowable business expenses.
Who does corporation tax apply to?
Corporation tax must be paid by limited companies, based on:
- trading profits – money made in the accounting period, minus overheads and expenses
- investments
- chargeable gains – money gained from selling assets, such as property, land or shares, for more than they originally cost
Companies are responsible for paying the correct amount of corporation tax by filing a Company Tax Return each financial year. It is essential that accurate accounts are kept and that the tax return is submitted in time for HMRC’s deadline.
Any foreign company with a UK branch or office must also pay corporation tax on profits generated by its UK activities.
While sole traders and partnerships don’t pay corporation tax, they are instead required to pay income tax on profits and capital gains tax, based on the sale of assets.
How much is corporation tax now?
Corporation tax hit the headlines recently, with some uncertainty around the rate changing – here’s a timeline of what happened:
March 2021 – In the March ‘21 Budget, Rishi Sunak (Chancellor at the time) announced that corporation tax would rise from 19% to 25% in April 2023. This would apply to businesses with profits in excess of £250,000
July 2022 – during her Conservative leadership campaign, Liz Truss said she would keep corporation tax at 19%
September 2022 – In the mini Budget, then Chancellor, Kwasi Kwarteng announced that corporation tax would stay at 19%
October 2022 – Liz Truss confirmed corporation tax would increase to 25% in 2023 and sacked the Chancellor
November 2022 – in the Autumn Statement, it was confirmed that the corporation tax rate will rise by 6% to 25% in April 2023, where profits are above £250,000. For companies with profits below £50,000, the tax rate of 19% will remain. A marginal rate of tax of 26.5% will be charged for companies where profits are between £50,001 and £250,000.
When is corporation tax paid
Corporation tax must be paid 9 months and 1 day after the end of your accounting period. Your accounting period is usually the financial year covered by your annual accounts, but you may have 2 accounting periods in the year you set up your company.
It is vital that you pay HMRC by the deadline, otherwise you will be charged interest at today’s rate of 6%. You must still send a return if you make a loss or believe you have no corporation tax to pay. We can check your accounting period.
How to save on corporation tax
One of the questions we are often asked by our business clients is: ‘how can I reduce my corporation tax bill?’.
One of the most common ways to reduce your corporation tax bill is by claiming allowable business expenses and overheads, namely:
- Stock items bought for resale
- Purchasing raw materials
- Employee salaries
- Employee benefits and bonuses
- Subcontractor costs
- Employers’ National Insurance Contributions (NICs)
- Employer pension contributions
- Business insurance
- Bank charges
- Business travel
- Business accommodation
- Training costs
- Accountancy fees
- Legal fees
- Storage, distribution and logistics
- Office costs – from basic stationery to your phone bills
- Travel, fuel and parking
- PPE, work clothing and uniforms
- Running your premises and utility bills
- Rents and rates on business premises
- Marketing expenses
- Stationery
- Phone and internet bills
To clarify, only expenses that are ‘wholly and exclusively’ for business are considered allowable – there must be no personal use or benefit.
Opt for a tax-efficient remuneration
If you are the owner or director of a limited company, you can minimise your corporation tax liability by paying yourself a salary or a combination of salary and remuneration that are allowable business expenses.
This type of structure isn’t ideal for all companies and requires tailored advice. We would urge you to make an appointment to discuss this possibility, based on your specific situation.
How to minimise corporation tax with reliefs
There may also be deductions and tax credits available – known collectively as ‘reliefs’. These reliefs are designed to help businesses grow and can reduce your final bill, assuming that you qualify for them.
Please talk to us regarding reliefs available to limit the corporation tax paid.
Additional ways to limit your corporation tax liability
Still wondering how to minimise corporation tax? As well as reliefs and allowable expenses, there are further ways to boost tax efficiency, maximise your capital allowance and release money. Depending on your business, you may be able to:
- Maximise capital allowances
- Make use of trading losses
- Strategically dispose of capital assets
With professional, tailored advice from a trusted accountant you can confidently reduce your corporation tax liability.
The importance of consulting a tax specialist
Without expert advice from a reputable accountant there is a possibility that you could end up paying too much corporation tax.
However, you cannot risk the alternative – paying too little tax. With all of the above said, it is absolutely essential to comply with HMRC’s guidance, when looking to reduce your corporation tax bill.
Extreme caution should be exercised around tax avoidance schemes – they are often at odds with HMRC’s rules. Should you opt to do this, you may find your company being investigated or penalised by HMRC.
There may be a fine line between reducing your corporation tax liabilities so it is important to take professional advice to ensure you can maximise your saving while remaining compliant.
Expert advice on how to minimise corporation tax
Here at Hartley Fowler Chartered Accountants, we provide businesses and individuals with specialist tax advice. We work with you to provide compliant and legal ways to limit your tax liabilities.
Our reputable team of corporation tax specialists has the knowledge and experience to save you money with legitimate ways to reduce your tax bill.
If you’d like to speak to a member of our team about corporation tax, please contact us today. Alternatively, please book a free initial consultation here.