10 Ways To Reduce Your Corporation Tax

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If you’re a Limited Company owner in the UK you’ll know that if your company makes a profit, the government will claim 19% of it.

That percentage is a significant amount to some businesses, so it’s no surprise that business owners look to reduce corporation tax wherever they can.

Whilst it is important that businesses adhere to the correct legislation around paying corporation tax, there are legal ways to reduce that cost. All you need is a touch of organisation, and the time to plan your finances in advance. 

Let’s get into our top 10 ways to help your business reduce its corporation tax. 

At MachFast we always recommend that our users consult trusted accountants and lawyers with regards to specific tax matters.

1. Claim All Your Business Expenses

Whilst it’s all too easy to write-off the occasional taxi journey or stationary purchase – don’t. Keep a record and claim for each and every expense related to your business. 

If you don’t, these small expenses can multiply into larger ones throughout the year which will end up costing your business more in Corporation Tax if they’re not recorded.

Expenses can include any charge incurred that is related to your business, or your businesses use. Expenses could include:

  • Travel costs, including public transport fares or public parking charges
  • Clothing costs, such as uniforms or safety accessories like masks, gloves, eyewear
  • Office costs, like stationery or other office equipment
  • Financial costs, like accountancy fees or bank charges
  • Business Premise costs like professional indemnity insurance or public liability insurance 
  • Marketing costs, like the cost of printing flyers, business cards or billboards

2. Claim Business Mileage

Whilst we’re on the subject of expenses, something that can make all the difference is claiming back car mileage. 

Rather than use public transport like rail or taxi, it can work out more tax-efficient for business owners and employees to make journeys using their vehicles where appropriate. Mileage can then be claimed back using HMRC’s authorised mileage rate.

For example, an employee or business owner can claim up to 10,000 miles in business travel each year, paid out at 45p per mile. Over 10,000 the cost decreases to 25p. The company is then awarded a deduction against its profits for the amount it has paid out to employees.

3. Use a Business Mobile Phone

If your business takes out a landline phone contract that is solely for business use, you can claim this as a company expense and not be taxed on it. 

In addition to this if your business takes out a mobile phone contract, provided the contract is between the company and the mobile phone provider your business will be able to claim all these costs as an allowable expense with no tax incurred. 

On claims for business calls made from landline phones, as long as the call can be proven as a business call, you can also reclaim the VAT element of the call (provided you‘re VAT registered).

4. Pay Yourself!

Company Directors most commonly pay themselves dividends. However, limited company owners need to ensure they use their designated salary allowance too. 

Separately from dividends, salaries are classed as business expenses. This means they’re deduced from the company’s overall profit, resulting in less Corporation Tax to pay. 

Taking as little as £732 a month won’t result in you paying any additional income tax or national insurance, and you’ll still qualify for a state pension so it’s a must-do. 

Read More: Sole Trader vs Limited Company: Top 10 Considerations

5. Contribute to A Pension

If your business has a pension agreement set up, make regular contributions to the pot. Just like how Company Directors can pay themselves salaries, pensions are also classed as business expenses. 

Paying in up to £40,000 a year can significantly reduce your Corporation Tax.

6. Claim Work from Home Allowance

Perhaps more relevant in 2020 than it has ever been, HMRC allows businesses to claim small portions of their expenses if they work from home. 

HMRC’s Work from Home allowance starts from £4 a week, so if you’re a business who has moved some of their staff into remote positions, or you’re a completely remote business – make sure you’re signed up and claiming expenses back to minimise corporation tax.

  1. Claim Work from Home Allowance

Perhaps more relevant in 2020 than it has ever been, HMRC allows businesses to claim small portions of their expenses if they work from home. 

HMRC’s Work from Home allowance starts from £4 a week, so if you’re a business who has moved some of their staff into remote positions, or you’re a completely remote business – make sure you’re signed up and claiming expenses back to minimise corporation tax.

7. Throw a Christmas Party

Arguably the most fun way to reduce your corporation tax, if you reward your employees with a Christmas party you can claim up to £150 per head for doing so.

Make sure to invite all your staff and watch your margins, otherwise, you could be subject to a Benefit in Kind charge. This is a tax incurred on employees who receive additional perks alongside their salary, for example a company car that is made available for private use.

8. Reinvest with an Annual Investment Allowance

HMRC encourages all businesses to reinvest their profits into their company so that they can grow into the next year. 

To cover this investment, it provides an allowance specifically made to spend on company equipment, like laptops, mobiles and other business equipment.

The allowance is currently £1,000,000 at the time of writing, so it’s a figure worth bearing in mind when you finalise your accounts! Reduce your corporation tax by reinvesting into your business’s longevity instead.

  1. Enrol in an Employee Share Scheme

Businesses can benefit from a reduction in corporation tax if they offer shares of their business to their employees. Whilst this may not be appropriate for every company, there are a variety of schemes available so there are several versatile options. These include Share Incentive Plans (SIPs), Save As You Earn (SAYE), Company Share Option Plans and Enterprise Management Incentives (EMIs). 

Aside from the primary benefit of your business enjoying lower corporation tax, businesses enrolled in share schemes have also been found to have boosted levels of employee motivation and reduced staff turnover, so it’s worth considering.

9. Enrol in an Employee Share Scheme

Businesses can benefit from a reduction in corporation tax if they offer shares of their business to their employees. Whilst this may not be appropriate for every company, there are a variety of schemes available so there are several versatile options. These include Share Incentive Plans (SIPs), Save As You Earn (SAYE), Company Share Option Plans and Enterprise Management Incentives (EMIs). 

Aside from the primary benefit of your business enjoying lower corporation tax, businesses enrolled in share schemes have also been found to have boosted levels of employee motivation and reduced staff turnover, so it’s worth considering.

10. Pay HMRC Early

It may not be top of your businesses priority list, but it can make a difference in lowering your corporation tax! Incredibly HMRC has a scheme that allows businesses who make early payments to enjoy interest rates.

It’s known as Credit Interest and currently has a rate set at 0.5%. The way it works is HMRC will pay interest from 6 months and 13 days after the beginning of the accounting period. The interest is then accumulated from the date your business pays its corporation tax to the payment deadline. As long as you have the funds available to safely complete the payment, why not take advantage of this little known scheme?

Helpful? You can read more of our free guides tailored to small business owners, or get in touch if you have any queries regarding starting your new business venture. 

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