Corporation tax is one of the largest bills most limited companies face each year, and it is natural to want to keep it as low as possible. The good news is that there are several straightforward, entirely legitimate ways to reduce a corporation tax bill, without doing anything remotely questionable.
The key is making sure the company is claiming everything it is entitled to and planning rather than only thinking about tax once the year has already ended. Here are some of the main areas worth reviewing.
Claim allowable expenses
The most basic way to reduce corporation tax is also the one most commonly missed in part making sure every allowable business expense has actually been claimed. Corporation tax is calculated on profit, so any legitimate cost that reduces profit also reduces the tax due.
Commonly overlooked expenses include:
- Use of home as office, for directors who work from home even some of the time
- Mileage and travel costs for business journeys
- Professional subscriptions and training relevant to the business
- Bank charges, interest on business borrowing and card processing fees
- Small pieces of equipment or software bought throughout the year that never quite make it into the accounts
None of this involves anything creative or aggressive. It simply means keeping good records throughout the year so that nothing genuinely allowable gets missed when the accounts are prepared.
Director pension contributions
Pension contributions made by the company on behalf of a director are one of the most tax-efficient ways to extract value from a business, because they can reduce the company’s profit while also building up the director’s personal retirement savings.
Employer pension contributions are generally an allowable business expense, meaning they reduce profit before corporation tax is calculated, provided they meet the normal wholly and exclusively test that applies to business expenses. Unlike salary, they do not attract National Insurance, which makes them considerably more efficient than an equivalent amount paid as pay.
This is usually most effective as part of a wider decision about how to structure director pay, alongside salary and dividends, rather than as an afterthought at the end of the year.
Capital allowances
When a company buys equipment, machinery, vehicles or certain other assets, it cannot usually deduct the full cost as a normal expense in one go. Instead, tax relief is given through capital allowances, which allow some or all of the cost to be deducted from profit for tax purposes.
Depending on the type of asset and the rules in place at the time, this can mean:
- Claiming the full cost of qualifying equipment in the year it is bought
- Spreading relief over several years for other types of asset
- Claiming allowances on integral features within a building, such as electrical systems or heating
Capital allowances rules and rates are reviewed regularly, so timing a purchase carefully and making sure it is claimed correctly, can make a meaningful difference to the tax due for that year.
R&D relief
Research and Development (R&D) relief is designed to reward companies that are investing in innovation, but it is claimed far less often than it should be, largely because many business owners assume it only applies to scientific or laboratory-based work.
In practice, R&D relief can apply to a much wider range of activity, including:
- Developing new products, processes or services
- Making meaningful improvements to existing products or processes
- Solving technical problems where the answer was not obvious or readily available
Where a genuine claim exists, R&D relief can significantly reduce a company’s corporation tax bill, or in some cases result in a payable credit. Because the rules around what qualifies and how claims are prepared are detailed and have changed several times in recent years, this is an area where it is particularly worth getting proper advice before submitting anything.
Timing of income and expenses
Corporation tax is calculated based on the company’s accounting period, which means the timing of income and expenditure can have a real impact on which year profit and therefore tax, falls into.
Some of the areas worth considering include:
- Bringing forward planned purchases of equipment or other qualifying costs if it makes sense to claim the relief sooner
- Reviewing whether income can reasonably be recognised in one accounting period rather than another
- Timing larger discretionary costs, such as staff bonuses or training, around the company’s year end
- Considering whether the company’s year end itself is still the most sensible date given how the business has grown or changed
This is not about artificially shifting figures around. It is about being aware that timing genuinely affects when tax is due and making sensible, well-planned decisions with that in mind rather than after the event.
Reducing corporation tax legitimately is mostly about good record keeping, forward planning and knowing what you are entitled to claim, rather than anything complicated or high risk. If you would like a proper review of where your company could be more tax efficient, we would love to help. Call us on 01173 700 079 or drop us an email at hello@steppingstonesaccountancy.co.uk and we can talk through what would work best for you.
