As a responsible and sensible owner of a limited company and growing business, you will no doubt be vigilant in ensuring that you pay all of the tax which you owe. While this is a laudable trait, avoiding any unnecessary tax investigations from HMRC and any subsequent financial penalties, the last thing you want to do is pay excess amounts of tax.
Within this blog, we will look at ways in which you can reduce your corporation tax bill by claiming all the expenses and deductions your limited company is entitled to. This not only decreases your corporation tax liabilities but will also give you a more accurate reflection of your annual profits.
Paying yourself a salary
If you are looking for the most tax-efficient way to pay yourself as the owner of your own limited company, paying yourself a small salary via PAYE is an extremely good starting point. The reason being that PAYE salaries are a permitted business expense for limited companies and can subsequently help to reduce your firm’s end-of-year corporation tax bill.
Paying yourself a salary and taking dividends at the correct levels can ensure that you can get money out of your company in a very tax-efficient manner. The reason we like to utilise dividends is because they have a lower tax rate, the basic rate is only 7.5%, while higher rate and additional rate taxpayers will pay 32.5% and 38.1% on additional dividends respectively.
The difficulty is knowing what the correct level is and this is where an accountant can help. We have years of experience in this area, so it is easy for us to sit down with you and give you tailored advice to ensure you are getting what you need out of your company in the most tax-efficient way.
Annual Investment Allowance
The Annual Investment Allowance can be used by limited companies so that they can deduct the cost of new assets within your company from your taxable profits, up to a maximum of £200,000 a year.
The AIA is one of the simplest forms of corporation’s tax relief to understand. All limited companies have the option of a £200,000 AIA which can be attributed to the following acquisition throughout the year:
- Essential machinery
- Any equipment for business usage
- Fixtures for business space
- Internal features for business space
- Costs incurred when incorporating any new assets to your business space
- The cost incurred for removing old equipment or plant
According to HMRC, there are three clear areas which cannot be covered under the AIA:
- Assets initially purchased for non-business use
- Assets given to your business
Claiming these allowances often needs to be planned carefully, for example, it may be better not to claim AIA on certain assets to maximise your tax savings. By contacting us and getting our help we can ensure that you take the best approach.
Research and Development Tax Credits
Another way to reduce corporation tax bills is to claim for any eligible R&D tax relief. Under the small or medium-sized enterprise R&D tax relief scheme, limited companies have the ability to get an additional 130% deduction of their qualifying R&D costs from your annual profits. This is on top of the usual 100% deduction, therefore giving you a 230% deduction against your taxable profits.
To put this into context, for each pound that you spend on qualifying R&D projects, you can claim back £2.30 in corporation tax relief.
Any limited company is eligible for SME R&D relief providing it employs less than 500 staff and reports a turnover of less than £100m or a balance sheet of less than £86m.
Our R&D experts can work with you to help you decide whether you can make a successful R&D tax relief claim, based on all qualifying expenditure such as:
- Staff costs
- Consumable or transformable items
- Contracted out R&D costs
- Externally provided workers
We can then help you apply for R&D tax credits, and ensure you get every penny you are entitled to.
Pay money into a pension pot
As an entrepreneur, it is always vital to plan for the future. That includes the future of your employees. Investing in your employees’ pension scheme is not just financially responsible, it is also tax efficient.
For the 2020/21 tax year, the total minimum contribution towards employee pension scheme is up 3%, from 5% to 8%, with employers required to contribute a minimum of 3% with employers having to make up the difference.
Given that the corporation tax rate is currently set at 19%, for every £100 invested into an employee’s pension fund, it will only cost £81, all of which can be deducted from your taxable profits.
If administering a workplace pension scheme is proving too complex for you, we can work with you to help your business comply with all your legal obligations in the years ahead.
Other allowable expenses
Aside from the main corporation tax-deductible expenses, limited company owners can claim above, there are many other smaller allowable expenses for corporation tax relief which should most likely be on your list as a deductible cost including:
- Eyesight tests for employees
- Annual Christmas parties
- Charitable donations
- Travel expenses
- Business mileage
- Costs towards employee’s childcare expenses
- Private health care insurance
- Professional trade subscriptions
- Advertising fees
- Staff training expenses
- Connectivity expenses
Remember, to claim an expense it must be ‘wholly and exclusively’ for the business. Therefore, it is worth getting your expenses checked by a professional to make sure that you are claiming as much as possible.
Don’t forget, if you would like any guidance on industry-specific allowable expenses that could reduce your company’s corporation tax bill further, our team of experts can help to give you the bigger picture.
Pay your corporation tax early
Another method of reducing your corporation tax for limited companies is to pay your bill with HMRC ahead of schedule. Not only does this mean that the money leaves your company accounts promptly, therefore avoiding the temptation of spending any money which is owed to the taxman, HMRC will also pay you ‘credit interest’. This interest is worth 0.5% of your bill from the date you pay your corporation tax to the final deadline for payment.
The earliest that you can pay your outstanding corporation tax and receive credit interest is six months and 13 days after the start of your period of accounting.
Maple Accountancy can help minimise your tax bill
Here at Maple Accountancy, our expert tax specialists can help you to reduce your corporation tax bill. Our team has years of experience when it comes to tax planning and minimisation, helping individuals and businesses of all sizes find and access tax relief schemes to ensure they never pay a penny more than they absolutely have to. To find out more about how we can help you reduce your tax bill, visit our website, or contact us at firstname.lastname@example.org or 01332 207336.