As a responsible owner of a limited company and growing business, you will no doubt be vigilant in ensuring you pay the tax you owe. While this is a laudable trait – avoiding unnecessary tax investigations from HM Revenue and Customs (HMRC) and any subsequent financial penalties – the last thing you want is to pay too much tax.
Within this article, we will look at ways of reducing your corporation tax bill by claiming all the expenses and deductions your limited company is entitled to. This will not only lower your corporation tax liabilities; it will also give a truer reflection of your annual profits.
Paying yourself a salary
If you are seeking the most tax efficient way to pay yourself as the owner of a limited company, paying yourself a small salary via PAYE is a 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 right levels can ensure 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, 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 here is knowing what the right level and this is where you need an accountant. We have years of experience in this area so can sit down with you and give you tailored advise 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 (AIA) can be used by limited companies to deduct the cost of new company assets from your taxable profits, up to a maximum of £200,000 a year.
The AIA is one of the simplest forms of corporation tax relief to understand. All limited companies have a £200,000 AIA which can be attributed to the following acquisitions throughout the year:
- Essential machinery
- Any equipment for business use
- “Integral features” for business space e.g. air conditioning, central heating
- “Fixtures” for business space e.g. fitted kitchens, bathrooms and toilet facilities
- Costs incurred of removing old equipment or plant
- Costs incurred when incorporating any new assets to your business space
According to HMRC, there are three clear areas that cannot be covered under the AIA:
- Assets given to your business
- Assets initially purchased for non-business use
Claiming these allowances often needs careful planning – for example, it may be better to not claim AIA on certain assets to maximise your tax saving. Please come and speak to us so we can ensure you take the best approach.
Research and Development (R&D) 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 (SME) R&D tax relief scheme, limited companies can get an additional 130% deduction of their qualifying R&D costs from your annual profits. That’s on top of the standard 100% deduction, giving you a 230% deduction against your taxable profits.
To put this into context, for every £1 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 fewer than 500 staff and reports a turnover of less than £100m or a balance sheet of less than £86m.
We can work with you to 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 (up to 65%)
- Externally provided workers (up to 65%)
Pay money into a pension pot
As an entrepreneur, it’s always important to plan for the future. That includes the future of your employees. Investing into your employees’ pension schemes is not just financially responsible, it’s a tax-efficient move too.
For the 2020/21 tax year, the total minimum contribution towards employee pension schemes is up from 5% to 8%, with employers required to contribute a minimum of 3%, with employees making up the difference.
Given that the corporation tax rate for 2020/21 is set at 19%, for every £100 invested into an employee’s pension fund, it will only cost you £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 that should be on your list as a deductible cost including:
- Business mileage
- Travel expenses e.g. fuel, parking, hire fees, air, rail, bus and taxi fares, as well as necessary overnight accommodation
- Charitable donations
- Costs towards employees’ childcare expenses
- Annual Christmas parties
- Eyesight tests for staff
- Private healthcare insurance
- Professional trade subscriptions
- Connectivity expenses e.g. telephone and broadband
- Staff training expenses
- Advertising fees
Remember to claim an expense it must be ‘wholly and exclusively' for the business. Therefore, it’s worth getting your expenses checked by a professional to ensure 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 can help give you the bigger picture.
Pay your corporation tax early
Another way of reducing 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, avoiding the temptation of spending any money 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 accounting period.
Note: HMRC’s credit interest is taxable and must therefore be incorporated in your company accounts.
Please do have a chat with us if you are considering doing this, as although it may be appealing it is not a process that is easily reversed. We can help you look at how paying your corporation tax early could affect your business in the future.
How we can help you
As part of our corporation tax services, our nationwide network of accountants is on-hand to advise on any corporation tax planning areas that may benefit you and your company.
We can assess your company’s financial position and recommend how to reduce tax bill payments in the simplest and most beneficial way possible.
To arrange a free initial consultation on your corporation tax obligations, please don’t hesitate to contact our friendly, experienced team today on 020 8883 5258 or get in touch whenever you are ready using our online enquiry form.
Last updated: 5th August 2020This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.