Running your own business sometimes seems to be a series of successes followed by setbacks.
You win a big client, then lose an existing client. You hire the perfect employee and their current employer offers them more money to stay. You make a nice fat profit, and the taxman comes along and takes 20 per cent of it! Talk about three steps forward, two steps back.
Limited companies making up to £300,000 profit a year pay the ‘small profits rate’ – currently 20%.
Fortunately, there are ways you can reduce your Corporation Tax bill. The trick is to find ways to avoid tax, which you are legally allowed to do (as opposed to evading tax, that’s definitely illegal).
Of course, this is a deeply complicated subject, and you should check with your accountant before acting on any information in this article. Getting your corporation tax wrong is not something you want to do, as you may be penalised by HMRC.
Lowering your company profits
The most obvious way to reduce your company tax bill is to lower your taxable profits. Your business is taxed on profit not turnover, so the less profit it makes, the less tax it will pay.
What direct expenses can you legally put through the business? For example, would it make better financial sense for your business to lease you a nice expensive company car? Yes you will pay personal tax on this as well, but overall you may be better off than if you went out and bought the car privately.
Remember that a limited company’s money is not your personal money – a limited company is a separate legal entity, so it’s not your own money. There are many laws governing what expenses can and cannot be counted as business expenses, so find out before you spend the cash.
These guides explain the subject of expenses in more detail, and are a good starting point;
It is possible to offset past losses against future profits. There are laws governing this, for example if a company changes hands this offset cannot happen. This is to stop badly-performing companies being sold as tax havens.
You may be able to claim tax allowances
You may be able to get tax relief through capital allowances on buying certain kinds of equipment and machinery.
These schemes allow you to set the costs of investments in certain equipment against your current profits, and can therefore help you to significantly cut your corporation tax bill.
The main capital allowance schemes are;
- Annual Investment Allowance (AIA)
- Writing Down Allowance (WDA)
- Enhanced Capital Allowances (ECA)
- Research & Development Tax Relief
With Annual Investment Allowance, if you are purchasing business equipment (tools, computers, furniture, machines, etc.), you may be able to set 100% of the cost against your current year’s profits.
In April 2014, the amount companies could claim an Annual Investment Allowance (AIA) for expenditure on plant & machinery was temporarily increased to £500,000 a year. However, this increase is due to end on 31 December 2015, when it will fall to just £25,000 per year.
If you are thinking of making an investment in plant or machinery of more than £25,000, it therefore makes sense for you to consider doing this before the AIA annual limit is cut at the end of 2015.
Read our dedicated guide to capital allowances for the full details;
If your business is innovative you may qualify for R&D tax relief
If your business is involved in any type of innovation, or carries out some form of research and development, you may be able to claim tax relief with R&D Tax Relief.
You may be surprised at what can constitute “R&D” or “innovation” so it’s worth exploring. This guide gives you the low-down;
Salary sacrifice schemes
Another area you may want to explore is salary sacrifice schemes. These allow you to give tax-free benefits, such as childcare vouchers, mobile phones or bikes to your staff, and yourself.
It may not cut your corporation tax bill, but it can cut the amount of National Insurance contributions you need to pay. For details of what you can do and how it works read;
Paying yourself tax efficiently
Finally, it may be worth looking at whether you want to reduce your corporation tax bill at all. If you want to take a lot of money out of your business, it may be more tax efficient to take a share of the profits, rather than draw a salary.
The current income tax rates go as high as 45 per cent for additional rate taxpayers, whereas company profits of up to £300,000 a year are currently only taxed at 20 per cent.
Shareholders in the company can draw a dividend – their part of the profits. You may have to pay income tax on that dividend, but overall you might be slightly better off as you won’t have to pay National Insurance contributions on it.
Your accountant will be able to advise whether or not this is a worth doing in your circumstances.
Remember the area of tax is complex and ever-changing, so make sure you get professional advice from a qualified person before taking any action. Don’t rely purely on information contained in this article.
More tips on tax
You will find lots more help and tips on tax matters in these other ByteStart guides;