Tactics on reducing your corporation tax bill
As a small business owner, staying on top of your finances can seem overwhelming, particularly when you're just starting out.
One of the key areas you need to keep an eye on is your taxes, and that's tricky subject to navigate. You want to reduce your tax bill wherever possible-and be in the good books of HMRC while doing so.
Below, we'll share a few simple tactics you can implement to reduce your Corporation Tax. Keep in mind that these are tactics that apply to businesses in general, and depending on your situation or industry, there could be other tax reliefs that may apply.
And as your business grows, there may be allowances or deductions that you now qualify for, but missed out on applying for previously. As such, we highly recommend checking in with our accountants at Forma to clarify any tax issues you're unsure about.
As a small business owner, staying on top of your finances can seem overwhelming, particularly when you're just starting out.
One of the key areas you need to keep an eye on is your company tax, and that's tricky subject to navigate. You want to reduce your tax bill wherever possible - and be in the good books of HMRC while doing so.
Below, we'll share a number of tactics you can implement to reduce your Corporation Tax. Keep in mind that these are tactics that are related to businesses in general, and depending on your situation or industry, there could be other tax reliefs that may apply.
And as your business grows, there may be additional allowances or deductions that you now qualify for, but missed out on applying for previously. As such, we highly recommend checking in with our accountants at Forma to clarify any tax issues you're unsure about.
The basics of Corporation Tax
Before we dive into the tactics you can implement to reduce your Corporation Tax, here's a quick overview of the basics of Corporation Tax:
What is Corporation Tax?
Corporation Tax refers to tax you pay on the profits earned by your company.
You'll need to register for Corporation Tax within three months of trading commencing.
Who pays Corporation Tax?
Limited companies are required to pay Corporation Tax at a rate of 19 percent (for the 2021/22 tax year).
Use our corporation tax calculator to work out how much corporation tax your company will need to pay.
When is it due?
Your Corporation Tax is due nine months and one day following the end of your accounting period.
That means that if the end of your accounting period falls on 31st March 2021, your Corporation Tax must be paid up by 1st January 2022. The payment is made once per year for businesses with profits below £1.5 million. Companies with profits exceeding £1.5 million will make their payment in instalments.
Salaries & Expenses to Claim
Claim your business expenses
It can seem tedious noting down minute business expenses amounting to no more than a few pounds - yet it pays to be meticulous, as these expenses can add up over the long run.
You'll need to keep proper records of your purchases, and apps such as Xero, BizXpenseTracker and Expensify can help simplify the process.
Just keep in mind HMRC's rule, which states that all revenue expenses claimed must have been incurred "wholly and exclusively" for the purposes of running the business.
Here are a few examples of allowable business expenses:
- Business entertainment expenses
- Business travel expenses
- Business use of home expenses
- P11D expenses
- Pension contributions
- Work from home allowance
For further information, refer to our guide for a comprehensive list of allowable limited company expenses you can claim as a limited company director.
Pay yourself a salary
Salaries are considered a business expense.
By paying yourself a salary, you're reducing your profit, and subsequently your Corporation Tax.
Our limited company expenses guide talks through all the different expense categories you can claim for along with key examples and how this can impact your corporation tax.
- Allowable business expenses
- Employee expenses
- Travel expenses
- Office & equipment expenses
- Professional services expenses
- General expenses
Early Tax Payment Incentives
Make an early payment to HMRC
If you've paid tax early, HMRC will pay you a credit interest.
HMRC will typically pay interest from the date you pay your Corporation Tax to the payment deadline, and the earliest date they'll pay interest is six months and 13 days after the start of your accounting period.
Here's an example:
If your accounting period starts on 1st January 2021 and ends on 31st December 2021, you can pay your Corporation Tax anytime between 13th July 2021 (six months and 13 days after the start of your accounting period) and 1st October 2021 (HMRC's deadline).
HMRC will usually pay you interest for the duration starting 13th July 2021 till 1st October 2021.
Take advantage of tax allowances and reliefs
Annual Investment Allowance (AIA)
If an item qualifies for the AIA, you can deduct its full value from your profits before tax.
You can claim AIA for most plant and machinery up to the AIA amount. This amount had been temporarily increased to £1 million until 31 December 2021, and it is set to revert to £200,000 starting 2022.
Do note that if you're running more than one business, you only get one AIA.
Business rates relief
The small business rates relief scheme reduces the amount of business rates small business owners need to pay.
The scheme is available to small business owners who own a single property with a rateable value of up to £15,000.
SME R&D relief
R&D tax reliefs are available to companies working on science and technology projects.
It allows businesses to deduct an extra 130% of their qualifying costs from their annual profit, or claim tax credits if the company is making a loss.
Patent Box tax relief
The Patent Box tax relief is available to companies earning profits from patented inventions. Eligible companies can apply for a lower rate of Corporation Tax (10%) on those profits.
Creative industry tax relief
This refers to a group of 8 Corporation Tax Reliefs available to certain types of businesses in creative industries.
Qualifying companies can claim a larger deduction, or claim a payable tax credit depending on the circumstances.
Corporation Tax Calculator: Work Out Your Company Tax
In the UK, corporation tax is straightforward but essential to understand. Companies must calculate their taxable profits, which include trading profits, investment profits, and any capital gains. Once the taxable profit is determined, companies apply the current corporation tax rate to find out how much they owe.
Know how much corporation tax you owe in the financial year 2024/25 easily with our easy to use Corporation Tax Calculator. Using our calculator is straightforward and user-friendly. Just select your company’s gross profit, and the calculator does the rest. It applies the current corporation tax rates for 2024/25 and provides an accurate estimate of what you owe. This ensures you stay compliant with UK tax laws without the hassle of manual calculations.
Our limited company expenses guide talks through all the different expense categories you can claim for along with key examples and how this can impact your corporation tax.
- Allowable business expenses
- Employee expenses
- Travel expenses
- Office & equipment expenses
- Professional services expenses
- General expenses
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