In April 2023, the rate of corporation tax for businesses increased from 19 to 25 per cent. While small businesses that make a profit must pay corporation tax within nine months of their year-end, there are legitimate ways to reduce your tax bill. However, pushing too hard to avoid paying taxes may trigger HMRC’s scrutiny. It’s important to work with your accountant and take advice from them.
Here are seven practical ways to reduce your corporation tax bill:
#1 – Keep profits under £50,000
Businesses making profits under £50,000 a year can escape the 25 per cent tax rate, paying only 19 per cent in corporate tax. Businesses making profits of £250,000 or more will fall under the 25 per cent rate. Businesses with profits between £50,000 and £250,000 will face a complex tapered rate.
#2 – Make pension contributions
Making pension contributions directly from the business can reduce the corporation tax paid. From April 2023, a company can pay up to £60,000 annually to its directors’ pension pots, reducing the taxed profits. However, the remuneration package must be reasonable for corporation tax deductions.
#3 – Work-from-home allowances
Businesses can reduce their corporation tax paid by claiming expenses for operating from a personal home office. This may include heating, lighting, and broadband costs, reflecting private use.
#4 – R&D tax relief
Businesses carrying out research and development may qualify for R&D tax relief, which can directly reduce the corporation tax paid. Small businesses can claim up to 130 per cent of qualifying costs from yearly profits plus the normal 100 per cent deduction.
#5 – Patent box
Limited companies deriving income from patents or having undertaken qualifying developments on patents can pay only 10 per cent corporation tax on those profits. However, qualifying patents must be registered with the UK Intellectual Property Office or relevant IP authorities in EU countries.
#6 – Buy plant and machinery
Companies purchasing qualifying plant and machinery can claim tax relief of up to 100 per cent of those costs, reducing their corporation tax exposure. Every business has an annual investment allowance of £1m, making it a huge relief.
#7 – Switch to electric company cars
Businesses buying new and unused zero-emission electric cars qualify for a 100 per cent first-year allowance, meaning the full cost of that purchase can reduce profits and corporation tax. Electric vehicles may be an attractive company car option.
In conclusion, there are several ways to reduce your corporation tax bill. However, it’s essential to work within the legal and regulatory framework to avoid attracting HMRC’s scrutiny. Consult with your accountant and explore the best practices in reducing your tax bill.
