A good tax strategy can help protect your limited company’s bottom line, but it’s important to reduce corporation tax legally. Staying compliant can help avoid costly penalties and investigations into your company’s affairs.
In this blog, we’ll outline our top tips for cutting down your bill while ensuring you stay on the right side of the law.
How can I reduce corporation tax legally?
Business expenses
If you’ve been in business for a while, chances are you already claim allowable business expenses to reduce your corporation tax bill. But are you maximising your claims?
Tax-deductible expenses for your limited company could include:
- office equipment
- rent on business premises
- travel
- accountancy and legal services
- training
- advertising and marketing
You can deduct most of the costs of running your company — but only if they’re used solely for the business. If you or your employees get personal use from anything, you must treat it as a benefit.
It’s essential to maintain good bookkeeping practices to make the most of your business expenses. These days, many qualified bookkeepers will use cloud accounting technology to record your financial data and help you keep track of your company’s spending that you can view from any device and on the move.
Keeping accurate, detailed records of all your business transactions won’t just help back up your claims to HMRC; it can also make it easier for you and your accountant to spot potential tax planning opportunities.
Capital allowances
Another way to reduce your corporation tax liability is by claiming capital allowances on plant and machinery.
The £1 million annual investment allowance, for example, allows you to deduct the full value of qualifying assets from your taxable profits. These assets can include equipment, machinery and certain fixtures such as fitted kitchens and CCTV systems used in your company.
R&D relief
If you undertake research & development (R&D), you may be able to reduce your corporation tax further. Companies that spend money on innovative projects in science and technology can often claim back a portion of the cost in their corporation tax return.
You don’t need to run a science lab or a tech company to qualify for this kind of relief – you can even claim R&D tax credits on unsuccessful projects, as long as they are related to science and technology.
However, working out how much your company can claim can be complicated, so we’d recommend working with an accountant to make sure you get it right.
Use your personal allowance effectively
If you own a limited company, paying your income effectively can save costs for both you and your business.
Company directors can pay themselves through salary or dividends. Since salary is an allowable business expense, you can claim yours to reduce the amount of corporation tax that your company pays. Meanwhile, neither employer nor employee National Insurance contributions are payable on dividends.
Meanwhile, because dividends are taxed at a lower rate than regular income, finding the right combination can cut down both your corporation tax and personal tax bill.
Work with experts
Unless you’re an expert, corporate tax planning can be difficult. You need to have a good understanding of how different tax reliefs work and how to claim them. It’s also important to stay up to date with any changes to legislation that could affect your company’s tax liabilities.
As your accountants, it’s our job to ensure you meet your obligations while minimising your corporation tax bill. We’ll work closely with you to ensure you pay the right amount of tax — no more, no less.
Interested in tax planning for your limited company? Talk to us about reducing your corporation tax bill.