Your company is legally required to pay tax on its profits, but there are ways to reduce corporation tax while still complying with your legal requirements.
The Government offers various tax reliefs, allowances and incentives that could help you minimise your liabilities. Let’s dive in.
How to reduce corporation tax
Claim business expenses
While this point may seem obvious, you’d be surprised at how many businesses miss out on tax savings because of overlooked expenses. If you want to retain more of your hard-earned profit, you’ll need to understand what counts as a business expense for tax purposes and keep your books up to date.
Tax-deductible business expenses can include (but aren’t limited to):
- travel costs (excluding the cost of commuting)
- professional service fees (including the cost of hiring an accountant)
- the cost of office equipment, supplies and stationery
- salaries and subcontractor fees
- rent and utilities on business premises.
Remember: any expenditure you claim on your corporation tax return must be made solely and entirely for business purposes. Furthermore, not all costs you incur in your business will count as allowable expenses. For example, you cannot deduct the cost of entertaining clients.
Using cloud accounting technology to keep detailed records of all your business transactions can make it much easier to claim expenses at the end of your financial year. In many cases, hiring a professional bookkeeper could save you a lot of money in the long run.
If you’ve recently invested in new plant and machinery, you may be able to minimise your tax bill by claiming capital allowances.
For example, businesses can claim the full value of qualifying items from their taxable profits by using the annual investment allowance (AIA).
The maximum amount businesses can claim each year is currently £1 million, but this has changed significantly since the allowance was introduced in 2008.
Another capital allowance to consider is the full expensing scheme, which was unveiled in the 2023 Spring Budget. This scheme allows companies to write off the cost of some investments in one go.
Research and development tax credits
It’s not just R&D-intensive industries that can benefit from this relief. If your company invests in innovative projects in an area of science or technology, you may be able to use R&D tax credits to minimise your tax bill.
Smaller businesses can use SME R&D relief to deduct an extra 86% of qualifying costs from their corporation tax bill. Meanwhile, larger entities can claim a tax credit worth up to 20% of total R&D expenditure.
However, the rules surrounding R&D tax relief are complicated and constantly changing, making them difficult to navigate. If you want to make the most of this tax relief, we’d recommend reaching out to an accountant.
Wages and pension payments
Not only are your employees’ salaries tax-deductible, but you can also reduce your tax burden by paying into their pension pots.
Finding a tax-efficient way to pay yourself can help minimise your corporation tax liabilities and personal tax bill all at once. Therefore, you should also consider paying yourself a basic salary topped up with dividends.
How to reduce corporation tax: Drawing up your strategy
Every company is different, so the best way to reduce corporation tax will depend on your specific circumstances. What’s more, the tax landscape is always shifting, which means you’ll need to regularly review your strategy if you want to keep it tax-efficient.
As experienced corporation tax accountants, we know how to help your company protect its bottom line while keeping you compliant. We’ll draw up a robust tax strategy and adjust it as legislation changes to ensure you don’t pay more than your fair share of tax.
Want to reduce corporation tax? Check out our corporate tax services to find out how we can help.