Limited companies in the UK pay corporation tax, and this is a large expense, but there are lots of ways to mitigate this. Such understanding will help businesses legally minimise their tax liability, thus retaining most of their profit.
In this guide, we will look at the current corporation tax rate and share 10 key tips on how your company can save money. Whether your business is small or large, these strategies will help you mitigate your tax position. Read on to learn how to maximise your tax opportunities and keep your business finances in order.
What is the corporation tax rate for a limited company in the UK?
In the United Kingdom, the corporation tax rate for limited companies is 25%, for businesses whose profits exceed £250,000. But businesses with profits under £50,000, pay a lower rate of 19%. Companies with profits between £50,000 and £250,000 are subject to a tapered rate of corporation tax, rising from 19% to 25%.
10 strategies to reduce corporation tax in the UK
Reducing corporation tax is a key goal for many businesses in the UK, as it allows them to retain more of their earnings and reinvest in growth. There are numerous strategies available to help companies lower their tax liabilities while staying compliant with the law.
Utilise tax allowances and reliefs
Claiming all available tax allowances and reliefs is one of the easiest ways to lower corporation tax. For example, one of the reliefs offered by the UK government is the Annual Investment Allowance (AIA), which permits businesses to deduct the entire value of qualifying capital assets, such as machinery and equipment, from their profits.
Companies involved in innovation or technology can leverage Research and Development (R&D) Tax Credits to these highly beneficial rebates. They can also claim capital allowances on other assets, such as vehicles and IT equipment. Maximising these allowances can reduce taxable profits and, consequently, your overall corporation tax liability.
Maximise research and development (R&D) tax credits
In a move to encourage innovation Research and Development tax relief is available in the United Kingdom in most sectors. If you’re taking on eligible R&D efforts, you may be eligible for a substantial reduction in your tax payments. This assistance means that companies can still recover a portion of their R&D expenses, which include wage costs, utility bills and software, as a deductible against profits for tax purposes.
In some instances, unprofitable businesses will even be sent a check for cash. The SME R&D tax relief is 33% of the qualifying expenditure. When correctly identified and mediated, your R&D activities can effectively allow your company to significantly reduce its corporation tax bill as well as help innovate your area of business.
Claim capital allowances on business assets
Capital allowances help businesses to claim tax relief on capital investments like machinery, buildings or vehicles. You can, for instance, deduct a percentage of the cost of qualifying assets from your profits by investing in them, lowering your taxable income.
Annual Investment Allowance (AIA) gives 100% immediate relief for capital assets up to the AIA limit (currently £1m), allowing businesses to claim the total cost of qualifying items in the year they are acquired. Other capital allowances may also be available depending on the type of asset, including the First Year Allowance and the Writing Down Allowance. Such allowances can really reduce your corporation tax.
Consider tax efficient profit distribution
One other way to reduce corporation tax efficiently is to make the most of how you extract profits from the company. Directors and shareholders, for example, can take a mix of salary and dividends. Dividends are taxed at a lower rate than salary payments, which are subject to income tax and National Insurance contributions.
The idea is to strike a balance here so that less corporation tax is paid while also benefiting from lower personal tax rates. Some tax relief may also be applicable, such as the Dividend Allowance, which allows individuals to receive dividends tax-free up to an annual amount. Speak to an accountant about the most tax-effective way to take profits.
Use losses to offset future profits
Since your company has made losses in its previous years, they can be carried forward and set against taxable profits in the current or future years. This strategy, labelled loss relief, could substantially cut your corporation tax bill. Those definitely do offset future profits or, in certain cases, can be carried back to previous profitable years, potentially leading to a tax refund. This can be especially useful for those whose profits rise and fall. Maintaining accurate records is key to ensuring that correct losses are noted and applied to the proper utilisation of said relief.
Contribute to pension schemes
A good method for companies to lessen their taxable profits is contributing to pension schemes. An employer’s contributions to an employee’s pension scheme are tax-deductible — they reduce the taxable profits of the company. This serves both to reduce the corporation’s tax liability and give employees valuable retirement benefits.
So it could be pension contributions on behalf of directors, employees or even into a company pension scheme. Establishing pension contributions in accordance with HMRC’s annual limits is imperative to avoid potential tax ramifications. This strategy allows both businesses and employees to gain tax savings.
Review your business structure
The structure of your business can have a big effect on your corporation tax liability. For instance, new enterprises often find it advantageous to incorporate. Limited companies generally pay less tax on profits than individuals or sole traders. Or restructuring the business, for example, splitting it into different divisions to exploit varying tax rates or reliefs.
For example, some groups of businesses might closely align and benefit from group relief measures, allowing inter-company trading and other means of compensating profits and losses in a tax-effective manner. A tax advisor can help determine whether restructuring might provide tax benefits.
Tax-efficient investment in property
If your business is thinking about investing in property, there are tax-efficient ways to do so. For instance, purchasing a commercial property could potentially qualify your business for capital allowances on some of the building costs, thus considerably lowering taxable profits. There are also targeted tax incentives for renovating or developing eligible properties under a scheme such as the Enhanced Capital Allowance (ECA).
And if your business owns any property then check out whether you can offset mortgage interest against profits. When structured correctly, property investments can lead to substantial tax savings, which may help reduce your overall tax bill and corporation tax liability — particularly if the investment is used to generate taxable income.
Engage in charitable giving
In the UK, another method of reducing corporation tax liability is donating to charity. Donations are tax deductible for companies making them to registered charities which lowers taxable profits. The company can give cash, equipment, or services to a charity, and the value of the gift is taken from its profits, which may reduce the amount of tax it pays.
Not only do socially responsible corporate social responsibility ( CSR) initiatives make a positive contribution, but they can also result in significant tax savings when aligned with charitable contributions. Ensure that the charity is registered with the Charity Commission, for only contributions to qualifying charities are eligible for tax relief.
Ensure tax relief on business expenses
You can deduct business expenses from your company’s taxable profits, decreasing your corporation tax bill. These can be costs such as wages, office supplies, travel, as well as other costs involved in running the business. Even seemingly small expenses, such as business lunch expenses or the price of software subscriptions, can compound over time. Make sure you have claimed all costs that you are eligible to claim and that you are not paying taxes you do not need to pay. It will help you to comply with the requirements, as well as optimise your expense claims.
Choose Reed & Co Accountants for expert corporation tax services
For expert guidance in reducing your corporation tax, choose Reed & Co Accountants. With years of experience, we specialise in providing tailored tax strategies that help businesses minimise their liabilities and maximise savings. Our team is well-versed in the latest tax regulations and relief opportunities, ensuring your company stays compliant while benefiting from all available tax advantages.
Whether you’re looking to optimise capital allowances, claim R&D tax credits, or implement tax-efficient investment strategies, Reed & Co Accountants are here to help. Contact us today for personalised, professional advice that will help your business thrive financially.
