11 ways to (legally) reduce your Corporation Tax Bill
Posted on 5th May 2022
Corporation Tax is based on the annual profit (income less expenses) your company makes. The current Corporation Tax rate is 19%*.
There isn’t a magic formula to reducing your Corporation Tax bill, it simply takes some know-how of the tax system and diligent record keeping of all your business expenses and mileage. Using accounting software like Xero will help you to stay organised as will partnering with an expert accountant (like Effective Accounting)! – Get in touch if you want to discuss!
1. Claim all business expenses
One of the simplest ways to reduce your Corporation Tax bill is to ensure you claim all legitimate business expenses, therefore reducing your taxable profit. HMRC views legitimate expenses as being ‘wholly and exclusively’ for your business, and they may also assess if the expense is reasonable and fair. Legitimate expenses that apply to directors and employees include, salaries, equipment, computer hardware and software, stationary, office consumables, work-related train, bus or taxi journeys, parking fees, hotel accommodation, and sustenance costs when away on business, purchasing assets and asset disposal, legal and professional fees, professional license payments and workplace utility bills.
Tip: The key to ensure you are claiming all valid Business Expenses is to use your company bank account for all costs AND use receipt-capture software, like Dext, to save the receipts.
Download our Expenses Guide for limited companies.
2. Claim any business mileage
Although your commute between home and regular place of work is not classed as business mileage (unless attending a temporary workplace), any other work-related journey in your own vehicle is. Whether you’re visiting a client, going to a networking event, attending training, or picking up milk for the office. You will need to record the date, location and distance of each journey and then submit a claim using HMRC’s approved mileage allowance. The standard rate for a car or van is 45p per mile for the first 10,000 miles, any mileage above that and the rate drops to 25p per mile. There are difference rates for motorcycles and bicycles.
3. Use a company mobile phone
Providing company directors and/or your employees with a mobile phone is deemed essential for most businesses these days. To ensure the handset and contract costs are classed as a business expense the contract will need to be in the company’s name and the company must pay the bill.
Tip: If you simply reimburse yourself or your employees for a personal mobile phone contract or top-up, this is not allowable – as it is not seen by HMRC to be “wholly and exclusively” for business.
4. Paying salaries
Employee salaries count towards your tax-deductible business expenditures. This includes any director salaries.
Employers’ NI on any salaries is also tax-deductible.
Tip: It is more efficient, as a director, to pay yourself a combination of a salary that takes advantage of your personal tax allowance, plus dividend payments taken from the company profit. Read our blog on Ways to Get Money from Your Company to find out more.
You could consider paying a salary to a partner or spouse if they assist with your business admin.
Note: Dividends paid to directors and/or shareholders are not classed as a business expense – they are withdrawn from after-tax profits.
5. Make a company pension contribution
Employers are now obliged to provide employees with a workplace pension (since the introduction of auto-enrolment). The cost of employer pension contributions are a tax-deductible expense.
In addition, if, as a director, you decide to invest company funds into your pension, provided they are paid as an employer contribution, these are also tax-deductible. For directors, we usually recommend setting up a regular monthly contribution and then assessing profits in month 9 to establish whether there is room to make an additional lump sum payment before the end of the year.
Note: To qualify for tax relief, pension payments must be made before the end of each annual accounting period.
Read more – here!
6. Claim home office costs
If you or any of your employees work from home rather than from an office, you can claim the cost of the space used, and the utilities needed to light and heat the space as a tax-deductible expense. You can either claim a flat rate of £6 per week or ‘rent’ a space in the home to your limited company.
Note: If you choose to rent a space, this may be more tax efficient, however you will need a formal rental agreement and any income, and this will need to be declared on personal tax returns.
See our Infographic for calculating Home Office Costs here.
7. Invest in plant and machinery, computer equipment or vehicles
Take advantage of the Annual Investment Allowance (AIA) by buying any qualifying items for your business needs, known as ‘plant and machinery’. This could be a new van or truck, machinery, or laptop. The current tax relief allowance you can invest from your profit before tax is £1 million. The AIA allows you to claim 100% tax relief on qualifying profits.
And – even better! – from April 2021, many such purchases now qualify for the Super-Deduction, which means 130% tax relief on qualifying purchases.
Read more about the Super-Deduction on our Fact Sheet here.
8. Ensure you claim any professional fees or training costs
Often overlooked, professional subscriptions required for your trade or business, training courses and the cost of travelling to them are all allowable expanses, and therefore tax-deductible.
Note: The type of training courses undertaken must have demonstrate the development of existing skills or development of a new relevant skill for HMRC to regard it as a viable expense.
9. Make use of Trivial Benefits
Since the 6th of April, 2016, a business is able to provide its directors and employees (but not shareholders) with trivial benefits, as long as they amount to £50 or less each time. These trivial benefits can be given without any National Insurance or tax implications.
Read more about Trivial Benefits in our dedicated blog here (important – as the devil is in the detail!)
10. Claim for your annual staff party
Whether it is a Christmas party or an annual summer BBQ, an annual event to celebrate with and reward your staff is an allowable expense, if the overall cost is no more that £150 per person and you follow some basic rules.
Note: Client entertainment on the other hand is not an allowable expense for tax purposes.
11. Claim R&D Tax Relief
Research and development (R&D) [LINK:https://www.gov.uk/guidance/corporation-tax-research-and-development-tax-relief-for-small-and-medium-sized-enterprises] tax relief is a government back scheme for small and medium sized companies who are at the forefront of innovation. You may well be able to reduce your tax by £24,700 for every £100,00 spent on innovation. Whether you’re developing new processes, resolving a technical problem, or creating a new product, this tax relief may apply to you.
Note: There are several R&D schemes available, we can advise you on which one will suit your business best.
Read our blog about R&D Tax Credits here.
If you have any questions on this, please get in touch!
Written by:
Nicola J Sorrell - Effective Accounting
Founder | Xero Champion | IR35 Expert
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