Xtract Accounting, the small business Accountants for Directors and Limited Companies, provides 7 great ways to legally reduce your Corporation Tax bill.
All UK-based companies pay Corporation Tax on their taxable profits made during its accounting period. Taxable profits can include profits from trading activities but also profits from the sale of a property or investment, known as Capital Gains.
A large Corporation Tax bill is often a sign of good times for most small businesses, but can also cause a cashflow panic for some - so it's worth making sure you're not paying more tax than you need to.
So, here are 7 great ways you can legally reduce your Corporation Tax bill.
1. Claim all allowable expenses
There are no rules on exactly what costs for expenses incurred by a business can and cannot be claimed. However, HMRC defines an allowable cost as “expenditure incurred wholly, exclusively, and necessarily for the performance of the business trading activities”. In other words, businesses can deduct costs for expenses that have been incurred purely for use by the business.
Such costs could include things like train tickets and business mileage to meetings, office and computer equipment, petty cash for tea and biscuits, plus other things specific to your industry. Also, if your business has employees, their salaries and your employer National Insurance contributions can also be claimed as business costs.
By deducting the costs of all business expenses from your business profit, you reduce the amount you must pay tax on and ultimately lower your tax bill.
2. Pay yourself a salary
As a director of your own limited company, it is important to remember that the profits earned by the company are not yours – they are the company’s. A mechanism is therefore required to enable the extraction of these profits, and one of the most tax efficient mechanisms is to pay yourself a salary.
Like with any other employee, your salary is a business expense, as are any National Insurance contributions the company makes on your behalf. These expenses therefore reduce the business profits and the resulting Corporation Tax bill.
However, be aware, a salary received from your company could give rise to Income Tax and Employee National Insurance contributions. You may also need to register your business as an employer with HMRC, if it is not already.
Because of this, we strongly recommend that you seek the advice of an accountant before proceeding with paying yourself a salary.
Here at Xtract Accounting, clients of our Monthly 'FD' service receive monthly profit extraction and tax advice which is always tailored to their personal circumstances. Contact us today for more information.
3. Make Employer Pension Contributions
For many years, this method of extracting profits from a limited company has been extremely popular due to its significant tax saving ability.
In short, the way it works is that your limited company makes an employer contribution directly to your personal pension. As this qualifies as an allowable cost for your company, the company reduces its business profits resulting in a reduced Corporation Tax bill. Then, later in life, you draw down your personal pension - some or all of which you may be able to receive tax free, depending on your personal circumstances of course.
There are however some complex rules and limits that you need to be aware of. So, again, we strongly recommend that you seek the advice of an accountant before proceeding. Where pensions and investments are concerned, we would also strongly recommend that you seek the advice of an Independent Financial Advisor too.
4. Claim all reliefs and allowances
If your company has previously made any trading losses, then these could be used to claim a relief from Corporation Tax simply by offsetting them against your business profits in the current accounting period.
If you have purchased any capital goods during your accounting period, like computer equipment for example, you may be able to claim 100% of their cost (known as Capital Allowances) against your business profits, thus reducing your Corporation Tax bill.
For details on all reliefs and allowances that may be available to your company, take a look at the Gov.uk website.
5. Pay your Corporation Tax bill early
Here at Xtract Accounting, we are a firm believer of keeping money out of HMRC’s pockets for as long as is (legally) possible. That is why this next one is painful to write about!
There is of course nothing wrong with being organised – and where Corporation Tax is concerned, it seems HMRC agree. If you pay your tax bill earlier than expected, HMRC will repay you some of it as interest at a rate of 0.5%. Now, that might not sound a lot, but in today’s low interest rate environment, it is a fair chunk, especially on, say, a £10,000 tax bill!
HMRC will usually pay interest from the date you pay your Corporation Tax up to the payment deadline. However, the earliest it will pay interest from is six months and 13 days after the start of your accounting period.
6. Ensure your Corporation Tax Return is accurate
If you file a Corporation Tax return and it is found to be inaccurate, HMRC may fine you. How much you will have to pay will depend on the type of error and whether HMRC believes the error was deliberate, whether you tried to hide it, and whether you voluntarily admit to it before HMRC finds out.
HMRC penalties for “careless” errors range from 0% to 30% of your tax bill, “deliberate but not concealed” errors range from 20% to 70%, and “deliberate and concealed” errors range from 30% to 100%. Ouch!
7. Become a client of Xtract Accounting
Here at Xtract Accounting, we specialise in helping limited company directors Xtract more out for the work they put in!
Our limited company director clients receive proactive profit extraction advice tailored to their personal circumstances. Furthermore, we provide them with some little-known profit extraction and tax saving tips and techniques that we reserve especially for them.
If you are not already benefiting from our proactive and fixed fee Monthly 'FD' service, then you are missing out!
Contact us today or find out how easy it is to switch accountants.
And don't forget, the fees that your limited company pays to an accountant can also reduce your Corporation Tax bill.
About the Author of this Blog post…
Hi, my name is Gordon Roe and I am the Founder and Managing Director of Xtract Accounting. Having worked in an accountancy practice setting for well over a decade, I had become accustomed to the same annual routine for clients - Books in… Analyse… Queries out… Answers in… Finalise… Accounts and Tax Advice out.
Then, in 2020 I realised I could use advancements in technology and software to significantly improve the relationship between accountant and client, and at the same time, provide an insightful and real-time tax advice service. After all, that is what the modern client expects and deserves!
And so, Xtract Accounting was born…
Xtract Accounting are online accountants based in Lincolnshire, who offer proactive small business accountancy services exclusively to Directors and Owner Managed, Micro and SME Limited Companies throughout the UK.
We specialise in helping Directors Xtract more out for the work they put in!
Our monthly 'FD' service with fixed monthly fees, sees us take on the more proactive role of Finance Director for your business, and offers a plethora of benefits including:
Inclusive accounting software provided by FreeAgent,
Your very own dedicated accountant,
Regular insights into how to maximise your tax efficient (or even tax free!) income,
Jargon-free telephone and email support,
Plus, much, much more!
With Xtract Accounting, you can be sure your accounts and tax will be kept up-to-date and organised.
Find out more about us or connect with us on Social Media (below)