How to Reduce Corporation Tax

Corporation tax can be a major outgoing for some companies, and it may appear difficult or impossible to reduce your burden while sticking to all the rules. However, that’s not the case. With a little organisation, forward planning and understanding of the tax system, you can take steps to reduce your liability, some of which will even benefit your business.

What Is Corporation Tax? 

Corporation tax is paid by all limited companies in the UK and is calculated based on annual profits. The rate for all companies is currently 19%, so a company with an annual profit of £75,000 would pay £14,250. This is set to be replaced by a variable rate from 19-25% – again based on profit – in 2023. It is a company’s responsibility to calculate their own tax bill, and you’ll need to file a tax return each year with HMRC and Companies House, even if no corporation tax is due.

While it is, of course, essential that you pay the right amount of tax, you don’t have to pay more than you need to, so it’s worth looking into ways to reduce the burden, most significantly by claiming every allowable deduction and expense to give an accurate picture of your profits.

Seven Steps to Reduce Your Corporation Tax Bill

1.Claim All Business Expenses 

Recording every business expense may seem more trouble than it’s worth, but it can make a big difference to your corporation tax bill. While a few pounds for a train journey may be a small amount on its own, it soon adds up if you make the journey regularly. Similarly, the cost of minor items such as office stationery and other supplies can make a difference.

Of course, you’ll need to make sure that the item counts as an allowable business expense – HMRC defines this as something that is "wholly and exclusively for business use". This will include miles travelled for business, a mobile phone for purely business use, professional insurance, business travel and maybe even a staff Christmas party, if certain rules are met. Find out about some more surprising tax-deductible items in our blog Ten Purchases You Didn’t Know Were Tax Deductible.

2.Claim R&D Tax Relief

You may also be able to claim corporation tax relief on your research and development. There are different types of R&D relief, depending on the size of your company and if the project has been subcontracted to you or not.

Your company will be eligible for SME R&D Relief if it employs fewer than 500 staff and has a turnover of fewer than 100 million euros or a balance sheet totalling under 86 million euros. You must also be seeking to research or develop and advance in your field, not just for your business. In addition, the project must relate to your company’s trade - either an existing one or one that you intend to start up based on the results of the R&D.

SME R&D relief allows companies to deduct an extra 130% of their qualifying costs from their yearly profit and the normal 100% deduction to make a total deduction of 230%. You can also claim a tax credit if the company is loss-making, worth up to 14.5% of the surrenderable loss.

Depending on your business activity, other tax relief may be available, such as the Patent Box, which lets you pay an effective rate of 10% on profits derived from patented inventions and innovations.

3.Invest in New Equipment

If you need a new laptop or phone for business use, the most tax-efficient way is to buy it through your business. If you’re making larger purchases, such as machinery, new premises or other costly assets, you can take advantage of the government’s Annual Investment Allowance (AIA). This lets you deduct the total value of a qualifying item from your profits before tax. HMRC refers to qualifying items as ‘plants and machinery’, which can include company vehicles, building fixtures and office equipment.

The AIA amount has been increased to £1 million until 31 March 2023, meaning businesses investing in qualifying items are able to write off a significant amount of the investment against their profits.

4.Pay Owner Salaries 

Remember, as a limited company director; you are a separate legal entity to your business, so your salary is a business expense. By paying yourself a salary, or a mixture of salary and dividends, you’ll reduce your profit and, therefore, your corporation tax.

5.Make Pension Payments 

If your company has employees, by law, you must contribute a certain amount into a pension scheme as part of the government’s auto-enrolment arrangements. However, it can be tax efficient to contribute more than the minimum amount as, again, this will reduce your taxable profit. 

As a company director, you can also make contributions to your own pension from pre-taxed company income, and as employer contributions are classified as allowable expenses, your business will receive tax relief.

Currently, you can receive tax relief on a maximum of £40,000 or 100% of your income, whichever is lower – known as the annual pension allowance.

Payments must be made before the end of the accounting period to obtain relief, and as pension schemes can be complex, it’s always worth speaking to a specialist advisor before making any decisions.

6.Start an Employee Share Scheme

As well as being a great way to incentivise and reward staff, it’s also often possible to obtain a corporation tax deduction when implementing an employee share scheme. There are a variety of share schemes available, each with their own qualifying criteria, benefits and aspects to consider, so again, expert advice is recommended.

7.Pay HMRC Early 

If you are organised enough and manage to make an early payment to HMRC, your efforts will be rewarded in the form of interest. HMRC will usually pay interest from the date you pay your tax to the payment deadline at a rate of 0.5%. Of course, you will probably be able to get better rates elsewhere, and you should always make sure paying early won’t negatively impact your cash flow. Also, remember that if you pay late, you will incur interest at the much higher rate of 3.5%.