Business Tips.

10 legal ways to reduce your corporation tax bill

By Michael Harle

Not many business owners want to pay more tax than they have to.

And most SMEs we work with are keen to discover legal ways to reduce their corporation tax bill.

But here’s the thing…

There’s no big secret to lowering your corporation tax bill.

All you need is:

  • Knowledge of how the UK tax system works (our speciality!)
  • A few minutes each month
  • Some organisation

If you’re keen to save yourself a few quid (whilst staying in HMRC’s good books), here are a few simple steps about how to avoid corporation tax legally!

1. Claim EVERY expense you’re allowed

If you’re failing to claim expenses, you’re basically throwing money down the drain.

Here’s why…

  • You’re losing out on tax relief gained from the expense claim.
  • You’re paying more on your corporation tax bill for that taxed expense.

If you pay £5,000 for a new AppleMac or piece of machinery but forget to claim the capital allowance you are entitled to, your profits will be seriously overinflated – and you’ll end up paying an extra £1,000 in Corporation Tax.

Recording every £1 parking fee or £2 notepad can be a hassle, but over a year those little expenses will add up – so it definitely pays to stay on top of things.

Using an accounting app like Xero and ReceiptBank will make it simple to ensure everything is properly recorded at the time of purchase!

There no hard-and-fast rules on what you can and cannot claim – because what may seem like a luxury to one business may be essential to another.

To stay compliant with HMRC, simply remember their “wholly and exclusively” rule and make sure you only claim for items which are entirely for business use.

2. Get a company mobile phone

Sounds simple, but you’ll be amazed how many people don’t put their mobile phone in the name of their business. If you do, every phone-related cost is tax deductible.

3. Claim mileage

It’s usually more tax efficient for business owners to run their own vehicle and claim back mileage using HMRC’s official authorised mileage rate. For limited company owners, doing this will often help you avoid paying higher rates of tax on company cars.

4. Buy some books or magazines

If you need a technical manual or book which relates specifically to the activities of your work, it can be claimed. But don’t buy a book or magazine which is for your own personal benefit (or that won’t help you develop a new skill) as an item like this WON’T be tax deductible.

5. Throw a party

If you own a limited company, you can treat your team members to an annual ‘party’ (not just at Christmas) and reclaim up to the value of £150 for each guest - including VAT.

Because the limit applies to each guest, you could invite your partner to enjoy a night out completely tax free. But don’t get carried away and invite all your family and friends because HMRC will definitely not view this as a ‘staff’ party.

You’ll also be able to claim Corporation Tax relief on the overall cost without being hit by a ‘benefit in kind’ charge. So, you can eat, drink and be merry – at the same time as you’re saving tax!

6. Surprise HMRC with an early payment 

If you’ve got the money to pay up early, this is a no-brainer. Staying on top of your tax affairs is usually rewarded by HMRC, who’ll happily give you some of your Corporation Tax bill back (in the form of interest) for settling up early.

7. Pay yourself a salary

Some limited company owners often ignore this basic Corporation Tax saving tip.

As a genuine business expense, paying a salary will reduce your profit - and Corporation Tax bill.

It’s not for everyone, particularly if you’ve got income from elsewhere, but it can be a tactic that’s worth having up your sleeve.

8. Put money in your pension pot

Paying into a pension is extremely tax efficient.

Unfortunately, lots of business owners fail to make the most of pension savings.

Don’t, you’ll regret it when you get your corporation tax bill – and when you’re older!

9. Get tax-free income protection

Income protection insurance can be invaluable for small business owners.

Should the worst happen and you’re unable to work, it can safeguard your family and allow you to maintain the lifestyle you’re accustomed to.

Paying the premium out of your company (not your taxed income) is a perfectly legal way to reduce corporation tax – and protect your income!

If you’d like to make the most of this saving, we can help you set it up in the most tax-efficient way.

10. Get a good accountant

When it comes to doing your VAT, bookkeeping or payroll, are you really the best person for the job? Probably not (if you’re honest!).

Stop wasting time on activities that won’t help you make more money and appoint an accountant to do it instead.

Okay, so you’ll have to pay for their fees. But a good accountant (like us) will usually save you thousands more by helping you claim everything you’re entitled to.

Remember, tax is a complicated subject.

Before trying to implement any allowable corporation tax deductions, always seek professional advice.

If you need assistance, get in touch or call 0113 2189552 - we’ll be happy to help. 

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