3 Quick and easy ways to reduce your corporation tax bill this financial year
It’s a given that every business owner would like to pay less tax.
In this article we cover off 3 quick and easy ways you can begin to think about and implement tax saving strategies into your business.
The basics:
The current rate of corporation tax is 19% of taxable profits, which means if a company earns £10,000 in taxable profits, £1,900 corporation tax will be due to be paid.
Note the corporation tax rate is due to increase from April 2023 to 25% for profits above £250,000 while companies with profits of less than £50,000 will still pay at a rate of 19%. There will be a tapered increase to the rate as profits increase up to £250,000 from £50,000.
The below gives some basic tips you can start implementing today to ensure you don’t pay any more corporation tax than you need to:
1) Claim all the expenses you’re able to:
One the best ways to ensure you do this is to use a piece of cloud accounting software such as Xero so that all expenses are tracked in real time ensuring all relevant expenditure is organized and complete.
Photographing receipts can also help maintain evidence and legitimise claims for tax purposes.
Expenses which are often overlooked/misunderstood are:
- Business mobile phones: can be claimed providing kept in the name of the limited company concerned (note only 1 phone per individual is allowable)
- Claiming business miles (keep a logbook where travelling by vehicle)
- Working from home expenses
- Professional insurance
- Pension contributions
Specific circumstances dictate claims which can and should be made.
If unsure, a good accountant will guide you through this process as part of the tax planning process and preparation of tax returns each year.
2) Take a salary/dividend mix from your business
Taking a salary/dividend mix from your business where appropriate, can help to minimize the profits you pay personally (through PAYE, NI, other self-assessment taxable income) and as a company (through corporation tax).
Determining the amounts to draw and according to which method (salary or dividend) will rely on a review of each individual’s company/personal circumstances e.g. establishing what all the sources of taxable income are for a particular year.
For the year ending 21/22, the most tax efficient salary for a limited director with income from the company only, will usually be £8,840 a year.
Again, if you are unsure, speak with your accountant to establish the right strategy for you.
3) Claiming capital allowances
As part of the Covid support measures announced early in 2021 – the government introduced more generous capital allowance measures known as the Super Deduction.
You can watch our video summary on super deductions by clicking here.
These allowances work alongside the pre-existing Annual Investment Allowance (AIA – see below) but give an effective tax saving of 25p for every £1 spent on new and unused equipment.
Note this only applies to purchases made between April 2021 and the end of March 2023.
Therefore, if you are considering purchasing things like phones, laptops etc. – you should consider this as part of your decision on when to buy.
The AIA – still allows for a 100% write off of qualifying assets in the year of purchase (so a 19p tax saving for every £1 spent) – although the AIA allowance threshold is sent to reduce from £1m to £200,000 from the 1st January 2022 (so only £200,000 of qualifying equipment can be purchased and then claimed under the AIA from the start of 2022).