Running a business in the UK can be pretty challenging, and the arrival of tax season can make it even more complex for entrepreneurs. As a business owner, you are liable to pay corporation tax based on your business’s yearly profits. But what if you could lessen the financial burden? If you are looking for ways to (legally) reduce your corporation tax bill, you have come to the right place. This blog post will reveal actionable strategies that business owners can adopt to retain more of their hard-earned income, relieving you of the heavy tax burden. Let’s dive into these tax-saving possibilities together.
Efficient ways to reduce corporation tax liability
There are many ways to reduce your corporation tax liability and we have included a number of them below. Please note that it is essential to comply with HMRC regulations to avoid HMRC tax investigations.
1. Claim allowable expenses
Allowable expenses are considered an efficient way to lower corporation tax liability, and many business expenses can be deducted from a company’s profits before the tax calculation.
Typical deductible expenses include:
- Office-related expenses such as employee salaries, office supplies, marketing and advertising expenditures
- Travel costs for business purposes and
- Financial and legal expenses.
To claim all expenses, it is crucial to keep detailed and accurate records of your costs as proof in case of a tax investigation.
2. Invest in Research and Development activities
Companies focusing on research and development activities involving science and technologies can claim R&D tax reliefs, significantly reducing the tax bill.
If you are a small business owner having fewer than 500 employees and a turnover of less than £100 million, you can claim SME R&D tax relief. You can claim as much as 130% of qualifying expenses in addition to the standard 100% deduction, bringing the total to an impressive 230%.
On the other hand, large companies working on R&D projects can claim research and development expenditure credit calculated at 20% of their qualifying R&D budget.
Understanding R&D tax relief is complicated and requires someone with detailed knowledge to ensure any application is fully compliant.
3. Maximise capital allowances
As a business owner, you can substantially maximise your capital allowances to reduce your corporation tax liability. This tax relief becomes effective from day 1 of your asset acquisition, allowing you to deduct its cost from your business’s taxable income over time.
Businesses can either gradually write off the expense of the asset or opt for immediate one-time capital investments. The deduction amount will differ based on the type of asset acquired; for example, fittings and fixtures typically have lower rates than equipment or machinery used in business operations.
Additionally, businesses can explore other options, such as Enhanced Capital Allowances, which offer 100% tax relief upfront for energy-efficient purchases that comply with specific HMRC criteria. Other options include Annual Investment Allowance (AIA) and First Year Allowances (FYA) for certain types of expenditure.
4. Change company structure
Evaluating and restructuring your business is one of the best ways to reduce corporation tax. For instance, if you are currently functioning as a sole proprietor or in a partnership, transitioning to a corporate structure could result in a reduced tax liability on earnings, subject to your specific situation.
Establishing a group structure with a holding company that oversees multiple subsidiaries allows for the legal delineation of different business operations while capitalising on the tax benefits of operating under a group framework.
5. Utilise the patent box scheme
The Patent Box enables companies to benefit from a reduced corporation tax rate of 10% on the profits from patented and other specific innovations. This represents a substantial decrease from the conventional rate of 19%.
Not all innovations are patentable. To qualify, the patent must be granted by the European Patent Office, the UK Intellectual Property Office, or certain IP authorities in EU countries. Additionally, your company needs to contribute significantly to the creation or development of the patented invention.
6. Make pension contributions
When a business contributes to a pension plan on behalf of its employees, it is classified as an allowable business expense. It lowers your company’s taxable profits, thereby reducing the amount of your corporation tax bill.
As a company’s director, you can make significant pension contributions that adhere to the annual and lifetime limits set by HMRC. For the tax year 2024/25, the annual allowance is set at £60,000, while the lifetime allowance has been replaced as of April 6, 2024, with a lump sum allowance of £1,073,100, which includes a death benefit.
Maximising your pension contributions can reduce your corporation tax liability and secure your financial future.
7. Make charitable donations
Making charitable donations through your business can be categorised as a business expense, which ultimately helps to lower your corporation tax liability. You can make these contributions through direct debits, sponsorships, and one-time donations.
Charitable donations will not qualify as a business expense if they are structured as loans that the charity must pay or if the charity intends to purchase properties linked to your business. Also, remember that if your business is donating, you won’t be able to claim Gift Aid, so be sure to uncheck that option during tax filing.
8. Pay yourself salary
If you run a limited company by yourself, do not forget to pay yourself a salary. Salaries count as a business expense, which helps lower your business profits and substantially reduce your corporation tax bill.
For the 2024/25 tax year, the most tax-efficient salary is at £12,570 annually (£1,047 monthly), allowing you to avoid personal tax while the business incurs only a minimal amount in National Insurance Contributions.
If you want to draw more income from your business, you can do so through dividends. Since dividends come from profits, you need to show that you have profits available before issuing them. If not, HMRC might classify your dividends as salary, and then you’ll end up paying income tax.
Seek professional help
Tax regulations in the UK are intricate and are subject to constant changes. By implementing the above ways, business owners can oversee and minimise their corporation tax liabilities while ensuring enhanced profitability and competitive advantage.
Your primary focus should be to seek professional advice on suitable approaches for your business and understand their potential impact on your overall tax liability. Experienced accounting firms like 3E’S Accountants will help you utilise all available reliefs and deductions and comply with HMRC regulations. Book a free consultation with us to learn more about how we make our client’s business tax-efficient.
