When it comes to scoring better funding options, loan rates, and credibility, registered company status has its advantages.
Corporation tax, well – it isn’t one of them.
While it’s easy to bemoan the dilemma of earning = paying taxes, most of us would rather cough up some of the cash than have none at all. This doesn’t take the sting out of handing over hard-earned revenue to HMRC. But the good news is: there are lots of perfectly legitimate ways to reduce the amount you need to pay.
WHAT IS CORPORATION TAX – AND WHO PAYS IT?
Corporation tax is a levy by the government on the taxable profits of a UK-registered company. This is calculated based on your income from the ‘corporate accounting period’ – usually the same as your financial year.
You might be wondering how this is different from income tax. The answer is simple: registered companies don’t pay income tax. This also means that, unlike sole traders or freelancers, they aren’t entitled to a personal allowance. Unless your company has previously made a loss, you start paying corporation tax from your very first sale.
HOW MUCH CORPORATION TAX WILL I NEED TO PAY?
As with income tax – the more you make, the more you pay (in theory – don’t forget the point of this article).
The rate for 2021/22 tax year sits at 19%. For example, if your business netted an annual profit of £100,000, you’ll pay £19,000 in Corporation Tax.
Thanks to the massive pandemic borrowing surge, Chancellor Rishi Sunak has warned that rates are on the rise. As of April 2023, there will be a headliner rate increase of up to 25% – though businesses with less than £50,000 in turnover will pay a tapered rate increase.
But enough about tax hikes. You didn’t come here for gloomy headlines. Let’s get that tax bill down!
Here are five ways to reduce your Corporation Tax Bill.
1. CLAIM BUSINESS EXPENSES
Most of the costs spent on running your business can be claimed off your taxes.
We’re talking more than just petrol for business trips or the office printer. The list of HMRC-approved business expenses is surprisingly extensive.
It’s incredibly important you’re aware of exactly what you can claim for. Things like the utilities on your workspace (even if you work from home), business insurance, freelancer and contract wages, marketing fees, protective gear – to name but a few.
Keep a clear record of each and every purchase made, so it’s simple to deduct the full amount off your final profit line. The easiest way to do this is to ensure you pay all business-related expenses from a company bank account.
Note: if you haven’t yet opened a business bank account, get hunting. These aren’t only great for keeping company money and personal finances separate – they also help legitimise your business in the eyes of HMRC.
A sure-fire hack for receipt-filing is not, in fact, a shoebox. Apps like Dext let you digitize, sort and log all of your expenditure records to a cloud (though you can probably stuff the paper versions into the shoebox if it makes you happy, too).
Once the tax year draws to a close, tally up your annual expenses – down to the very last pencil – and knock them off your turnover. This will lower your final profit line, and since you only pay tax on your post-expenses profit, you’ll end up paying a lot less tax.
2. PAY YOURSELF A SALARY
Yes, you need to pay yourself. After all, you’re your own boss – who else is meant to do it?
“But I own the company.” You might argue, “I’m not an employee – why do I need a wage?”
If you’ve registered your business as a limited company, it’s a separate legal entity. You aren’t personally liable for any loss or debt, but you also aren’t personally entitled to its profits. Paying yourself a wage is the easiest way to legitimately extract money from your business.
The biggest advantage of paying yourself a salary is that employee wages are a valid business expense. This means they can be deducted from your profits. And the lower your profit margin, the less corporation tax you’ll pay!
Speaking of paying yourself from a limited company: how much should you pay yourself?
The answer isn’t always ‘as much as humanly possible’.
While it’s true that the higher your salary is, the less tax you’ll pay, there are some benefits to low-balling. For example: an employee wage is still subject to Income Tax and National Insurance contributions. Earning lower than the Personal Allowance threshold (currently £12,570) exempts you from this.
There are other ways to extract money from your company. Dividends are a great example of this. In fact, many business owners pay themselves a mix of wages and dividends. These are amounts paid to company shareholders (like you) from profits.
Before you issue these, however, make sure you can show you have available profits. If not, HMRC might decide that they are a salary and not dividends – meaning you’ll get taxed!
For more information on how to pay yourself a wage, head over to our guide on the topic!
3. CLAIM R&D TAX CREDITS
If you’re an SME with less than 500 employees with a turnover of under €100m, you can claim Research and Development tax relief. This isn’t the only qualifier, but it’s an important one.
R&D tax relief is specifically designed to reward small businesses for innovation with a tax break.
“What exactly is R&D?” you may ask.
It’s only a £2 billion+ contribution target of the UK government. While larger corporations can win grants for this, smaller businesses get the chance to claim the costs off qualifying projects from their annual tax bill.
What qualifies, exactly? There isn’t a set list. In fact, the parameters are pretty broad on this. HMRC will make the final call, but in order for your project to be considered, it needs to meet some key criteria.
Essentially, you’ll need to demonstrate that it was technological in nature, and helped develop a new or improved process or idea.
Some examples of this in the hospitality industry, for instance, are:
- Creating a new recipe or dish
- Modifying an existing recipe or food product (for example, making a vegan alternative)
- Inventing a new process (previously undocumented in your industry
There are lots of ways that small businesses can meet the R&D eligibility criteria. You can even backdate your claim by two years if there’s a project in that time frame you think may qualify.
Of course, HMRC will be the ultimate judge of this. But if you’re curious, you should book a free call with Addition. We can chat about your project, let you know if you’re eligible, then handle the claim for you, no-win, no-fee!
It’s literally free money. Surely it’s worth a shot?
4. PAY EARLY – GET INTEREST
There aren’t usually a lot of perks associated with paying bills early. In fact, when it comes to some fees – like mortgages – early payments are even penalised (good deeds never seem to go unpunished).
Despite their hard-nosed reputation, HMRC are surprisingly committed to rewarding early payments. If you submit payment for your Corporation Tax early, they’ll pay you interest.
The current rate is 0.05% from the date you pay, until the actual deadline. The earliest they’ll pay interest from is 6 months and 13 days from the start of your accounting period.
5. GET A REFUND
If you’re paying early, the amount of Corporation Tax you owe will be based (in part) on projections. Another plus of paying early is that HMRC will refund you if you’ve overpaid. This is called ‘repayment interest’.
The great thing about this (besides the fact that it’s income) is you have multiple options for repayment methods.
If you’re looking for a cash-flow boost, for instance, you can have your refund paid directly into your business bank account. If you’re good for cash and would rather put the money towards your next bill, that’s another option. Lastly, you can put the refund amount towards any other outstanding payment due with HMRC (like VAT or PAYE).
These are some of the tried and tested means of lowering your Corporation Tax bill!
WANT SOME HELP WITH THAT?
We know a thing or two about this – and we love supporting small businesses. If you’re looking to slash your Corporation Tax bill without stealing time away from your growth goals, hop on a free call! We can get it added up.