How to Reduce Your Corporation Tax Bill

As you may know, all types of businesses are required to pay corporation tax on their profits, hence why many businesses aim to reduce their tax liability to the minimum. Therefore, this blog will give an insight into corporation tax and potential tips for tax savings. 

What is corporation tax?

Corporation tax is put simply is the tax paid on profits that a company earns, and it is applicable to:

  • Limited companies
  • Foreign companies which have an office or branch in the UK
  • Unincorporated businesses such as sports club or community groups

The taxable profits which require corporation tax include:

  • Trading profits
  • Investments
  • Selling assets at a higher value than they were purchased known as chargeable gains.

If a company is based in the UK, then it has a requirement to pay corporation tax on its profit both in the UK and abroad. However, if the company is not based in the UK but rather just has a branch or office in the UK then it has a requirement to pay corporation tax on the profits earned in the UK.

When is corporation tax due?

Below are a list of steps explaining how to claim corporation tax:

  1. When a business starts to operate, they first need to register for corporation tax.
  2. It’s important for a company to keep accounting records and prepare a company tax return.
  3. The company will use the above information to pay corporation tax which is due 9 months and 1 day after the accounting period.
  4. Finally, a company needs to file a tax return according to their accounting period which is 12 months after the end of the accounting period.
Companies should keep their accounting records to prepare for a company tax return

How to reduce your corporation tax bill?

Often companies aim is to reduce their tax liability and below are some tips on how to achieve this.

Claim Research and development tax relief

For example if the business has developed new technical products or paid for research then this allowance will reduce the tax liability significantly. However, it’s important for companies to ensure that the research and development allowance is claimed within the two years at the end of the accounting period.

Investment in Plant and Machinery

By investing in new machinery, building companies will benefit by qualifying for immediate tax relief through ‘Annual Investment Allowance’.

Claim Business Expenses

It’s important for companies, especially sole traders and partnership, to keep hold of transaction records in order to claim all business expenses.

Claiming Business Mileage

If an employee uses a personal car for business purposes then they claim allowance on mileage, for example:

  • £0.45 up to 10,000 miles
  • £0.25 above 10,000 miles

Working From Home Allowance 

If an employee works at home then they may be able to claim an allowance covering lighting, heating, internet access, phone calls expenses.

Offering Share Schemes

Often companies offer a share package to employees, which can reduce corporation tax.

Claim Losses 

Companies should ensure that the loss relief is used effectively to reduce corporation tax as a loss can be claimed against the previous accounting period which can result into a tax refund. 

Training Costs

If a company has training costs related to the business or a subscription then they are able to claim this as tax deductible.

Companies can reduce their tax liability if they follow our tips mentioned above

How Rishi Sunak's announcement effects corporation tax

It is expected that in April 2023, corporation tax will rise to 25% which is a 6% increase for larger businesses who earn more that £250,000 – a rise from previous years, further increasing the tax liability whereas smaller business earning a profit under £50,000 will continue to pay at 19%. Similarly, the diverted tax profit is expected to increase to 31% in April 2023. 

Income Tax Allowance

Starting from April, the income tax allowance will be frozen to £12,570 until 2026 which means that over the years if wages increase, this will lead to more people paying tax in the next few years.

As well as this, the higher income threshold will rise from April to £50,270 and will stay the same until 2026, forecasting an increase in income tax by £8 billion in 2025-2026.

Overall, this blog has considered ways in which to reduce corporation tax which is important considering the rise in corporation tax in the forthcoming years which can significantly impact business profits and plans for investments.

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