The United Kingdom has one of the most complex tax regulations compared to other countries. The corporation tax rate in the UK is around 25% to 19%, depending on the annual profits of the company. That’s perhaps why companies in the UK often look for ways to reduce their corporation tax liability.
While adhering to tax rules is essential for all UK companies, they don’t necessarily have to overpay taxes. A few ways can help you reduce corporation tax and increase the profit margin.
If you are a business owner and wondering how to reduce corporation tax, read on to know:
All About UK Corporation Tax
Corporation tax is levied on the yearly profits made by companies in the UK and their branches and foreign subsidiaries. The tax rate for companies with a taxable profit above GBP 250,000 is 25%, and for companies with a taxable profit below GBP 50,000, the rate is 19%. Companies with a taxable profit between GBP 50,000 and GBP 250,000 must pay the main rate (25%) reduced by a marginal relief, providing a steady increase in the average tax rate.
The directors of the company must ensure that taxes are paid, and returns are filed with HMRC within the stipulated deadlines. A tax accountant in London can help companies prepare corporate tax returns, although the legal obligation to file returns is on the directors.
How to Reduce Corporation Tax in the UK?
Several ways can help companies reduce corporation tax. Here are some of the ways.
1.Claim Research and Development (R&D) Relief
Companies paying a technical staff for any technical work can claim R&D and tax relief. Companies developing new products, software, or processes are eligible to claim this tax relief.
This can be around GBP 25000 for every GBP 100,000 spent on innovation. Where the company makes losses, it is still eligible to claim tax credit. However, this credit will be paid in cash.
2.Claim All Business Expenses
Companies are allowed to claim a wide range of expenses, such as professional fees, office costs, commercial rent and utility bills, bank loan interest, the cost of stock of raw materials, travel and accommodation costs related to business/official trips, mobile expenses, business gifts, office party expenses, donations, membership and subscriptions, no matter how small they are.
Usually, many companies overlook these expenses. While recording and keeping a list of all such expenses can be a hassle, all these expenses will add up, which can be claimed later. This will benefit the company since claiming expenses means reducing the company’s profits, which, in turn, will reduce the corporation tax that the company must pay.
Companies can claim capital allowances if they purchase assets needed for the purpose of business. For example, plant and machinery, buildings, and business vehicles such as vans, buses, cars, lorries, etc.
The value of the items can be reduced from the profits before tax is worked out on the difference. Capital allowance claims include the following.
● Research and development
● Structure and buildings
● Renovation of business premises in disadvantaged areas
● Patents and know-how
● Extraction of minerals and dredging
The full value qualifies as an annual investment allowance (AIA) (maximum amount GBP 1 million), which can be reduced from profits before tax. However, AIA cannot be claimed on cars. Additionally, the full cost of assets qualifying for first-year allowances can also be deducted.
4.Pay Owner Salaries
If you run your own business, pay yourself an ordinary income (salary). Unlike dividends (paid from profits), the salary paid is classified as business expenses. Many limited company owners overlook this basic tax-saving tip.
Paying a salary will reduce the profit, reducing the corporation tax. Company owners can pay themselves a combination of salary and dividends. Nevertheless, this option must be considered carefully, keeping in mind other factors such as income tax, personal circumstances, and national insurance contributions.
5.Claim Business Mileage
Another expense that companies can claim to reduce corporation tax is car mileage. Business owners and staff can use their own cars and then claim their mileage back using the official authorised mileage rate of HMRC. This is especially useful for limited company owners, as this will help avoid paying higher tax rates on office cars.
Any company employee is eligible to claim up to 10,000 yearly for business travel at 45p/ mile. For over 10,000 miles, it is 25p. Companies can claim a deduction against their profits for the amounts they pay to their employees.
6.Patent Box Scheme
Companies can claim a lower tax rate on profits they earn from patented inventions via the Patent Box scheme. The objective of the scheme is to encourage companies to make investments in innovative technologies by offering such companies tax incentives on the profits earned from patented processes/products.
The Patent Box scheme is generally combined with the R&D tax relief to encourage companies to invest. Companies eligible for this scheme can reduce their rate of corporation tax to 10%.
Companies can claim a reduction in tax if they contribute towards pension schemes on behalf of their directors/employees. Such payments have to be made before the accounting period ends.
However, companies must consider the personal tax situation (for instance, income tax, capital gains, etc.) of the individuals before making contributions to such schemes. The company must understand the potential tax consequences and how the contributions affect the individuals' overall tax liabilities.
8.Pay HMRC Early
Companies must try and pay HMRC early, since any early payment of taxes to HMRC will benefit the company. If companies stay on top of their tax affairs and make payments early, there is a possibility that HMRC may reward them by paying back some part of the tax bill in the form of interest.
Late payments of tax will lead to a penalty, interest or a higher tax rate, which will be higher than the interest you will receive by making an early payment.
9.Employ Share Scheme
Companies can claim a deduction from tax if they offer shares to their employees. Besides being an incentive for employees to stay with the company and increasing the staff retention rate, offering shares can help companies save tax. Many schemes are available. Hence, seeking advice from a professional tax accountant in the UK will help in selecting the best scheme.
10.Creative Industry Tax Relief
Companies from the creative industry can claim additional tax relief if they are in the production of animation programmes, video games, theatrical productions, certain films and TV programmes, putting on a qualifying exhibition in a gallery/museum, or orchestral concerts.
There are eight different tax relief schemes. While the relief is provided in the form of additional deductions, the rules related to such deductions vary for each scheme. The companies claiming relief must be solely responsible for the production, running and completion of programmes, video games, or films.
How Can Unicorn Accountants Help?
The UK Tax is a complicated subject and constantly changing. For each company, the tax liability may differ depending on the circumstances. Hence, seeking the help of a professional tax accountant in the UK will help companies know how to reduce corporation tax, make more money and save where appropriate.
Unicorn Accountants offers tax advice to companies and ensures they comply with rules and regulations as stipulated by HMRC, easing your tax burdens. Our team comprises experts with an in-depth understanding of all tax laws and offers cost-effective solutions for all your tax plans. We help clients optimise their tax position and reduce their tax liabilities where possible. Contact us for any type of tax solution or if you want to reduce your corporation tax!