Actionable tips and strategies to maximize Corporation Tax savings for your business.
Introduction
When it comes to running a business, saving money is just as important as making it. Corporation Tax is a significant outgoing for businesses, but the good news? There are plenty of ways to reduce your Corporation Tax bill. With a bit of planning, some savvy decisions, and a sprinkle of expert advice (that’s where I come in!), you can maximize your Corporation Tax savings and retain more profits to reinvest in your business.
So, Nic, what are they?
What Is Corporation Tax, and Why Does It Matter?
Corporation Tax is a levy on the profits your business makes. Whether you’re a large corporation or a small consultancy, if you’re making money, you’re paying tax on it. Corporation Tax rate currently sits at 25% (though it’s only 19% on profits up to £50k/annum). That’s a decent chunk of your earnings, which is why finding ways to reduce your liability is crucial for your business’s growth and sustainability.
Top Strategies to Maximize Corporation Tax Savings
Here are some practical, no-nonsense strategies to help you save on Corporation Tax:
1. Claim All Allowable Expenses
If you’re not claiming every eligible business expense, you’re leaving money on the table. Expenses like office supplies, software subscriptions, travel costs, and even your phone bill (if used for business) can all be deducted from your taxable profits.
Tip: Keep detailed records of your expenses. A good accounting software like Xero can make this a breeze.
2. Utilise Capital Allowances
When you purchase assets like equipment, vehicles, or machinery, you may be able to claim Capital Allowances. This allows you to deduct the cost of these items from your profits, reducing your tax bill.
Pro Tip: The Annual Investment Allowance (AIA) lets you claim 100% of qualifying expenses up to a certain limit—currently £1 million per year.
3. Make the Most of R&D Tax Credits
If your company invests in innovation or product development, you could qualify for Research and Development (R&D) tax credits. This is one of the most underrated ways to achieve Corporation Tax savings, especially for businesses in tech, manufacturing, or engineering.
4. Set Up a Director’s Pension Scheme
Contributing to a pension scheme not only secures your future but also reduces your taxable profits. Employer contributions to a director’s pension are a deductible expense, which can significantly reduce your Corporation Tax liability.
5. Take Advantage of Loss Relief
If your business has experienced a loss, you can carry it forward or backward to offset against profits in other years. This means you’ll pay less Corporation Tax either now or in the future.
Quick Example: If you made a profit last year but incurred losses this year, you can carry the loss back to claim a refund on the previous year’s tax bill.
6. Claim the Creative Industry Tax Reliefs
Businesses in the creative sector—like film production, video game development, and theatre—may qualify for specific tax reliefs. These schemes can significantly reduce your Corporation Tax bill.
7. Review Your Salary vs. Dividends
As a director, paying yourself through a mix of salary and dividends can optimise your tax position. Dividends are taxed at a lower rate than salary, so getting the balance right can save you money.
Caution: Always consult an accountant (again, that’s me!) before making changes; this strategy needs to align with your overall financial goals.
8. Consider the Patent Box Scheme
If your business holds patents, you could benefit from the Patent Box Scheme, which offers a reduced Corporation Tax rate on profits from patented inventions.
9. Charitable Contributions
Donating to registered charities not only supports a good cause but also reduces your taxable profits. It’s a win-win!
Common Mistakes That Can Cost You
It’s not just about what you do to save on Corporation Tax, but also about avoiding costly mistakes. Here’s what to watch out for:
- Failing to Keep Records: Without proper documentation, HMRC might disallow your deductions.
- Missing Deadlines: Late filings can result in penalties and interest charges.
- Overlooking Tax Reliefs: Many businesses aren’t aware of the reliefs they qualify for, like R&D credits.
- Misclassifying Expenses: Personal expenses disguised as business expenses can lead to trouble with HMRC.
FAQs on Corporation Tax Savings
Q1: Can small businesses benefit from Corporation Tax savings?
Absolutely! Small businesses can claim a range of deductions, from allowable expenses to R&D credits. Every penny saved counts.
Q2: What’s the most effective way to reduce Corporation Tax?
The key is to plan ahead. Claiming all eligible expenses, utilizing tax reliefs, and consulting with an accountant can make a significant difference.
Q3: Are there any risks with aggressive tax-saving strategies?
Yes, pushing the boundaries of tax laws can attract scrutiny from HMRC. Always ensure your strategies are compliant and well-documented.
Q4: How can I find out if I qualify for R&D tax credits?
If your business is involved in innovation, product development, or problem-solving, you’re likely eligible. Consult a specialist to assess your claim.
Q5: Is hiring an accountant worth it for Corporation Tax savings?
Without a doubt. A good accountant knows the ins and outs of tax laws and can identify savings you might have missed.
Conclusion
Corporation Tax savings aren’t just about cutting corners—they’re about working smarter and making the most of the opportunities available to you. By claiming the right expenses, leveraging tax reliefs, and planning strategically, you can reduce your tax liability and keep more of your profits where they belong: in your business.
So, don’t wait until the end of the financial year to think about your tax bill. Start planning now, and consult a professional if you need guidance. After all, a penny saved is a penny earned!