Corporation Tax Will Rise Again – 3 Ways Limited Company Owners Can Reduce Their Tax Bill

During the mini-budget, former chancellor Kwasi Kwarteng presented his intention to cancel the planned rise in corporation tax.

However, on October 14, the government made a U-turn. Plans to increase corporate tax from 19% to 25% will still be ongoing.

Here are some tips to help you reduce your corporation tax bill, before these increases take effect or when other changes are introduced.

We hope you find this article helpful, but it is not personal advice. If you’re not sure what’s right for you or need help making financial planning decisions, seek financial advice. For help with complex taxation, talk to an accountant.

What is corporation tax and how much do you have to pay?

If you are the owner of a limited liability company, you will have to pay corporation tax on the profits made by your company. Corporation tax is currently 19% in the UK.

You must register with HMRC to pay corporation tax within three months of starting your business. If you are doing business as a sole proprietor, partnership or limited liability company (LLP), you pay income tax on your profits rather than corporation tax.

When will the corporate tax increase?

Currently, all companies, regardless of the size of their profits, pay corporation tax at the rate of 19%, which will continue until March 31, 2023.

From 1 April 2023 a new higher rate comes into effect for companies with profits over £50,000. They will face a significant increase and will have to pay corporation tax at the rate of 25%.

All businesses with profits of less than £50,000 will continue to pay the 19% rate of corporation tax.

Depending on the circumstances, if a company’s profits are between £50,000 and £250,000, it may be possible to claim marginal tax relief to reduce the rate by 25%.

You can find out more about corporation tax on gov.uk.

3 ways to lower your corporate tax bill

1. Consider making an employer pension contribution

Adding money to a pension can help you maintain your financial independence whenever you decide to stop working. But if you have your own limited liability company, it could also help you save on tax burdens.

If you are employed by the company, you can make employer contributions to your pension from your company account. Employer contributions are normally treated as a business expense, so you will not pay corporation tax on the contribution.

If the pension contribution is paid instead of paying you this amount of salary, you and your company will also save on national insurance. Personally, you also wouldn’t pay UK income tax until you have access to your pension money.

Remember though that pensions are designed for retirement. Usually, you must be at least 55 years old before you can withdraw money again. HMRC could also question any corporate tax relief if your total salary and benefits are more than the work they think you have done for the company.

First make sure you understand the limits of your annual allowance. Most people have an annual allowance for pension contributions of £40,000. But you may be able to “carry over” any allowances you haven’t used from the previous three tax years.

Pension and tax rules may change, and the benefits will depend on your situation.

FIND OUT MORE ABOUT PENSION BENEFITS

2. Claim all possible business expenses

It’s important to claim all you can when running your own business, no matter how small. By making a claim, you reduce your profits, which also reduces the amount of corporation tax you pay.

You can claim anything from office supplies and advertising costs to travel expenses and training courses. Just make sure that the expenses you claim are for business purposes only.

Don’t forget to keep a record of your expenses. It’s not just good practice, it’s essential. Without a dossier, HMRC may refuse to accept your application.

3. If you can afford it, pay your corporation tax sooner

HMRC will normally pay you interest if you prepay your corporation tax. Currently, they will pay 0.5% from the date you make the prepayment until the payment deadline.

The first date from which they will start paying interest is 6 months and 13 days after the start of your “accounting period”. This is the period covered by your company’s tax return. It cannot exceed 12 months and generally corresponds to the accounting year covered by your company’s annual accounts.