How to Reduce a Company’s Corporation Tax Bill

The new tax year begins on 6 April 2023 and brings a range of increased taxes businesses must pay. With national insurance and corporation tax rates increasing, and income tax thresholds being frozen until 2028, most companies and directors are looking at ways to reduce their tax bills. This blog highlights a number of simple steps a company can take. Professional advice should always be taken as part of tax planning for a business or an individual.

Ensure all business-related expenses are claimed

All businesses incur costs, and HMRC provides scope for business-related expenses to be offset against a company’s profit, thereby reducing its corporation tax bill. Some of the more obvious expenses to offset against company profits are shown below. However, they must relate ‘wholly and exclusively’ to the running of a business or HMRC will not allow them to be claimed.

Salary and dividends

All employee salaries and on-costs can be offset against company profits, though dividends can only be paid to shareholders from available company profits after tax.

If you’re a director of a company, you must use your personal allowance efficiently. This will often mean taking a low salary from the business with more income taken by way of dividends, which attract a lower rate of personal tax. No national insurance contributions are paid on dividends by the employer or the employee.

In addition to the personal allowance of £12,570, a director of a company is entitled to a dividend allowance which amounts to £1,000 in the 2023/24 tax year (the allowance is being reduced to £500 from 6 April 2024). This slightly reduces the personal tax bill for a director taking dividends.

The rate of Income Tax applicable to dividend income is 8.75% for the ordinary rate, 33.75% for the upper rate and 39.35% for the additional rate.

Business mileage

If a personal car is being used for company business, an employee can claim 45p per mile up to 10,000 miles and 25p per mile for miles traveled above the 10,000 threshold. Other related expenses such as parking costs, toll charges and congestion charges can also be claimed when traveling for business purposes.

Pension contributions

The government allows generous tax relief on contributions made to a personal pension scheme. Companies can pay up to £40,000 each year into an employee’s scheme. The payment must be made during a company’s accounting period and is not automatically aligned to a tax year.

An individual can pay into a personal pension scheme to reduce their personal tax – the £40,000 limit still applies.

Home working expenses

HMRC allows businesses to pay employees an allowance starting at £6 per week to work from home – the annual amount of £312 can be claimed as a business expense. HMRC will also allow home expenses to meet the additional costs of heating and lighting a work area. This calculation is more complex and is generally made based on the space used by an employee while working at home.

Training and professional subscription costs

Training for employees and any professional subscription costs can be paid by a company. The amounts paid do not affect the personal income tax of an employee and are allowed as business expenses by HMRC.

Other business expenses

As you would expect, the government allows a range of business-related expenses to be claimed, if a business incurs any of the following costs, it can offset them against profits:

• costs of employee meals and accommodation when working away from an office base
• payments to subcontractors
• premises costs such as rent, business rates, utilities and maintenance costs
• any expenses for business banking and insurance
• costs of IT equipment and software, broadband and mobile phones
• stationery
• legal costs and accountancy fees
• depreciation of fixed assets.

Ensure all allowances and tax reliefs are claimed

The government provides businesses with access to various allowances and reliefs, depending on the nature of the business. Some of the more common allowances and reliefs are shown below.

Research and Development (R&D) Tax relief

Any company carrying out Research and Development (R&D) work can claim R&D tax relief. The rules are changing from 1 April 2023 and mean the type of expenses allowed for relief are being extended. However, the amount of relief is being reduced to 86% of eligible R&D expenditure.

You can find out more about R&D tax relief changes from 1 April 2023 in our detailed blog.

Annual Investment Allowance

The Annual Investment Allowance (AIA) allows a business to claim tax relief on purchases of certain assets up to a specified limit. The AIA was increased permanently to £1 million from April 2023.  Businesses offset a significant amount of qualifying investment expenditure against their profits and reduce the amount of corporation tax paid.

Capital allowances

The government provides capital allowances for expenditure on ‘plant and machinery’. This is a complex area for accountants. In most cases a company can deduct the full cost of these items from its profits before tax using the annual investment allowance (AIA) which may be a more straightforward alternative.

The capital allowance can be claimed through the annual company tax return, all claims must be supported by a detailed calculation. Businesses must claim in the accounting period the item was purchased if any of the following claims are to be made:

• 100% first year capital allowances
• super-deduction or special rate first year allowance.

The main rate of capital allowance is 18% of the asset value. The amount of the allowance reduces over the life of the asset.

If a business doesn’t want to claim the full value they can claim part of it using writing down allowances at any time, as long as the business owns the item.

How Initor Global can help your clients reduce corporation tax

At Initor Global we have accountants and tax specialists who can meet your outsourcing needs. Our experts can prepare your clients annual accounts, company tax returns and calculate any tax due to ensure all deadlines are met.

If you want to find out more about our accountancy and tax services, or arrange a free consultation, please contact us on hello@initor-global.co.uk or visit our website at initor-global.co.uk.

You can also call us on 0203 519 2121.