How to Reduce Your Corporation Tax Bill

How to Reduce Your Corporation Tax Bill

The importance of managing your corporate tax correctly cannot be underestimated, as it could significantly impact the financial situation of your business.

However, many businesses are still looking for ways to reduce their corporation tax bills, ensuring they only pay for what is needed. In this blog guide, we’ll look at some effective ways to reduce corporation tax bills, thus reducing your corporate tax expenses in a strategic and legal means.

What is a Corporation Tax Bill?

A corporation tax bill is a tax bill that all limited companies must pay on their earnings, which are the funds left over after deducting overheads and costs. Understanding how to calculate it for small businesses is critical to ensure you satisfy corporation tax bill obligations.

Businesses in the UK must pay corporation tax on their yearly profits, the same as individuals do on their wages. The current corporation tax rates (2024-2025) are:

  • 25% for companies with profits over £250,000
  • 19% for companies with profits under £50,000
  • If your profits are between £50,000 and £250,000, your business may be entitled to marginal relief

How to Reduce your Corporation Tax Bill

Let’s discuss the following tips on how to reduce your corporation tax bill:

Claim Every Business Expenses Possible

It is important to always claim every expense incurred by your business where possible. This helps to reduce the amount of tax that your business needs to pay, with almost all business expenses can be claimed. This covers office supplies, utility bills, payroll, and even travel expenses. 

By keeping track of and reporting these costs, you can pay less tax and keep more of your company’s profits. Remember: reporting all of your business costs is critical for lowering your tax burden.

Early Payment of Tax to HMRC

Making early payment of your corporation tax bill is also a good way to reduce your bill. HMRC will return some of it back in the form of interest.

For example, If you are a limited business and wish to pay your Corporation Tax bill before it is due (9 months and 1 day after the end of the fiscal year), you may be eligible for a 4.75% interest rate on all company tax paid before the due date. If you overestimate your tax bill and end up paying too much, you will be charged 4% interest from the due date until you receive your refund.

Claim R&D Tax Relief

Claiming R&D (Research and Development) Tax Relief is one of the most effective ways to reduce your corporation tax bill. This relief basically supports businesses that work on innovative projects in science and technology.

It allows such businesses to claim tax on qualifying R&D expenses, thereby reducing their taxable income.

Employer Pension Contribution

Contributing to your employees’ pensions might help you reduce your corporation tax payment in the UK. When your business pays pension contributions for workers, the payments are considered a business expenditure. This implies they can be deducted from your company’s taxable profits. 

So, by contributing to your employees’ pensions, you are not only helping them save for retirement, but you also reduce the amount of corporate tax your business must pay. It’s a win-win situation that may help both your staff and your business’s finances.

The Patent Box System

The Patent Box is intended to encourage businesses to maintain and commercialise their intellectual property in the UK. It enables businesses to use a reduced Corporation Tax rate on earnings derived from patented inventions.

Companies must elect into the Patent Box in order to benefit from the 10% Corporation Tax rate. This relief was introduced in stages from 2013 to 2017.

This instruction applies solely to patents. However, if your firm owns additional pharmaceutical or botanic invention rights, it can also benefit from Patent Box protection.

Employee Allowance

The Employment Allowance scheme allows some limited enterprises to lower their yearly National Insurance contributions (NICs) by up to £5,000 each tax year. It is applicable to employers who have Class 1 National Insurance payments of less than £100,000 in the preceding tax year.

It is important to know that sole directors cannot claim employment allowance.

Working from Home

Working from home is another great way to reduce your tax bill if your business is also registered to your home address. You can claim a percentage of household costs and utility bills as allowable business expenses, and this can be claimed if:

  • You work from home, you can claim tax relief of up to £26 per month under HMRC’s simplified expenses program.
  • You divide your household costs by work-related expenses, you can get the exact amount.

Trading Losses

Trading losses can be claimed as relief when computing corporation tax. Tax relief is accomplished by balancing the loss with other company earnings or profits from the same accounting period.

To compute a trading loss, capital allowances (which raise the loss) and balancing charges (which lessen the loss) must be included. Losses or profits from the sale or disposal of assets should not be included.

Losses suffered from the sale or disposal of a capital asset, as well as property income, are both subject to similar tax relief.

Conclusion

In conclusion, there are several ways to reduce your corporate tax bill legally. The main issue is that they sometimes require a significant amount of effort and organisation.

It is therefore important to always use an organised accounting department and a high-quality accounting software, so that you can ease the stress and end up saving a lot of money.

Need a Corporation Tax Accountant?

If your tax affairs are more complex, and you need the help of a corporate tax accountant, our team of accountants are highly experienced in personal and business tax issues and can help you to reduce your tax bills. Book a discovery call today.