6 Simple But Effective Ways to Save on Corporation Tax
Author: Russell SmithNovember 15, 2015
Running a limited company? Let our accountants in Leeds help you save on your corporation tax
It is widely accepted among those in the finance industry, including our accountants in Leeds, that it is easier to save on income tax than corporation tax.
Regulations and laws are tighter around corporation tax, governed differently to personal income tax. However, that doesn’t mean you can’t save a Pound or two.
Businesses want to pay the correct tax and stay on the right side of HMRC, but they also don’t want to pay more than they have to. Our accountants in Leeds know a couple of simple tricks that can help you lower corporation tax in a legitimate way.
1. Claim All Available Expenses
Failing to claim on an expense is like shooting yourself in both feet.
The first bullet is for losing out on tax relief gained from the expense claim. The second is for then paying out extra on your corporation tax for that taxed expense. For example, let’s say you bought a £1000 computer. If you claimed that as an expense, you might see a £100 relief, meaning you pay corporation tax on the remaining £900. If you don’t claim, you pay corporation tax on the full £1000.
The simplest thing to do is pay close attention to your expenses through good bookkeeping. Make sure everything is recorded at the time of purchase, avoiding any mistakes when claiming.
2. Defer Invoices
Let’s say you are coming to the end of the tax year and you’ve been particularly successful this year. Next year, though, you don’t forecast as much growth. Maybe you are seeing a slowdown in the market or your increased revenue was due to a trend that has since finished.
Consider delaying sales invoices until after April 5th on projects coming to an end during that period. That way, you’ll be charged tax on it next year, when you will potentially have lower earnings and less tax to pay.
3. Pay HMRC Early and Receive Interest Back
HMRC want to encourage early payments — so much so that if you pay your projected corporation tax early, then don’t make as much, they will repay the extra with interest.
An over-the-top payment is going to raise eyebrows, but anything within reasonable projections will likely earn you a reduction in corporation tax through interest. So, if you’ve got the money to pay your tax early, you might see some benefit.
4. Buy Necessary Equipment Now
The government currently offers £200,000 in tax-free business investment ventures, as part of its annual investment allowance. This applies to all ‘plant and machinery’ expenses, which are basically investments in improvements to your business, from cars to office buildings.
You can see the official list of claimable goods here.
This is a very strong way of claiming on investment goods. Because, unlike normal claims where you simply have a percentage relief, you receive a 100% tax relief on goods purchased under the annual investment allowance.
For example, if you have made £700,000 taxable income through your business and invest £200,000 in cars, offices and the like, you’ll only be taxed on £500,000. If you’ve got the capital firepower, this is an incredible way of growing your business and saving on tax, too.
5. Record Travel Expenses Correctly
Travel expenses are something that confuses a lot of people. With numerous ways to claim and numerous things you can and can’t claim on, it is often the case that some tax relief simply goes unused.
Be clear on the rules of travel expenses and make sure anyone on your employee roster is, too. By having this knowledge available, you can be sure to claim the correct amount and reduce your corporation tax bill in a fair and acceptable way.
6. Pay Yourself a Reasonable Salary
It seems obvious, but many business owners choose to pay themselves the lowest salary possible then achieve a livable income from dividends. The difference is, dividends are categorised as profits and receive corporation tax. A salary on the other hand, is a business expense and does not receive corporation tax, instead, it falls under income tax.
The trick is finding that perfect line where you can save the most by splitting your money carefully between salary and dividends. Too high a salary and you’ll incur extra income tax fees. Too many dividends and you’ll lose money on corporation tax.
Need help finding the perfect middle ground? Our accountants in Leeds can help!
Russell Smith is an award-winning accountant and founder of RS Accountancy. With over a decade of experience running his company, he has worked with countless small businesses just like yours, helping them grow profits and manage their finances. Russell is also a prolific financial writer, having contributed to such publications as The Guardian, The Telegraph and The Daily Mail.