4 Min. Read

How to Reduce Corporation Tax: 8 Ways

November 11, 2024

We’d all like to pay less taxes.

But wanting to and actually doing so are two very different things. The ability to reduce the amount of tax you pay is a tricky concept. Most people will want to pay their fair share of taxes without paying an excessive amount.

Luckily, there are a number of legal ways to reduce your corporation tax liability.

But what exactly is corporation tax? We’ll take a closer look at the definition and the 8 ways to reduce your corporate taxes.

Here’s What We’ll Cover:

What Is Corporation Tax?

8 Ways to Reduce Your Corporation Tax

Key Takeaways

What Is Corporation Tax?

Corporation tax is a form of tax paid by UK limited companies. It is based on the annual corporate profits that a business or company generates.

For a limited company, corporation tax specifically applies to the following:

Trading Profits: Earnings generated from doing business
Investments: Any profit made from business investments
Selling Assets: Any asset such as land, property, shares, and machinery that is sold for a chargeable gain.

The corporate tax rate in the UK is currently set at 25% for all business profits. However, there is a lower threshold limit of £50,000 which will remain at 19%.

8 Ways to Reduce Your Corporation Tax

There are a number of ways to reduce your business taxes. Some of these include:

1. Claim R&D Tax Relief

Assuming your business pays technical staff to solve technical problems, you can claim R&D tax relief under the UK government’s scheme for small and medium-sized enterprises (SMEs). Profit-making businesses can deduct an additional 86% of qualifying R&D costs—a total of 186% deduction from taxable profit.

Loss-making companies can claim a payable tax credit and receive up to 33% of their R&D expenditure back via cashback from HMRC. Qualifying costs include staff wages, consumables, software, and subcontractor fees.

2. Invest in Plant & Machinery

Any company can benefit from the Annual Investment Allowance, or AIA. This allows businesses to claim immediate tax relief on purchases of certain business assets.

The limit of AIA is currently set at £1,000,000. This means businesses investing in qualifying items are able to write off a significant amount of the outlay against their profits.

3. Capital Allowances on Property

Companies were able to claim a 3% allowance on new commercial building expenditure as of April 2020. Any building bought before this date can review the purchase to determine whether it qualifies for capital allowances.

4. Claim All Business Expenses

It may seem obvious, but businesses often overlook some expenses from their accounting records. It’s important to keep a list of all business expenses so that you can claim them back at the end of the tax year.

It may seem tedious to keep track of every single expense, but over the course of a year those items you’ve purchased can really add up.

5. Pay Owner Salaries

If you are running your own business, don’t forget to pay yourself an ordinary income. It can be easy to forget that your business is a separate legal entity. So make sure that you pay yourself a salary which will reduce your profit. This in turn means that your Corporation Tax will be reduced.

6. Stay On Top of Payments

If you are able to pay your Corporation Tax bill early, then HMRC may give you some of it back in the form of interest on your original return.

7. Pension Payments

Paying into your or your employees pensions through a limited company is an allowable expense. It’s also a tax-efficient way to save for your retirement so it makes sense to make the most of this tax break.

8. Claim Business Mileage

If you or any of your employees use their personal car for business purposes, you can claim expenses from the company on a tax-free basis.

Key Takeaways

There are a number of ways to legally reduce your corporate income taxes. The only issue is that they do require a lot of work and organisation.

But through the use of an organised accounting department and a top-notch accounting software, you can ease the strain and end up saving a lot of money.

Are you looking for more business advice on everything from starting a new business to new business practices?

Then check out the FreshBooks Resource Hub.