How to Reduce Corporation Tax Bill

Team Nomi

Dec 26, 2024
13 minutes read

How can you reduce your corporation tax bill? This is a common question among business owners who want to keep more of their profits. Corporation tax is the tax that UK companies pay on their profits, and it can take a significant piece out of your earnings. However, there are legal ways to lower this tax burden. You can effectively minimise your corporation tax bill by understanding and utilising various strategies.

From claiming allowable business expenses to exploring government tax relief schemes, there are many options available. Additionally, optimising your company structure and making smart financial decisions can lead to further savings. 

In this blog, we will outline practical tips and strategies that can help you reduce your corporation tax bill while ensuring compliance with tax laws. Let’s explore how you can maximise your business’s financial health.

What is Corporation Tax

Companies in the UK are subject to corporation tax, which is a tax on their profits. Any business that makes money through investing, selling assets, or selling goods or services must pay corporation tax on those gains. One of the main ways the government makes money is through this tax.

The standard rate of Corporation Tax is currently 25% for profits over £250,000. For smaller companies with profits below this threshold, a lower rate may apply due to slight Relief, which gradually reduces the tax rate based on profit levels.

Within three months of launching their business, companies must register for Corporation Tax with HM Revenue and Customs (HMRC). They must also file an annual tax return using form CT600, which details their income and expenses. The tax payment is due 9 months and 1 day after the end of the accounting period.

Why Reducing Corporation Tax is Essential

Reducing corporation tax is important for businesses looking to enhance their financial stability and growth potential. The main reason is that a lower tax bill means more money remains in the industry. This extra capital can be reinvested into critical areas such as research and development, marketing, or expanding your product line, all of which can drive growth and increase profitability.

Furthermore, reducing your corporation tax can importantly improve cash flow. With more funds available, you can better manage operational costs, pay employees on time, and invest in new opportunities without the stress of financial constraints. A healthy cash flow is important for navigating unexpected challenges and catching market opportunities.

Additionally, a lower tax burden can make your business more attractive to investors. Potential investors are more likely to invest in a company with strong profitability and efficient tax management.

Therefore, understanding how to legally minimise your corporation tax ensures compliance with tax regulations, helping you avoid penalties and fines. In summary, reducing corporation tax is not just beneficial, it’s essential for supporting growth, improving cash flow, attracting investment, and ensuring long-term success for your business.

Key Strategies for Reducing Corporation Tax

Reducing Corporation Tax is essential for businesses looking to maximise their profits. Here are seven key strategies to effectively lower your Corporation Tax liability:

Claim Allowable Business Expenses

Make sure you include any allowable business expenses in your claim, such as staff pay, office supplies, and travel expenses. By keeping in-depth records of these costs, you can lower your taxable profits by maximising your deductions. Legal fees and marketing expenditures are also examples of common deductible expenses that can drastically reduce your tax liability.

Utilise Capital Allowances

Businesses are eligible to receive capital allowances when they invest in capital assets such as machinery or equipment. Because of this tax relief, you can gradually deduct some of the cost of these assets from your taxable profits. The Annual Investment Allowance (AIA), for example, allows you to deduct the entire cost of eligible assets in the year of purchase, up to a certain amount.

Explore Tax Reliefs

Benefit from research and development (R&D) tax credits and other available tax breaks. By deducting up to 230% of their eligible costs from taxable profits, businesses that participate in qualifying R&D activities can highly lower their tax responsibility.

Make Charitable Donations

You can deduct donations to approved charities from your taxable income. This reduces your corporation tax cost in addition to helping charity causes. To be eligible for tax reduction, donations must be authentic and adhere to HMRC guidelines.

Balance Salary and Dividends

Strike a balance between dividends and salaries to maximise your self-payment. While keeping your corporation tax under control, this trick can also reduce your tax responsibility. Your overall tax exposure and National Insurance contributions may be decreased by accepting a lower salary and bigger dividends.

Contribute to Employee Pensions

Employer payments to employee pension plans are tax deductible, which lowers your taxable profits and helps employees save for retirement. This strategy not only lowers taxes but also aids in luring and keeping talent for your company.

Review Your Business Structure

Consider whether changing your business structure could yield better tax benefits. For example, switching from a sole trader to a limited liability partnership (LLP) may offer more favourable tax treatment and liability protection, depending on your business circumstances.

Claiming Allowable Business Expenses

Claiming allowable business expenses is important for reducing your corporation tax bill. These expenses are costs that are necessary for running your business and can be deducted from your profits before tax is calculated. Common allowable expenses include office supplies, rent, utilities, travel costs, and employee payments.

To effectively claim these expenses, it’s important to maintain accurate records. Keep all receipts and invoices organised, and ensure that each expense is directly related to your business activities. 

Additionally, don’t overlook other potential deductions, such as professional fees, marketing costs, and home office expenses if you work from home. By maximising your allowable business expenses, you can significantly lower your taxable income, ultimately reducing the corporation tax you owe. This not only helps improve your cash flow but also supports the overall financial health of your business.

Early Payment of HMRC for Interest Benefits

1. Interest Earnings: Paying your corporation tax early allows you to earn interest from HMRC. This interest reimburses for the time your money is with HMRC until the payment deadline.
2. Taxable Income: Any interest earned from early payments is considered taxable income, so it must be included in your corporation tax calculations.
3. No Interest on Overpayments: While early payments can earn interest, overpayments do not. HMRC will refund any excess amount paid without interest.
4. Cash Flow Considerations: Ensure that your business can manage its cash flow effectively when making early payments. This strategy is beneficial if you have excess funds that are not generating interest elsewhere.

Charitable Donations and Tax Deductions

In the UK, companies can deduct donations made to registered charities from their taxable profits, reducing their corporation tax bill. This means that every pound you donate can lower the amount of tax you owe, making it mutually beneficial.

To qualify for tax relief, ensure that the charity is recognised by HMRC. Donations can take various forms, including cash contributions, gifts of equipment, or sponsorship of charitable events.

It’s important to keep thorough records of your donations, including receipts and any correspondence with the charity. This documentation will be necessary when you file your tax return.

By integrating charitable giving into your business practices, you not only support important causes but also enhance your company’s reputation. This approach demonstrates corporate social responsibility while providing valuable tax deductions that contribute to your financial health.

Investigating Government Tax Relief Schemes

Investigating government tax relief schemes is an effective way to lower your corporation tax bill and promote business growth. Here are key tax relief schemes available in the UK:

Research and Development (R&D) Tax Credits

This scheme allows companies to claim back a portion of their R&D spending as a cash refund or tax reduction. It is designed to encourage innovation and can significantly lower taxable profits. Companies must demonstrate that they are developing new or improved products, processes, or services that resolve scientific or technological uncertainties.

Eligibility Criteria

To benefit from these schemes, businesses must familiarise themselves with the specific eligibility criteria for each relief. Maintaining detailed records of expenses is important for successful claims.

Maximising Benefits

By utilising these government tax relief options, businesses can enhance their financial health, reduce their tax liabilities, and invest more in growth initiatives.

Professional Guidance

Consulting with tax professionals can help navigate the complexities of these schemes and ensure compliance while maximising potential savings.

Continuous Review

Regularly reviewing your eligibility for these schemes can help your business take full advantage of available tax reliefs as regulations change or new opportunities arise.

Optimising Business Structure for Tax Efficiency

1. Choose the Right Business Entity: Selecting the appropriate business structure, such as a limited company, partnership, or sole trader, can significantly impact your tax responsibility. Limited companies often benefit from lower corporation tax rates compared to personal income tax rates for sole traders.
2. Consider Incorporation: Incorporating your business can provide tax advantages, such as limited liability and the ability to pay yourself through dividends, which may be taxed at a lower rate than salary.
3. Review Profit Distribution: Strategically planning how profits are distributed can enhance tax efficiency. Balancing salary and dividends can minimise overall tax liabilities.
4. Utilise Partnerships or LLPs: If applicable, consider forming a partnership or limited liability partnership (LLP). These structures can offer flexibility in profit sharing and may provide tax benefits.
5. Regularly Review Your Structure: Periodically assess your business structure to ensure it remains optimal for your financial situation and changing tax laws.

Balancing Salary and Dividends

Balancing salary and dividends is a smart strategy for business owners looking to optimise their tax situation. As a director of a limited company, you can pay yourself through both methods, each with its own tax suggestion.

A salary is subject to income tax and National Insurance contributions, while dividends are taxed at lower rates. To maximise tax efficiency, consider paying yourself a salary up to the National Insurance threshold. This allows you to benefit from state pension contributions without incurring high tax costs.

After set up a reasonable salary, you can take additional income as dividends. This approach not only reduces your corporation tax bill but also provides you with a more favorable personal tax rate on the dividends received.

It’s necessary to keep accurate records and understand the limits on dividend payments. Consulting with an accountant can help you find the right balance, ensuring you minimise your overall tax liability while maintaining financial stability for your business.

Employer Pension Contributions as Tax Deductions

1. Tax-Deductible Contributions: Employer pension contributions are considered allowable business expenses, meaning they can be deducted from your taxable profits. This reduces your corporation tax bill while helping to secure your employee’s futures.
2. Enhanced Employee Benefits: Offering pension contributions can improve employee satisfaction and retention. A strong pension scheme makes your company more attractive to potential hires.
3. National Insurance Savings: Employer contributions do not attract National Insurance contributions, providing additional savings for your business compared to salary payments.
4. Long-Term Financial Planning: Investing in employee pensions not only benefits your staff but also encourages a culture of financial security within your company, ultimately supporting long-term growth.

Understanding Dividends About Corporation Tax

Payments from a company’s profits to shareholders are known as dividends, and they are crucial to the management of corporation tax. Before a business may start paying dividends, it must pay corporation tax on its profits. In other words, post-tax earnings are used to pay dividends.

One key advantage of dividends is their lower tax rate compared to salaries. While salaries are subject to income tax and National Insurance contributions, dividends are taxed at reduced rates, making them a more tax-efficient way for business owners to extract profits.

Understanding how dividends interact with corporation tax allows business owners to make informed decisions about profit distribution, ultimately enhancing financial efficiency and reducing their overall tax liability.

How to submit corporation tax to HMRC

To submit corporation tax to HMRC using Nomi’s Corporation Tax software, follow these steps:

1. Prepare Financial Analysis: Start by conducting a complete financial analysis. Ensure all bookkeeping records are accurate and up-to-date.
2. Upload Working Papers: Gather and upload the necessary working papers and documentation required for your corporation tax return.
3. Review Final Accounts: Use Nomi’s automated features to generate final accounts, including profit and loss statements and balance sheets. Review these documents for accuracy.
4. Check for Errors: Make sure that all data is correct and that there are no differences in your accounts before proceeding.
5. Attach Supporting Documents: If necessary, attach any supporting documents directly to your CT600 filings within the software.
6. Submit to HMRC: Once everything is reviewed, simply click the submit button in Nomi to file your corporation tax return directly to HMRC.
7. Store Records: After submission, Nomi securely stores your final accounts and corporation tax returns for easy future access.

Benefits of Nomi’s Corporation Tax Software

• Automated Processes: Nomi’s corporation tax software automates the preparation of final accounts and tax returns, significantly reducing manual effort and minimising errors.
• Direct Filing: The software allows for direct submissions to HMRC and Companies House, updating the filing process and ensuring compliance with regulations.
• Integration with Bookkeeping: It integrates perfectly with bookkeeping entries, ensuring that all financial data is accurate and up-to-date.
• Time Efficiency: Automating year-end accounts, saves valuable time, allowing accountants to focus on client relationships rather than administrative tasks.
• User-Friendly Interface: Designed for ease of use, the software simplifies complex accounting processes, making it accessible even for those with limited technical skills.
• Support and Resources: Nomi offers high customer support to assist users with any issues, enhancing the overall user experience.
• Scalability: The software is suitable for various practices, accommodating the needs of both small firms and larger accounting practices.

Accountants can handle their corporation tax responsibilities with confidence and ease by using Nomi’s software. Bookkeepers and accountants may need help managing corporation tax deadlines, if you’re searching for software that streamlines tracking and submission, Nomi is the solution. Our corporation tax software simplifies the entire process, keeping you organised and compliant.

We offer a 30-day trial package, allowing you to explore the features and benefits of Nomi firsthand. Experience how our platform can enhance your workflow and help you manage corporation tax deadlines effectively. Try Nomi today or book a demo to see how we can support your accounting needs.