"Reducing" the amount of tax you pay is a difficult concept to grasp. Most responsible individuals and businesses want to pay the correct amount of tax owed – but they also don't want to pay more than necessary. So, what are the (legal) methods for lowering your Corporation Tax bill? Are you going into your next significant business choice with caution? How about some insights that actually come in handy? The topic at hand is a review of your financial records performed once a year. It's possible that you wasted money on projects and assets that didn't bring in enough money to cover their costs. Don't keep making the same errors again and over. Talk to our best small business accountants to increase your revenue base. How much does a limited company have to pay in Corporation Tax? For the 2021/22 tax year, the Corporation Tax rate on company profits is 19%, which means that a company with a £100,000 annual profit will pay £19,000 in Corporation Tax. The Chancellor announced plans to raise the headline Corporation Tax rate to 25% beginning in April 2023 in the March 2021 budget. From that date forward, a new small profits rate of 19% will apply to companies with profits of less than £50,000, with the rate gradually increasing as profits increase. Businesses with profits of more than £250,000 will pay the standard rate of 25% beginning in April 2023. The key to avoiding paying more Corporation Tax than necessary is to claim every allowable deduction and expense in order to provide an accurate picture of your profits. If you paid £5,000 for new equipment but failed to claim the capital allowance, your profits may be overstated by £5,000, resulting in an extra £950 in Corporation Tax. It literally pays to keep up with these things. Every situation is unique, and there may be allowances or deductions for your specific industry (as always, consult a tax expert if unsure), but there are a few fundamentals that every business owner should understand to avoid paying more tax than necessary. Tip 1: Claim every allowable business expense. Allowable expenses reduce your company's profits, so this is the simplest way to reduce your Corporation Tax bill. Not sure what you can and cannot deduct as a business expense? We have an article explaining business expenses for your limited company, a handy business expenses PDF guide, and a video below. Check that you've claimed everything. Recording every £3 bus ticket and £2 pad of paper may seem inconvenient, but over the course of a year, those items add up. You'll also be able to claim industry-specific items – there are no hard and fast rules about what you can and cannot claim. What is clearly an unnecessary luxury for one business may be a necessity for another. Remember the "wholly and exclusively" rule from HMRC; anything you claim must be entirely for business purposes. So you can claim for the cost of a business mobile phone if it is registered in the name of your limited company, and you can also claim for any business miles you travel (even if it is by bicycle). You can deduct certain expenses if you work from home or rent out a room in your home to your limited company as an office. If you travel for work away from home or the office, you may be able to claim both the cost of lunch and the cost of business travel. Pension contributions and professional insurance are two other expenses you may not have considered. Both of these can be paid for by your company rather than by you. You can even claim expenses for an annual staff party, whether it's a summer party or a Christmas party (within certain limits), as well as small gifts for employees (if they meet the trivial benefit rules). Using great accounting software makes it so much easier to record and claim all of your expenses, with handy apps for uploading expenses with a photo or recording business mileage. Our great value limited company accountancy packages even include all the advice and support you need from our expert accountants and superhero client managers to deal with Companies House and HMRC on your behalf. Tip #2: Remember to pay yourself a salary. When running a limited company on your own, it's easy to lose sight of the fact that your company is a separate legal entity – your money isn't yours! So, in order to get it into your pockets, you must pay yourself a salary. Salaries are a type of business expense that reduces your profit and, as a result, your Corporation Tax. So, before you pay taxes on your profits, pay yourself! But there is one word of caution. Many business owners pay themselves a combination of salary and dividends – dividends are drawn from profit, so you must be able to demonstrate profits before issuing dividends. Otherwise, HMRC will almost certainly reclassify your dividends as salary, requiring you to pay Income Tax and National Insurance Contributions. We have a great article on how to maximise your tax efficiency and how much salary to take from your limited company. Don't forget to open a separate bank account for your limited company; read our article to learn how and why to open a business bank account. Tip#3: Go shopping. If you need a new laptop or phone for business, purchasing them through your company is the most tax-efficient option. If you require a slightly larger piece of equipment, new premises, or other assets, you can use the Government's Annual Investment Allowance. This allowance currently allows businesses to deduct investments in "Plant and Machinery" (such as commercial vehicles, building fixtures, and office equipment). This is set at £1 million until the end of 2021. The allowance is set to be reduced to £200,000 after that. Assume your company makes £1 million in profits (you lucky thing!). If you spend £400,000 on plant and machinery for your business, you can currently deduct the entire amount from your profits, reducing them to £600,000. The remaining £600,000 would then be subject to Corporation Tax. Tip 4: If you pay HMRC early, they will owe you interest. That's right – if you keep track of your tax affairs and pay your Corporation Tax bill on time, HMRC will give you some of it back in the form of interest. Learn more in our article "Benefits of Paying Corporation Tax Early." Tip 5: Make use of your tax-free allowances. As previously stated, contributing to a pension through your limited company is an allowable expense. It's also a very tax-efficient way to save for retirement, so take advantage of this tax break for yourself, as a company director, and any employees you have. You should also consider protecting yourself and your company against income loss, disability, or even death. It's unpleasant to consider, but it's critical to plan ahead of time and be prepared. With the right advice, you can save money on certain types of business insurance that protect you, your company, and any loved ones. You will pay less tax and save money if you pay the premiums from your company rather than your taxed personal income. CruseBurke best Accountants in Croydon has been providing assistance to local businesses. Yes, we can trace our roots all the way back to World War II, and we take great pride in our age.
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August 2022
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