The recent rise in the UK’s Corporation Tax basic rate to 25% has greatly impacted all businesses’ tax burdens. Businesses are looking for strategies to lower their Corporation Tax obligations and ensure they are only paying what is necessary now more than ever.
Fortunately, companies can use many legitimate methods to reduce their corporation tax liability and optimise profitability.
Hire Tax Accountants
Work with UK-based Experts for tax, audit, accounting, payroll, & EIS/ SEIS needs.
This comprehensive guide’ll look at 7 efficient methods to help you effectively and legally reduce your corporate tax expense.
Table of contents
Creative ways to reduce corporation tax bill
1. Take advantage of Capital Allowances
UK companies can utilise Capital Allowances to decrease Corporation Tax substantially. This tax relief is available from the first day of an asset’s purchase, and its cost can be deducted from the business’s taxable income over the years.
Companies have versatility in selecting between writing off the expense of the asset slowly or claiming an immediate one-off allowance for capital investments immediately.
The amount will vary depending on the asset purchased—for instance, fittings and fixtures have lower rates than equipment or machinery used in company operations.
Businesses can also choose from alternative options, such as Enhanced Capital Allowances, which provide 100% upfront tax relief for energy-efficient purchases that meet specific HMRC requirements.
Overall, this is an excellent method for businesses to lower their Corporation Tax liability and make their financial situation more manageable.
2. Invest in Research and Development (R&D)
Companies that carry out studies and research can be eligible for
claiming R&D tax relief will significantly decrease the corporation tax a business pays.
In short, any company undertaking research or development to advance technology or science may qualify. Numerous companies, whether in construction or IT, creating novel items or procedures can be eligible for relief, often without realising it. The relief can be used for materials, staff, and utility costs.
Small companies – which HMRC considers to have a staff of fewer than 500 and a turnover of £100m – can claim up to 130% of qualifying expenses from their yearly earnings plus the normal 100% deduction, totalling 230%.
3. Utilise tax-exempt pension contributions for minimising Corporation Tax
Contributing to director and staff pension schemes provides a tax-effective way for businesses to access funds. These contributions are beneficial because they are usually tax-free in the hands of the pension plan and deductible from the business’s taxes, decreasing its tax burden.
In addition, by contributing to a pension, directors can maximise their yearly pension allowance and apply any unused allowance from previous years, which can result in significant tax savings.
Also, directing company pension contributions towards developing funds for purchasing commercial property offers a tempting financial opportunity. With this tactic, the pension plan can increase the amount of assets it has while possibly reaping the rewards of property ownership’s long-term value growth and income production.
Overall, contributing to pension schemes is helpful in retirement planning and acts as a knowledgeable financial move for businesses seeking tax efficiency and potential investments.
4. Strategically, time income and expenses
Strategic timing of revenue and expenditures can majorly affect a company’s tax liability. Businesses can minimise their overall tax burden and optimise their tax position by carefully regulating the timing of financial transactions.
One way to reduce the taxable income in the current year and delay the corresponding tax bill is to defer income to a future tax year.
Similarly, accelerating deductible expenses into the current tax year can reduce taxable income, leading to lower taxes owed. With this strategy, businesses can maximise tax savings and manage their cash flow by taking advantage of tax deferral and deduction opportunities.
5. Optimise organisation or team structure
As companies expand, they often end up with many distinct operations in one company or with many independent businesses established for each distinct activity. Also known as ring-fencing.
Both can give rise to tax ineffectiveness. A review can be undertaken to determine the company’s most tax-effective structure, such as consideration of the investor’s ultimate aims. Possibilities may include:
This could be:
- A group structure with a holding corporation having various subsidiaries – this accomplishes legal separation of the different operations whilst retaining the tax benefits provided by functioning within a group of businesses.
- Investors hold individual businesses directly rather than using a holding company. In certain cases, this can be more tax-efficient if an individual company may be sold.
These structures tend to be complex, and you should consider expert advice before considering any.
6. Offsetting losses
Offsetting losses is an extremely helpful means for UK-based companies to minimise their corporation tax bill and can be an excellent means for companies to recover from any unexpected expenses.
The method permits businesses to take any losses from previous years and use them against future profits to lower the corporate taxes they owe.
Companies are permitted to carry forward these losses for several years, indicating that if a business fails to use its losses in one year, it can still benefit in the following years.
Companies must submit evidence of the loss suffered to claim on this regulation, including a valid invoice or statement demonstrating the cost incurred.
There are a few restrictions surrounding Offsetting Losses, including only offsetting against commercial earnings (not capital gains) and not being able to net off losses against earnings within a group of businesses.
7. Utilising Patent box scheme
Limited companies that derive an income from trademarks or have undertaken qualifying development on trademarks can pay corporate taxes at just 10% on those profits.
Those patents must be enrolled with the UK Intellectual Property Office, the European Patent Office, or pertinent IP authorities in EU countries to qualify.
However, the patent box system is intricate.
It will be important to determine those patents that qualify and the earnings produced. So it is advisable to consult an expert.
Hire Tax Accountants
Work with UK-based Experts for tax, audit, accounting, payroll, & EIS/ SEIS needs.
Final thoughts
Decreasing the cost of Corporation Tax is a major priority for any UK business. Getting qualified guidance on what approaches are right for you should always be your top concern, as should knowing how they will impact your overall tax bill.
Ultimately, you can ensure that your company has a solid financial future and stays competitive in the UK market by utilising these 7 legal strategies to lower your Corporation Tax bill.