Corporation tax is a tax on the profits earned by any business. So the higher the profit, the higher the corporation tax. Currently, the corporation tax on business profit is 19%.
This means that for every £ 100 made in business profit, the company will pay £ 19 to HMRC as corporation tax. 19% may seem like a huge amount when your business grows and makes the most of it.
However, not everyone loves to pay 19% tax, so we have a comprehensive guide on how a business can reduce corporate tax to the maximum. If you are a beginner and don’t have any corporate tax knowledge then you don’t have to worry about just spending a guide on how to pay corporation tax.
Keep a record of expenses
The first and most important thing with regard to a business is to keep a record of all expenses. Entrepreneurs should always consider high costss while keeping track of petty expenses will surely help you reduce corporate tax.e, during a business meeting at the restaurant, food bills may not be considered a significant expense, but many meetings held this way will add up to a significant number in a month.
You do not need to pay out of pocket or personal account. Maintaining a business account and a personal account is the main key to reduce corporation tax. It’s surprisingly shocking that companies overpay corporate tax just because of a lack of proper records!
Pay a director’s salary
You may be a director and shareholder in your limited partnership. There can be multiple directors and shareholders, and the good news is that you have the option of paying yourself a salary or dividends or a combination of both. Dividends are paid to you, the shareholder, with earnings after corporation tax.
Therefore, they do not get corporate tax relief, while directors’ salaries are based on allowable expenses and reduce the overall corporate tax bill. The more that is paid, the increase in income tax and national insurance liability will eventually outweigh any savings in corporation tax. As a director and shareholder, it is common for you to pay an optimal salary, with the rest of your income being produced by dividends through earnings.
“Directors’ salaries are based on allowable expenses and will reduce the overall corporate tax bill.”
This will ensure maximum tax efficiency and tax savings for both you and your business. The salary you should be paid as a director will depend on your circumstances and any other source of income in a particular fiscal year.
Invest in your business
When you invest in your business, especially hardware, such as machinery parts and accessories and accessories, there is a way to reduce corporation tax. The typical way to account for the new asset is to spread its cost over several years, as its value depreciates. The machinery is related to heavy industrial plants and incorporates modern hardware such as laptops, printers and other system units.
Accessories and accessories include desks, tables, office chairs, bookcases, and accessories. In addition, for tax purposes, your business may use a form of capital allowance called the Annual Investment Allowance (ALA). It will allow your business to deduct the total cost of the asset from earnings when the purchase year arrives, reducing your corporate tax bill.
“The annual investment allowance allows your company to deduct the total cost of the asset from the earnings.”
The annual investment allowance is £ 1000,000 but as of January 1S t, 2022, it will drop to £ 200,000, which is still enough for many companies. For example, suppose an XYZ limited partnership earns a pre-tax profit of £ 100,000 for the final year. The business owners are considering buying some hardware equipment for £ 60,000.
The estimated useful life of the hardware will be three years. So, according to limited partnership XYZ, the depreciation will spread out over three years. That turns out to be £ 20,000 per year through the income statement. However, before December 31 of that year, XYX Limited Partnership will deduct the full cost by taking advantage of the annual investment allowance that will provide them with £ 40,000 as a taxable profit.
Your company can make pension contributions on behalf of the directors and their PAYE, which is a payment as it gains employees. Contributions to pensions are allowed for corporate tax purposes. For every £ 100 contributed directly to a pension plan, i.e. gross from your limited partnership, in an approved pension plan, £ 19 will be saved in corporate tax.
In the following year, you can receive a total contribution of £ 40,000 to an approved private pension plan without having to pay pension savings tax. Excess contributions are subject to pension savings tax burdens, which companies must consider when making any contributions.
Claim allowed expenses
Finally, claim legitimate and allowable expenses. Don’t go on a spending spree to save your corporate tax. As a managing shareholder of a company, you will have to face a series of legitimate expenses that you can claim for your company that may eventually reduce your corporate tax bill. The costs are totally and exclusively for your business. HMRC does not appreciate that all business expenses are allowed. As entertainment for the customer, but must be added back to earnings when calculating the corporate tax liability.
“You can claim your legitimate business expenses to reduce your corporate tax bill”
It’s always helpful to keep the numbers in mind and mix them up when necessary. For example, corporate tax is 19%, but there are many ways to rearrange this 19% in other ways. Therefore, you do not have to pay corporate tax as required. Maintaining the registry, taking advantage of AIA, transferring money to pensions, knowing the benefits of being a shareholder and finally claiming legitimate expenses will help you reduce corporation tax and help you be more tax efficient.
There is no need to pay extra money or tax bills when your tax consultants, such as Financial legendI have so many doors so you can reduce corporation tax. So start saving today and invest it elsewhere, but don’t worry about other income tax because we’ll manage that too. So, start thinking about an expanded business without considering any additional stress regarding taxes because we have it!