Corporation tax to rise again – 3 ways limited company owners can reduce their tax bill

During the mini-budget, former Chancellor Kwasi Kwarteng, outlined his plans to cancel the planned rise in corporation tax.

However, on 14 October, the government took another U-turn. Plans to increase corporation tax from 19% to 25% will still go ahead.

Here are some top tips to help keep your corporation tax bill down, before these rises take effect, or when more changes are introduced.

We hope you find this article helpful, but it isn’t personal advice. If you’re not sure what’s right for your situation, or you need help with financial planning decisions, ask for financial advice. For help with complex taxation, speak to an accountant.

What is corporation tax and how much do you have to pay?

If you own a limited company, you’ll need to pay corporation tax on the profits your company makes. Corporation tax is currently 19% in the UK.

You must register with HMRC to pay corporation tax within three months of starting your business. If you do business as a sole trader, in a partnership or as a limited liability partnership (LLP), you pay income tax on your profits rather than corporation tax.

When is corporation tax going up?

Currently all companies, regardless of the size of their profits, pay corporation tax at the rate of 19%, which will continue until 31 March 2023.

From 1 April 2023, a new higher rate comes into effect for companies with profits over £50,000. They’ll face a significant increase and must pay corporation tax at a rate of 25%.

All companies with profits below £50,000 will continue paying the 19% rate of corporation tax.

Depending on the circumstances, if a company’s profits lie between £50,000 and £250,000, it might be possible to claim some marginal tax relief to reduce the 25% rate.

You can find out more about corporation tax at gov.uk.

3 ways you could lower your corporation tax bill

1. Consider making an employer pension contribution

Adding money to a pension can help make sure you keep your financial independence whenever you decide to stop working. But if you have your own limited company, it could help you save on tax charges too.

If you’re employed by the company, you can make employer contributions to your pension from your company account. Employer contributions are normally treated as a business expense, so you won’t pay corporation tax on the contribution.

If the pension contribution is made instead of paying yourself that amount of salary, then both you and your company will save on National Insurance too. You personally also wouldn’t pay any UK income tax until you access money from your pension.

Remember though, pensions are designed for retirement. Usually, you must be at least 55 before you can take money out again. HMRC could also question any corporation tax relief if your total salary and benefit package is higher than the work they think you’ve done for the company.

Make sure you understand your annual allowance limits first. Most people have an annual allowance for pension contributions of £40,000. But you might be able to ‘carry forward’ any allowance you haven’t used from the three previous tax years.

Pension and tax rules can change, and any benefits will depend on your circumstances.

MORE ON PENSION ALLOWANCES

2. Claim for every business expense possible

It’s important to claim for everything you can when you run your own business – no matter how big or small it might be. By making a claim, you reduce your profits, which also reduces how much corporation tax you pay.

You can claim for anything from office equipment and advertising costs, to travel expenses and training courses. Just make sure the expenses you’re claiming for are only for business purposes.

Remember to keep a record of your expenses. It’s not only good practice, it’s essential. Without a record, HMRC can refuse to accept your claim.

3. If you can afford to, pay your corporation tax early

HMRC will normally pay you interest if you pay your corporation tax early. Currently they’ll pay 0.5% from the date you make the early payment, to the payment deadline.

The earliest date they’ll start paying interest from is 6 months and 13 days after the start of your ‘accounting period’. This is the time covered by your company tax return. It can’t be longer than 12 months and it’s usually the same as the financial year covered by your company’s annual accounts.

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