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How to reduce your tax bill as a limited company owner

With a rise in corporation tax potentially on the horizon, we look at three ways to help reduce your tax bill.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It’s been almost a year since the UK went into its first national lockdown, and we’re not out of the woods yet. It’s unlikely any of us expected the past year to turn out like it has – that includes our government.

Billions have been spent supporting jobs, businesses and to fight the pandemic. But how does the government expect to pay this all back? With this year’s budget fast approaching, there could be some potential changes or even rises in taxes but if and what could change is yet to be announced.

The Institute of Fiscal Studies (IFS) has suggested the government’s current spending plans and financial targets won’t be possible without increasing taxes.

One of these potential tax hikes could be corporation tax.

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 rate is currently 19%.

While tax helps governments balance the books and is an important part in any economy, that doesn’t mean you need to pay more than you need to.

This isn’t personal advice and we’re not tax advisers. If you’re not sure something is right for you, or you need help with financial planning decisions, please speak to a financial adviser. For help with complex taxation, please speak to an accountant.

Three ways you could lower your tax bill

1. Consider making an employer pension contribution

Adding money to a pension can help to 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. As employer contributions are normally treated as a business expense, you won’t pay corporation tax on the contribution.

If the contribution is instead of paying yourself salary then both you and your company will also save on National Insurance, and you personally wouldn’t pay any UK income tax until you access money from your pension (usually after the age of 55, or 57 from 2028). However, if you need access to the monies in the pension before you retire it may not be right for you.

Remember though, HMRC could 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. Plus, for most people pension contributions have an annual allowance of £40,000. But you might be able to ‘carry forward’ any allowance you haven’t used from the three previous tax years.

Find out more about pension allowances

Remember pension and tax rules can change and benefits depend on circumstances.

New to HL?

Join thousands of self-employed people already saving and investing with us.

If you don’t already have a pension and you are happy making your own investment decisions, you could think about paying into the HL Self-Invested Personal Pension (SIPP). Lots of business owners use a SIPP because you’ll usually have more choice and control over where you’re invested, compared to other options out there.

Read our essential guide to find out more about the HL SIPP and the tax benefits of paying into a pension.

Download now

Already have an HL SIPP?

If you’d like to make an employer contribution to your HL SIPP, we’ll need to add your company's details to your record. The quickest way to do this is by calling us. You’ll need to confirm the name of the company, the registered address and Companies House number. Any payment you make will need to be paid from your company bank account.

2. Make sure you 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 have to 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, but it’s also 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.

For more guidance on pensions for business owners, download our guide

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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