How to reduce your tax bill as a limited company owner
Corporation tax rose for some businesses on 1 April 2023. We look at who could be impacted by this change and offer tips to reduce your company tax bill.
Last Updated: 17 April 2023
On 1 April 2023, corporation tax increased from 19% to 25% for some businesses. Thankfully there are things you can do reduce your corporation tax bill, and the amount of tax you pay.
Below we offer three tips to help keep your company’s tax bill to a minimum.
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, please ask us 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.
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.
On 1 April 2023, a new higher rate came into effect for companies with profits over £50,000. They now face a significant increase and must pay corporation tax at a rate of up to 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 may be possible to claim some marginal tax relief to reduce the 25% rate.
You can find out more about corporation tax at gov.uk.
Three ways you could lower your corporation 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. 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, and you personally wouldn’t pay any UK income tax until you access money from your pension. You usually need to be at least 55 (rising to 57 from 2028) before you can access money in a pension.
Make sure you understand your pension contribution limits first. Most people have an annual allowance of £60,000. 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. 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.
Want to start a private pension?
Join thousands of other business owners already saving and investing with us.
If you don’t already have a pension and are happy making your own investment decisions, you could think about opening an HL Self-Invested Personal Pension (SIPP). Lots of business owners use a SIPP because of the wide investment choice and flexible payment options.
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 0117 980 9926. 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. 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. Make a charity donation
Limited companies can pay less corporation tax if they gift money to a charity or community amateur sports club.
The value of any charity donations is deducted from any total business profits, before tax is paid.
Find out more on donating to charity, including payments that don't qualify.
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