How to reduce your tax bill as a limited company owner
With corporation tax rising from 19% to 25% for some businesses next year, we look at three ways to help reduce your tax bill.
It’s been almost two years since the UK’s first national lockdown, and true to the suggestions made by the Institute of Fiscal Studies (IFS), we’re now seeing a rise in taxes. Inflation rates are also at a 30-year high. These rises are impacting everyone, but business owners may feel particularly nervous as consumer spending habits and affordability are affected.
The bigger picture is unclear. Other taxes could increase in future, to meet the government’s current spending plans and financial targets. Current global and economic factors could also influence these plans.
Here’s some top tips to help keep your corporation tax bill down, before 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, please speak to a financial adviser. 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. The corporation tax rate 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 will 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 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.
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.
Want to start a private pension?
Join thousands of self-employed people 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. 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.
Guide to saving tax
For more tax saving tips, download our guide specifically designed for self-employed and business owners.