Am I paying too much corporation tax?

Let’s face it, no one reading this is going to be happy paying too much tax.

The key to making sure you are not paying too much corporation tax is to make sure you claim every allowable deduction and expense to give HMRC a true representation of your profits.

The 2021 / 2022 Corporation Tax rate is 19%.

The Chancellor announced at the March 2021 budget a planned rise in the rate of corporation tax to 25% from April 2023.

This means that there will be a small profits rate of 19% for companies with profits less than £50,000 with a tapered increase to the rate as profits increase.

Businesses with profits over £250,000 will pay the main rate of 25% from April 2023

Each and every one of your situations will be different depending on the Industry that you work in, there are however a set of basic principles that can be adopted by any small business to make sure you do not pay too much corporation tax.

13 easy ways to make sure you are not paying too much corporation tax.

Claim all business expenses

If you fail to claim all your expenses you could be throwing money away.  When you claim company expenses you are reducing your companies profits which in turn results in you paying less corporation tax.

In practice this is easier said than done as it means you being super organised and keeping and recording every receipt that relates to the business.

Don’t forget to make HMRC happy all business expenses need to be wholly and exclusively for business and not personal use.

Claim business mileage

This is another claim that is often missed and takes an organised person to keep a record of business miles travelled and the relevant fuel receipts.

It’s sometimes more tax efficient for employees and business owners to use their own car for business purposes and claim their mileage back using the HMRC’s authorised mileage rate.

Any employee at the company can claim up to 10,000 miles per year for business travel at 45p per mile. For anything over 10,000 miles it is 25p. The company will get a deduction against its profits for the amounts it pays out to employees.

It’s important to remember that you cannot claim for your normal commute to work.

Use a company mobile phone

If you find yourself or your staff using personal phones to make business calls consider switching to business phones.  There is no charge to tax for the employee on the cost of the phone, the line rental or any calls, and the company gets a tax deduction for its costs.  The contract must be between the company and the supplier.

Throw a staff Christmas party

Costs of up to £150 per head to pay for an annual staff party (such as a staff Christmas Party) can be tax free for the employees and tax deductible for the company.  This can be a way of rewarding staff in a tax efficient manner and building goodwill across your workforce.

Pay HMRC early

You may ask “Why would I want to pay HMRC early”?  Well if you are super organised and have all of your affairs in order HMRC will reward early payment in the form of interest.  On the flip side of this they if you pay late you will incur interest at a higher rate than you receive on early payments

Pay a Directors salary

Company owners should look to use their personal allowance effectively, by drawing a tax efficient combination of salary and dividends from the business.

Unlike dividends which are paid out of a company’s profit, a salary is classed as a business expense. The best approach for business owners is to pay themselves a mixture of dividends and salary. However, this option needs to be planned carefully as there are other factors at play such as income tax, National insurance contributions and personal circumstances.

Take advantage of the annual investment allowance

The UK government has an Annual Investment Allowance (AIA) for companies purchasing assets to keep and use in their business. This allows a company to set money spent on plant and machinery including fixtures and fittings, commercial vehicles and integral features against their profits for the year.  Current AIA £1M until Dec 21, £200K from 1^st Jan 22

Claim R&D tax relief

Your business could be missing out on a government tax relief for innovation. If your company is developing new products, processes or software it may be eligible for this tax relief. This can equate to additional tax relief of up to £ 24,700 for every £100,000 spent on research. If the company makes a loss, it could claim a tax credit which will be paid in cash.

For accounting periods beginning on or after 1 April 2021, the amount of SME payable R&D tax credit that a business can receive in any one year will be capped at £20,000 plus three times the company’s total PAYE and NICs liability.  You currently have 2 years from end of the accounting period to claim.

Employee share scheme

Companies can obtain a deduction in corporation tax if they offer shares to their employees under certain schemes https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim44020 . Not only does the company benefit from this tax saving but offering shares can also increase staff retention and motivate employees at the same time.

Tax relief for creative industries

Creative Industry companies can benefit from additional corporation tax relief if they produce video games, animation programmes, certain films and TV programmes, theatrical productions, orchestral concerts or putting on a qualifying exhibition in a museum or gallery. There are eight different schemes. The relief is given in the form of an additional deduction, but the rules for each scheme vary, so it maybe wise to seek advice.

Pension contributions

Companies can normally obtain a deduction from their profits for pension contributions paid into pension schemes on behalf of employees or directors.  Payments must be made before the end of the accounting period to obtain relief.  This is a quite straightforward way to reduce Corporation Tax, although consideration should also be given to the individuals’ personal tax position before making contributions.

Claim losses

Make sure that your business is claiming all available loss reliefs.  There are different types of loss that a company can suffer, but in certain circumstances they can be carried back to a previous year (to generate a tax refund), carried forward against future profits or even surrendered to a fellow group company.

Subscription and training costs

Providing they relate to the activity of the company, training and subscriptions costs can be paid for by the company without the benefitting employee suffering Income Tax.  The costs can be tax deductible for the company, resulting in the tax-free development of your staff