The UK Government has increased the Corporation Tax main rate from 19% to 25% from April 2023.
More than ever, companies are seeking ways to reduce their Corporation Tax liabilities. We frequently advise clients on ways to ensure they pay the least amount of tax possible. There are several effective strategies to consider.
15 ways to reduce Corporation Tax
- Claim R&D Tax Relief
- Claim Patent Box Tax Relief
- Ensure all deadlines are met
- Invest in plant and machinery (P&M)
- Capital allowances on property
- Claim all business expenses
- Use directors' personal allowance effectively
- Pension contributions
- Claim business mileage
- Work-from-home allowance
- Claim Creative Industries Relief
- Offer share schemes to employees
- Claim all available loss reliefs
- Subscriptions and training costs
- Pay for a staff party or event
Read below for more information about each of these Corporation Tax saving tips.
Claim R&D tax relief
Does your business pay technical staff to solve technical problems? Are you developing new or improved processes, products or software? If so, you could be reducing your Corporation Tax through the R&D Tax Relief scheme.
- The SME scheme is currently worth around 21.5% of qualifying R&D expenditure.
- In addition to this, SMEs can claim R&D Tax Credits if they are loss-making, which are worth up to 10% of surrenderable losses. This can lead to a maximum benefit worth 18.6% of the qualifying expenditure.
- SMEs are able to deduct 186% of their qualifying R&D costs from their taxable profits, which includes an extra 86% deduction on top of the standard 100% deduction from the Profit & Loss account.
- The RDEC scheme allows eligible companies to claim a tax credit worth up to 20% of their qualifying R&D expenditure and a net tax saving of 15%.
To test your eligibility to claim, why not download our eligibility checklist? It features 11 simple questions to determine whether you could be eligible to claim.
Pay a lower effective rate of 10% with Patent Box
The Patent Box enables qualifying companies to benefit from a reduced rate of Corporation Tax, currently 10%, for their profits generated from patented income.
Its main objective is to promote investments in new innovative technologies by providing a tax incentive for the profits generated by patented products or processes.
The Patent Box is frequently paired with the UK government's R&D tax relief programme to encourage companies to invest in innovative ventures.
If you generate income from patented products or processes, we strongly recommend checking whether you qualify.
Read more: Our comprehensive guide to Patent Box
Don’t miss deadlines
Companies normally have two years from the end of an accounting period to claim tax reliefs. These include R&D tax reliefs, Capital Allowances and Patent Box tax relief. Make sure you have claimed your full entitlement to these reliefs before it is too late.
Read more: Two-year window for claiming R&D tax credits
Invest in plant & machinery
The “Annual Investment Allowance” (AIA) allows a business to claim tax relief on purchases of certain assets up to a specified limit. The AIA was increased to £1m on 1 January 2019. Businesses can write off a significant amount of qualifying investment against their profits.
Capital allowances on Property
Companies can claim a 3% straight line writing down allowance on new commercial building expenditure from April 2020.
Companies should review their expenditure to determine whether it qualifies for capital allowances. The claim does not have to be made when the costs were incurred. It is possible to claim missed allowances going back several years, often to when a property was acquired.
Read more: Capital allowances on commercial property
Don’t forget to claim all business expenses
It may sound obvious, but don’t overlook any expenses from your accounting records. Many Directors incur expenses on behalf of the business but fail to claim them back through their accounts.
Directors Salaries
Company owners should use their personal allowance effectively. This means drawing a tax-efficient combination of salary and dividends from the business.
Pension contributions
Companies can 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.
This is a straightforward way to reduce Corporation Tax. You should also consider the individuals’ personal tax position before making contributions.
Claiming business mileage
If they use their personal car for business, any employee can claim expenses on a tax-free basis, using statutory rates per mile:
- Up to 10,000 miles per annum @ 45p
- Above 10,000 miles at 25p
Work from home allowance
Where homeworking takes place, HMRC will allow you to claim a portion of your home expenses to meet the additional costs of heating and lighting the work area. There might also be increased charges for internet access, insurance or telephone calls etc. As a starting point, a £6 per week payment from the employer is acceptable.
Read more: Remote working and tax
Creative industries relief
There are several tax reliefs available for video games and other creative industries. Video Games Tax Relief (VGR) is one of eight tax reliefs that apply to qualifying companies. It allows companies to benefit from reduced rates of Corporation Tax.
Video Games Tax Relief operates in a similar way to SME R&D relief, as it provides a further deduction against taxable profits.
Read more: Creative Industries Tax Relief
Share schemes
Companies can get a Corporation Tax deduction when offering share schemes to their employees. This is a good way to incentivise and reward them. There are many schemes available, so advice is essential to ensure you use the best one for your business.
Claim all available loss reliefs
Make sure that your business is claiming all available loss reliefs. In certain circumstances, losses can be carried back to a previous year (to generate a tax refund). They can also be carried forward against future profits, or even surrendered to a fellow group company.
If you do not have a group company structure but do have a separate company that is making a loss, we recommend bringing these into a group so that you can use these losses going forward.
Subscriptions and training costs
Training and subscription 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.
Paying for a staff 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. Rewarding staff in a tax-efficient manner can also build goodwill across your workforce.
Read more: VAT on Business, Client & Staff Entertainment
Download your free copy of our tax saving guide today, or drop us a line to see how we can help your business reduce its Corporation Tax liability.
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The 2023-24 Tax Saving Guide
Our tax team are available for queries on any of the above. Please do not hesitate to get in touch. Let's start talking about ways to reduce taxable income, and how you can start saving tax.
Other related articles
- R&D Tax Relief explained
- View a recording of our tax savings webinar for individuals and businesses
- RDEC - cash repayments from HMRC for large companies
