Corporation tax is a major financial obligation for UK businesses, and knowing how to reduce corporation tax is a savvy move for good financial management.
In April 2023, the UK government increased corporation tax from 19% to 25% (for profits above £250,000), making it more important than ever for businesses to pay the least amount possible.
Fortunately, there are several ways to reduce corporation tax, and in this Tax Natives blog post we’re going to discuss a handful of ways that you can save on corporation tax so you can put your money back into your business.
- Capital allowances
- Trading losses and future profits
- Allowable business expenses
- Pension contributions
- R&D tax relief
- WFH allowances
- Patent Box
Capital Allowances
Capital allowances are a tax relief claimed on assets that have been bought for use within a company. They let companies deduct some of the cost of the asset from their taxable profits each year over the time it is used.
There are two types of capital allowances: Annual Investment Allowances (AIA), and Writing Down Allowances (WDA).
Annual Investment Allowances (AIA)
AIAs allow you to deduct the full cost of most new plant and machinery from your taxable profits in the year of purchase. This means you can effectively claim a 100% tax deduction on the prices of assets including:
- Machinery and equipment
- Computers and software
- Office furniture
- Fixtures and fittings
Writing Down Allowances (WDA)
WDAs allow your company to deduct a portion of the cost of other types of assets from their taxable profits each year over the time it is used. The rate of WDA depends on the type of asset, which includes:
- Cars
- Plant and machinery
- Computer equipment and software
- Integral building features (e.g. air conditioning)
Claim R&D tax relief
This is a government-backed scheme designed to encourage businesses of all sizes to invest in research and development (R&D).
Like capital allowances, there are two different types of R&D tax relief. Each type applies to the size of the business: SMEs and large companies.
SMEs
Small and medium enterprises (SMEs) can claim R&D relief on qualifying expenditure against their taxable profits, this includes:
- Salaries
- Materials
- Equipment
- Subcontracted R&D
Large companies
Larger companies can claim R&D expenditure credit (RDEC), a cash payment made in addition to a corporation tax refund, depending on qualifying expenditure. To claim RDEC, your R&D activities must meet the following criteria:
- Be novel and inventive
- Be carried out with a view to developing new or improved products, processes, or services
- Be done at a commercial scale
Trading losses and future profits
This is another valuable tool in reducing corporation tax. It involves companies ‘carrying back’ trading losses to offset against taxable profits of previous accounting periods.
This means you can effectively claim a refund of corporation tax you’ve already paid – up to a maximum of three years.
Similarly, you can ‘carry forward’ trading losses to offset against the taxable profits of the future accounting period.
This can be done indefinitely and allows you to defer paying corporation tax on a trading loss until a profit is made in the future.
Both methods allow companies to effectively eliminate or reduce corporation tax liability for several years.This is especially helpful for companies that experience periods of profitability and periods of loss.
Allowable business expenses
Allowable business expenses – also known as tax deductible expenses – are a big part of planning for corporation tax.
There are several allowable business expenses for companies to consider, including:
- Cost of Goods Sold (COGS) – This represents the direct costs associated with producing goods or services, and includes the cost of raw materials, labour, and direct overheads.
- Wages and salaries – Employee salaries are a major expense for most businesses, though they are generally fully deductible from taxable profits. This means that companies can reduce corporation tax by paying employees more.
- Business travel – These include reasonable travel costs, accommodation, and meals – as long as they’re incurred for genuine business purposes.
- Depreciation – This is a non-cash expense that allows companies to deduct a portion of the cost of fixed assets over their useful lives.
Pension contributions
Companies can also reduce their corporation tax bill by making pension contributions on behalf of their employees. This is because these are considered “allowable expenses”, meaning they can be deducted from taxable profits.
The ways in which you can make pension contributions are: Defined contribution (DC) schemes, and defined benefit (DB) schemes.
Defined benefit
In a DB scheme, the company guarantees to pay the employee a certain pension at retirement, no matter the investment performance of the scheme.
The company is responsible for funding the scheme’s liabilities, something that can be a major financial commitment.
Defined contribution
In a DC scheme, the company makes regular contributions to the employees’ pension pot. The value of the pot grows over time based on investment performance, and the employee’s eventual retirement benefit is based on the value of the pot at retirement.
You can make pension contributions via salary sacrifices, where your employee puts some of their salary away for retirement. This is tax-efficient because the employee’s income tax national insurance liability is lower on the reduced salary.
Then there are non-salary sacrifices, whereby the company makes pension contributions directly from its profits.
WFH Allowances
Working from home (WFH) allowances are tax credits that can be claimed by companies that allow their employees to work from home.
These allowances can help to reduce the company’s corporation tax bill, and can be claimed on certain expenses like work furniture and equipment, and other WFH-related costs like heating, electricity, and internet.
Patent Box
The Patent Box is a tax incentive scheme introduced in 2013 to encourage companies to develop, protect, and commercialise intellectual property (IP). It allows companies to pay a lower rate of corporation tax on profits made from their patented inventions.
This reduced rate of corporation tax on profits from patented inventions can be as low as 10%, more than half the standard rate of 25%.
Reduce your corporation tax with our tax experts
Corporation tax is a major expense for businesses, but as you can see, there are several ways to lower it. Whether it’s claiming all allowable expenses, investing in R&D, utilising the Patent Box, and taking advantage of other tax credits, you can lower your corporation tax bill and save big. Speak to a corporate tax specialist today.
For extra advice and guidance on navigating the realm of UK tax, get in touch with Tax Natives. We’ll get you in contact with a professional, regulated tax advisor that perfectly suits your unique needs.