How to reduce your corporation tax bill

If you run a limited company, you’ll have to pay corporation tax on any profits your company makes from investments, doing business, or selling assets. 

Corporation tax is a flat rate of 19%, but there are a few simple things you can do to reduce your corporation tax bill. 

Specifically, we’ll be talking about:

• Capital allowances
• Business expenses
• Director salaries
• Research and Development (R&D) relief
• The Patent Box
• Relief for creative industries (theatre, film, TV, animation, or video games)
• relief on goodwill and other relevant assets, such as customer relationships and unregistered trade marks
• Disincorporation Relief if you’re closing your company and becoming a sole trader, ordinary business partnership or limited partnership
• Losses

Any time you buy business assets, it can be claimed as a capital allowance. An item counts as an asset if you use it in your business. Thing like:

• Equipment
• Machinery
• Vehicles used for business (cars, vans, or lorries)

Items like this are often called ‘plant and machinery’. To deduct them from your corporation tax bill, you need to work out the value of the items. 

Usually, it’s just the amount you paid for it yourself. But if you used it before you started using it for business, or it was a gift, you use the current market value (how much you could sell it for).

Business expenses are similar to capital allowances but they apply to ongoing running costs, rather than one-off expenses on items. 

You can claim business expenses on things like:

• Bank fees and interest
• Rent
• Utilities
• Insurance
• Company car
• Equipment or equipment rental
• Software
• Supplies
• Membership fees
• Meals
• Travel
• Subscriptions
• Advertising
• Legal fees
• Maintenance and repair

If you work from home, you can also claim a lot of your home costs as business expenses. 

For example:

• Home office space (as long as this is your main place of business)
• Mortgage interest
• Security system
• Property taxes
• Maintenance, repairs or upkeep
• Business phone line (separate from the home line)
• Insurance

If you’d like more information about what you can claim as a business expense, check out the HMRC website. 

As the owner/director of a limited company, you can pay yourself a salary that will be deducted from your corporation tax. And you can take advantage of a few tax-free allowances when you pay yourself. 

You can pay yourself £12,570 in yearly wages without having to pay any tax. This is called your personal allowance.

Anybody who owns shares in a limited company can earn dividends. They’re like a bonus for the shares increasing in value. And, as the owner, you can pay yourself dividends. The important part is that you can earn up to £2,000 in dividends before having to pay any tax on them.  

Paying yourself with a combination of employee income and dividends is one of the best ways to reduce your corporation tax bill, while also paying yourself a tax free salary. 

If your company is involved with a project that makes advancements in science or technology, you can apply for R&D relief. 

The project has to be related to your company’s trade, and doesn’t apply to social sciences (like economics or philosophy), or theoretical fields (like pure mathematical theory). 

There are a lot of different rates for R&D relief depending on the size of your company and the kind of project you’re involved with. You can find more information on R&D relief on the HMRC website. 

The Patent Box is an incentive for companies to register intellectual property in the UK. If you’re profiting from a patented invention, you can register for the Patent Box and apply a lower rate of Corporation Tax (10%) on any profits made from that invention. 

You can find more information about The Patent Box on the HMRC website. 

If your company works in a creative industry, you can apply for CITR. To qualify, your company needs to be:

• Directly involved in production and development.
• Involved with decision making.
• Directly responsible for goods and services.

There are 8 kinds of relief for creative industries;

• Film Tax Relief
• Animation Tax Relief
• High-end Television Tax Relief
• Video Games Tax Relief
• Children’s Television Tax Relief
• Theatre Tax Relief
• Orchestra Tax Relief
• Museums and Galleries Exhibition Tax Relief

You’ll need to pass different tests to qualify for each kind, and they all offer different levels of relief. To find out if CITR applies to your company, check out the HMRC website. 

If you decide to change from a limited company to a sole trader, business partnership, or limited partnership, you can apply for Disincorporation relief to get a discount on transferred assets. 

Normally, when you transfer assets, you record the market value of those assets and it counts toward your total taxable income, even if no money is paid for it. But Disincorporation relief lets you transfer those assets well under market value and it won’t be added to your total taxable income. 

If you think this could apply to your company, find out more information on Disincorporation relief on the HMRC website. 

If your company makes any losses from trading, selling assets, or property income, then you can claim relief on your Corporation tax.

When you make a loss, you can offset the loss against your profits to reduce your total taxable amount. There are 4 different kinds of losses that allow corporation tax relief:

• Trading losses – From normal trading of goods and services.
• Capital losses – From selling or disposing of a capital asset.
• Property income losses – From renting out buildings and other property. 
• Terminal losses – From making losses in the last 12 months of your company’s trading. 

Each kind of relief is treated differently, and affects your corporation tax in different ways, so check out the links above for more detailed information on how to apply. 

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