In April 2023, the rates of corporation tax increased from 19 to 25 per cent. Small businesses that make a profit must pay corporation tax within nine months of their year-end, but not every business need pay the higher rate. There are many entirely legitimate ways you can reduce the profits your business makes and your corporation tax bill.
But be warned; HMRC takes a keen interest in the tax it believes a business should pay and any business that looks to push too hard to reduce the tax it pays may find itself under the taxman’s spotlight. Working with and taking advice from your accountant is important.
#1 – Keep profits under £50,000
Businesses that can keep their profits under £50,000 a year can escape the new 25 per cent rate, paying corporate tax at just 19 per cent. The 25 per cent rate only applies to businesses making profits of £250,000 or more, with a complex tapered rate applied for those businesses with profits between £50,000 and £250,000.
#2 – Make pension contributions
Making pension contributions directly from the business will reduce the amount of corporation tax paid. A company can, from April 2023, pay up to £60,000 a year into the pension pots of its directors, reducing the profits that are taxed. Remuneration packages for individuals must, however, be reasonable for corporation tax deductions.
It is possible to carry forward pension contributions over a three-year window, meaning that where trading differs each year and you were unable to take full advantage of the £60,000 allowance, it can be topped up over the subsequent three years.
Pension contributions have additional tax benefits too. Unlike dividends or salary, no income tax is paid on pension contributions unless thresholds are exceeded.
But, be warned. Pension contributions cannot exceed the income generated by the business. HMRC will want to make sure a business passes the ‘wholly and exclusive’ test, meaning that contributions are reasonable for the work being done. It is rare to fail this test, but it pays to check with your accountant before contributions are made.
#3 – Work-from-home allowances
The pandemic has changed the way we all work, yet for many small businesses or sole traders, a home office has long been the norm. If you work from home permanently or for part of the week it is possible to claim expenses that reduce company profits and the corporation tax paid.
If you work from home on a more regular basis there will be other costs, such as heating, lighting and broadband that can be claimed. These need to be realistic, reflecting private use, so unless you have, for example, an entirely separate broadband supply into a home office, you will not be able to claim the full cost.
#4 – R&D tax relief
Businesses that carry out research and development may qualify for valuable R&D tax relief, and that will directly reduce the amount of corporation tax a business pays.
R&D reliefs for small businesses are not as generous as they once were, with the government reducing the amount of relief that can be claimed, believing the system had been open to abuse and fraud.
In short, any business that undertakes research or development to achieve an advance in science or technology may qualify. Many businesses, whether in construction or IT, developing new products or processes may qualify for the relief often without realising. The relief can be applied to staff, materials, and even utility costs.
Small businesses – which HRMC considers having less than 500 employees and a turnover of £100m – can claim up to 130 per cent of qualifying costs from yearly profits plus the normal 100 per cent deduction, totalling 230 per cent.
#5 – Patent box
Limited companies that derive an income from patents or have undertaken qualifying development on patents can pay corporation tax at just 10 per cent on those profits.
To qualify, those patents must be registered with the UK Intellectual Property Office, the European Patent Office or relevant IP authorities in EU countries.
The patent box system is complex, however. It will be necessary to identify those patents that qualify and the profits that are generated, and that is not always straightforward.
#6 – Buy plant and machinery
Businesses that purchase qualifying plant and machinery can claim tax relief of up to 100 per cent of those costs, reducing their corporation tax exposure. Every business has an annual investment allowance of £1m, making it a significant relief. It is possible to offset 100 per cent of any qualifying expenditure in the first year of purchase – a measure introduced in 2023’s Spring Budget.
The allowance notably excludes cars but does extend to a wide range of other assets including vans, IT, plant and machinery. It can also be applied to second-hand assets.
#7 – Switch to electric company cars
Businesses that purchase new and unused zero-emission electric cars can qualify for a 100 per cent first-year allowance, meaning that the full cost of that purchase can be used to reduce profits and corporation tax. There is no upper limit on the cost of those purchases, making electric vehicles an attractive company car option.
James Johnson is a partner at the accountants Hillier Hopkins. He works with ambitious and growing businesses, advising on funding, tax and compliance.