Reducing your corporation tax bill is a critical aspect of running a successful business. With careful planning and strategic use of available tax reliefs and deductions, you can significantly lower your tax liability. The goal isn’t just to save money; it’s also about optimizing your business operations and ensuring you’re making the most of the financial opportunities available to you.
Corporation tax is a major expense for businesses, and many companies end up paying more than necessary simply because they are not aware of all the tax-saving options available. This is particularly common among small businesses where owners might prefer to handle their own tax affairs without the help of professional accountants. However, understanding and utilizing the various methods to reduce your corporation tax can make a substantial difference to your bottom line.
In this blog post, we’ll explore ten effective strategies that can help you reduce your corporation tax bill. These methods range from claiming all allowable expenses and taking advantage of capital allowances to leveraging research and development (R&D) relief and the Patent Box scheme. By implementing these strategies, you can not only reduce your tax bill but also reinvest the saved funds into other critical areas of your business, fostering growth and innovation.
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Each strategy has its own set of rules and requirements, so it’s essential to familiarize yourself with the details or consult with a tax professional to ensure you’re fully compliant and making the most of the available reliefs. Let’s dive into these ten strategies and see how they can benefit your business.
1. Claim All Allowable Expenses
One of the simplest ways to reduce your corporation tax bill is to ensure you claim all allowable expenses. These can include:
- Premises costs (rent, utility bills)
- Salaries and staff costs
- Bank loan interest
- Cost of stock or raw materials
- Office costs (stationery, etc.)
- Travel and accommodation for business trips
- Professional fees (accountancy, legal)
- Advertising and marketing costs
- Insurance payments
- Childcare costs
Additionally, there are lesser-known expenses that businesses often overlook, such as the cost of setting up your limited company, bad debts, broadband, mobile telephones, bicycle mileage, parking, books and magazines, business gifts, donations to charity, eye tests, flights, memberships and subscriptions, and training courses.
2. Capital Allowances
Capital allowances can be claimed when a company purchases assets required for business use, such as plant and machinery, business vehicles, and equipment. The value of these items can be deducted from profits before tax is calculated. This includes:
- Renovating business premises in disadvantaged areas
- Extracting minerals and dredging
- Research and development (R&D)
- Patents and intellectual property
- Construction costs for structures and buildings.
3. Trading Losses
If your company incurs trading losses, you can claim relief by offsetting the loss against other business gains or profits in the same accounting period. This can significantly reduce your corporation tax bill. Similar relief applies to losses from the sale or disposal of capital assets and property income.
4. Research and Development (R&D) Relief
R&D relief is designed to support companies working on innovative projects in science and technology. Eligible companies can deduct an extra 86% of their qualifying costs from their yearly profit, in addition to the normal 100% deduction, totaling a 186% deduction. Loss-making companies can claim a tax credit worth up to 10% of the surrenderable loss.
5. The Patent Box
The Patent Box scheme allows companies to apply a lower rate of corporation tax to profits earned from patented inventions. Qualifying companies can reduce their corporation tax to 10% on profits from their patented inventions.
6. Employment Allowance
The Employment Allowance allows certain limited companies to reduce their annual National Insurance contributions (NICs) by up to £5,000 in the tax year (increasing to £10,500 from April 2025). This is available to employers whose Class 1 National Insurance liabilities were less than £100,000 in the previous tax year.
7. Business Rates Relief
Business rates are taxes payable by businesses that use non-domestic properties. These are generally considered tax-deductible business expenses. Many businesses can obtain business rates relief, which is a deduction from the standard rate.
By implementing these strategies, you can effectively reduce your corporation tax bill and reinvest the saved capital into other essential areas of your business. Always consult with a professional accountant to ensure you are maximizing your tax relief opportunities and staying compliant with tax regulations.
8. Creative Industry Tax Reliefs
Creative industry tax reliefs consist of eight different types of Corporation Tax reliefs and two Corporation Tax expenditure credits available. These allow qualifying companies to increase their amount of allowable expenditure, ultimately reducing their overall Corporation Tax bill. Creative industry tax reliefs can be claimed by companies that make a profit from films, ‘high-end’ television, children’s television, animation television, video games, theatrical productions, orchestral concerts, museum or gallery exhibitions, etc. The company applying for these reliefs must have responsibility throughout development, from the start of pre-production until the completion of the film, programme or video game. Or, in respect of theatrical productions, orchestral concerts or exhibitions, they must be responsible for producing, running and closing the production.
9. Goodwill and Relevant Assets
Corporation Tax relief is available on certain intangible assets such as intellectual property and goodwill (business reputation). Relief on goodwill and relevant assets is at a fixed rate of 6.5% a year on the lower of:
- The cost of the relevant asset
- Six times the cost of any qualifying IP assets the business has purchased
For a full explanation of relevant intangible assets, see the HMRC Corporate Intangibles Research and Development Manual.
10. Working from Home
If the home is being used for business purposes, all limited companies can claim a percentage of household costs and utility bills as allowable business expenses. This can be claimed by:
- Taking advantage of HMRC’s simplified expenses, providing flat-rate tax relief of up to £26 per month in respect of home working
- Working out the exact amount by calculating the proportion of household costs that are being incurred for work purposes
Please note that if you use the latter option, you will need to keep full records of these costs, including receipts, bills, or contracts.
By implementing these strategies, you can effectively reduce your corporation tax bill and reinvest the saved capital into other essential areas of your business. Always consult with a professional accountant to ensure you are maximizing your tax relief opportunities and staying compliant with tax regulations.