Corporation tax is one of the largest costs a limited company faces, and with the main rate sitting at 25% for businesses with profits above £50,000, the difference between good planning and no planning can run into thousands of pounds a year. The good news is that HMRC provides a wide range of legitimate reliefs, allowances and deductions that every limited company can use. The key is knowing what is available and making sure you are actually claiming it.
At Taylor Associates, we work with company directors throughout North London and beyond who are paying more corporation tax than they need to. Not through any fault of their own, but simply because nobody has sat down with them and reviewed their position properly. Here is what that review typically covers.
Claim every allowable business expense
This sounds obvious, but it is consistently where businesses lose money. Every pound spent wholly and exclusively for business purposes can be deducted from your taxable profits, reducing the amount corporation tax is calculated on.
Common expenses that get missed include: business mileage, home office costs, professional subscriptions, training and development, software licences, and telephone bills. If an expense is not recorded and claimed, you are effectively paying corporation tax on income you should have sheltered. Our bookkeeping team works with clients throughout the year to make sure nothing slips through the cracks.
Use capital allowances on equipment and assets
When your company purchases equipment, machinery, vehicles or technology, you do not simply write the cost off as an expense. Instead, capital allowances let you deduct some or all of that cost from your taxable profits.
The Annual Investment Allowance currently allows businesses to deduct up to £1 million of qualifying capital expenditure in the year it is incurred. For most small and medium companies, that means the full cost of any qualifying purchase can be written off immediately rather than spread over several years. Full expensing, introduced in April 2023, also provides 100% first-year relief on qualifying plant and machinery with no upper cap for larger investments.
Despite these generous allowances, we regularly meet directors who have not claimed what they are entitled to. It is worth reviewing any purchases made in recent accounting periods to check nothing has been missed.
Make pension contributions through the company
One of the most effective and straightforward ways to reduce corporation tax is for the company to make employer pension contributions on behalf of directors and employees. These contributions are treated as a business expense, which means they are deducted before corporation tax is calculated.
For a director taking a salary and dividends, redirecting some income into a pension via the company saves corporation tax on the contribution, avoids National Insurance on the amount, and builds long-term retirement wealth at the same time. Most individuals have an annual pension allowance of £60,000, and unused allowance from the previous three tax years can often be carried forward.
Review your salary and dividend structure
For limited company directors, the way you take money out of the business has a direct impact on your overall tax position. A combination of a low salary and dividends is typically more tax-efficient than a higher salary, because dividends are not subject to National Insurance.
However, with dividend tax rates having increased in recent years, the calculation needs reviewing regularly. What was the optimal structure two years ago may now be less efficient. Our taxation team reviews salary and dividend splits as part of year-round planning, not just at the year end. Use our dividend tax calculator to get a sense of where you currently stand.
Look at R&D tax relief if your business innovates
Research and Development tax relief is one of the most underused reliefs available to UK companies, partly because business owners underestimate what qualifies. You do not need to be a technology company or running a formal lab. If your business has spent time and money developing new products, improving processes, or solving technical problems that were not straightforward to resolve, there may be a legitimate R&D claim.
Carry back losses to reduce prior year tax
If your company has made a loss in the current accounting period, that loss can be carried back and set against profits from the previous year, potentially generating a corporation tax refund. Alternatively, losses can be carried forward to reduce tax in future profitable years.
This is particularly relevant for businesses that have had a difficult trading period or made significant investment that temporarily reduced profits. It is worth discussing with your accountant how best to use any losses, since the timing can make a material difference to cash flow.
Do not leave it until year end
The single biggest mistake we see with corporation tax is treating it as an annual task. By the time the year-end figures are being prepared, most of the opportunities to reduce the bill have already passed. The investments that would have qualified for capital allowances needed to happen before the period closed. The pension contributions needed to be made in time. The salary and dividend structure needed to be set at the start of the year.
Tax planning works when it runs alongside the business throughout the year. Our accountancy team works with directors on a proactive basis, reviewing the position regularly so that decisions are made with tax efficiency in mind, not after the fact.
If you would like a review of your corporation tax position, get in touch with our team. We will take a thorough look at your structure, your expenses, and your allowances, and make sure your company is only paying what it needs to.
The information in this blog is for general guidance only. Tax rates and legislation change, including at the start of each new tax year on 6 April, and you should always take professional advice before making any decisions about your tax position. Contact us for help.
