How to Lower Your Company’s Tax Bill

Summary: Reducing your tax liability is a crucial aspect of managing a UK limited company. This article provides an educational overview of effective strategies to lower your company's tax bill. From claiming R&D tax credits and capital allowances to optimising director's remuneration and making charitable donations, we explore practical approaches that can help UK businesses maximise tax efficiency and retain more profits.

Main Content:

Introduction

As a UK limited company, understanding how to manage and reduce your tax liability is vital. With the corporate tax landscape continuously evolving, being aware of the current rates and available tax reliefs is essential. This guide will outline strategies to lower your tax bill for the 2024/2025 tax year, including up-to-date information on corporate tax rates and key reliefs.

Understand the Corporation Tax Rates Today

For the tax year 2024/2025, the UK has introduced a tiered corporation tax system:

• 19% Rate: For companies with profits up to £50,000.
• 25% Rate: For companies with profits over £250,000.
• Marginal Relief: Available for companies with profits between £50,000 and £250,000, providing a gradual increase in the effective tax rate.
• Actionable Tip: Calculate your estimated taxable profits to determine your applicable corporation tax rate. Consider timing and structuring your income to benefit from lower rates or marginal relief where possible.

The rest of this article covers various strategies that UK limited companies can use to lower their tax bills while ensuring compliance with HMRC regulations.

1. Claim R&D Tax Credits

Research and Development (R&D) tax credits are a valuable incentive for UK companies investing in innovation. These credits can reduce your corporation tax liability or provide a cash refund for qualifying R&D activities.

• Key Points:
  • Eligibility: Includes projects that seek to advance science or technology.
  • Qualifying Costs: Staff costs, materials, software, and subcontractor expenses.
  • Claim Process: Claims are made through the company's Corporation Tax return.
• Actionable Tip: Keep detailed records of all R&D activities and expenditures to support your claim.

2. Utilise Capital Allowances

Capital allowances allow companies to deduct the cost of certain capital expenditures from their taxable profits. This includes investments in machinery, equipment, and business vehicles.

• Key Points:
  • Annual Investment Allowance (AIA): Provides 100% relief on qualifying expenditures up to a specified limit.
  • Writing Down Allowance (WDA): Allows deductions on a percentage basis for assets not covered by AIA.
• Actionable Tip: Plan your capital expenditures to maximise the use of AIA and WDA.

3. Optimise Director’s Remuneration

The structure of a director's remuneration can impact the overall tax liability of both the individual and the company. Combining a salary with dividends is a common approach to minimise tax.

• Key Points:
  • Salary: Can be set at a level that maximises personal allowances without incurring National Insurance contributions (NICs).
  • Dividends: Often taxed at a lower rate than salary, making them a tax-efficient way to extract profits.
• Actionable Tip: Regularly review and adjust the balance between salary and dividends based on personal and company tax positions. Consult with a tax advisor to determine the optimal balance of salary and dividends.

4. Make Use of the Patent Box Regime

The Patent Box regime offers a reduced rate of corporation tax on profits earned from patented inventions and certain other innovations. This can significantly lower the effective tax rate on qualifying profits.

• Key Points:
  • Eligibility: Companies must own or exclusively licence the patents.
  • Qualifying Income: Includes sales from patented products, licensing fees, and royalties.
• Actionable Tip: Keep thorough records of all income derived from patents and related activities.

5. Claim the Employment Allowance

The Employment Allowance allows eligible businesses to reduce their employer NICs bill by up to £5,000 per year. This relief can be particularly beneficial for small businesses with modest payroll expenses.

• Key Points:
  • Eligibility: Most businesses and charities that pay employer NICs.
  • Application: The allowance is applied through your payroll software or by using HMRC's Basic PAYE Tools.
• Actionable Tip: Ensure that you claim the allowance each tax year, as it does not roll over.

6. Make Charitable Donations

Charitable donations made by a company can reduce its taxable profits, thus lowering the corporation tax liability. This is a straightforward way to support charitable causes while benefiting from tax relief.

• Key Points:
  • Qualifying Donations: Must be made to registered charities.
  • Tax Treatment: Donations are deductible from taxable profits.
• Actionable Tip: Maintain accurate records of all charitable donations for tax reporting purposes.

7. Loss Relief Utilisation

If your company experiences a loss, you can utilise loss relief to offset taxable profits in other years, potentially reducing your tax bill.

• Key Points:

  • Carry Back Losses: Offset losses against profits from the previous year to claim a tax refund.
  • Carry Forward Losses: Offset against future profits, reducing tax liabilities in upcoming years.

• Actionable Tip: Maintain accurate records of all losses and consult with a tax advisor to optimise the use of loss relief for tax planning.

Conclusion

Lowering your tax bill as a UK limited company involves understanding and leveraging various tax reliefs and allowances. By claiming R&D tax credits, utilising capital allowances, optimising director’s remuneration, and exploring other strategies, businesses can effectively manage their tax liabilities. Always consult with a tax advisor to ensure compliance with HMRC regulations and to tailor strategies to your company's specific circumstances.