Since the last budget, the rate of corporation tax is reducing. Businesses will need to pay 20%, which is now in line with income tax for individuals. Many businesses struggle to pay corporation tax on time to HMRC, so here is some tips to help reduce your corporation tax liabilities and keep more money for your business profits.
1. Talk to your accountant: before you do anything, you need to make sure it is worthwhile and legal. Accountants are the best people to talk to about reducing your liabilities and will help with understanding the financial jargon. Accountants will also help you fill out your tax returns and offer help with your other liabilities to HMRC. If you haven’t already, invest in a professional accountant; you can use those fees against your tax too.
2. Reduce the amount of profit your business makes: your corporation tax is not applied to your annual turnover but to the amount of profit you make. Sound like the same thing? They are not. Your annual turnover is the amount that you make throughout the year but your profit is the amount you have left after you pay your bills and business expenses. The more business expenses you have, the less profit you have and the less you have to pay in corporation tax. However, you need to make sure that this works in your favour since it will not put money back into your pockets. You also need to make sure that everything you spend the money on is counted for a tax deduction.
3. Don’t pay yourself a salary: instead of paying yourself through a salary, pay yourself through dividends. These help to reduce two financial liabilities – your corporation tax and your national insurance contributions. Dividends are only liable for income tax deductions, which save you 9% of your salary. By not taking a salary, you are actually taking money out of the profits, which helps to reduce the amount of corporation tax you need to pay.
4. Offset your past losses: You can use your past losses to reduce the amount of profit that you make this year. However, this is only legal if your company is not sold on after the losses are made. Losses are when you do not make a profit in the previous year.
5. Pay pension contributions: this will benefit you in various ways. Not only will you reduce your tax liability since you are reducing the amount of profit you make but you have a pension pot to rely on when you retire. Look around for a good pension account now to take advantage of this benefit.
Nobody likes to pay tax. Luckily, setting up a limited company has already helped you decrease the amount of tax that you pay. You can reduce that amount by reducing the amount of profit that your business makes through the above methods. However, invest in a good accountant to make sure you are acting legally; although you need to know everything your accountant is doing as you will still be liable for taxes.
Alex Ingham has written many business-related articles for RealBusinessRescue. Over the past year, she has contributed on topics include HMRC and tax, duties and roles of directors and how to improve your cash flow. Real Business Rescue offers advice to company directors and owners from professional Insolvency Practitioners about their financial needs.