- Reducing your limited company's corporation tax bill
doesn't always need to involve complex
or convoluted tax planning.
There are some simple but yet effective things
that you could be doing to ensure your business
isn't paying more than its fair share of corporation tax
here in the UK.
In this video, we will cover what exactly
is corporation tax,
keeping detailed records,
paying a director's salary,
investing in your business,
pension contributions,
and finally claiming legitimate expenses.
Before I get into today's video,
be sure to hit that subscribe button
as well as the notification bell,
to make sure you're kept up to date
with all of our latest content.
This really helps us to produce more helpful videos,
and to get you real quality advice
from real qualified accountants.
(soft music)
Corporation tax is a tax on a company's profits.
So how much corporation tax your company pays,
depends entirely on how much profit the company makes.
The rate of corporation tax in the UK for the 2021
to 22 tax year remains at 19%.
So for every 100 pound of profit a company makes,
HMRC will expect to receive 19 pounds of corporation tax.
Corporation tax is applied to profits and not revenue,
which means any allowable expenses or allowances
will help to reduce profit and the overall tax bill.
So let's look at five common ways that you and your company
can reduce your overall corporation tax bill.
At the beginning of April we granted early access
to the Accounting & Tax Academy membership site.
In July of this year we're opening our doors to everyone.
Our members will have access to in-depth tutorials,
free downloads and exclusive discounts.
And the best part is it's absolutely free to join.
Head to the link in the description box below
to register your interest today.
(soft music)
It's surprising how many companies overpay corporation tax
purely because they haven't kept detailed records
of their business expenditure.
Where possible you should transact business expenses
through the company bank accounts
to create a clear paper trail,
and avoid paying through your own personal bank account
or worse still with cash out of your own pocket,
and then never reclaim it from the company.
Just by paying out of your own personal account
or with cash you end up creating
an additional unnecessary step
which consumes your valuable time.
Common examples of such expenses include subsistence,
studies, food and drink,
travel and parking expenses just to name a few.
In these situations it is essential that as a minimum,
that they are recorded through your company bank account
and where possible receipts obtained
and uploaded into the cloud.
Now for these types of expenses
each individual transaction may not be particularly high,
but as these are often regular recurring expenses
that they do accumulate
and quite often add up to material numbers.
Using a piece of accounting software
such as Xero with Hubdoc can help you keep track
of your business expenditure,
and even scan receipts for you with your smartphone.
This entire process can and should be systemized
and automated where possible,
and this particular discipline will give you
a positive return both in terms of tax savings
and time efficiency.
(soft music)
Now, quite often you will be a director
and a shareholder of your limited company.
There may be multiple directors and shareholders,
and the good news is that you as a director shareholder
have the option of paying yourself a salary,
or dividends or a combination of both.
Dividends are paid out to you the shareholder
from profits post corporation tax.
So they do not obtain corporation tax relief,
whereas directors salaries are an allowable expense,
and will reduce the overall corporation tax bill.
Now it's important not to go off
and start paying yourself a director salary,
your company cannot commercially justify
or afford just to say some corporation tax.
And the more you pay yourself,
the increased income tax
and national insurance liability will eventually outweigh
any corporation tax saving made.
It is very common for you director shareholders
to pay yourselves an optimum salary
with the rest of your income being paid by dividends
through profits.
This will ensure maximum tax efficiency
and tax savings for both your company and you.
The amount of salary you as a director should be paid,
would depend on your personal circumstances,
and if you have any other sources of income
in a particular tax year.
We've already done an in-depth video on how to determine
and pay yourself the most efficient director's salary
in the 2021, 22 tax year.
Click on the banner or follow the link
in the description box below to view this.
(soft music)
When you invest in part machinery
and fixtures and fittings for your business,
the typical way to account for that new asset
is to spread the cost of it over a number of years,
as its value depreciates.
Now plant or machinery does not only relate
to heavy industrial plant,
but includes modern hardware such as laptops and printers.
Fixtures and fittings include items such as desks
and chairs as an example.
For tax purposes though your company can utilize
a form of capital allowance called
the Annual Investment Allowance.
Now it sounds like a bit of jargon
but it's not that complicated at all.
In simple language, the Annual Investment Allowance
will allow your company to deduct the full cost of the asset
from profits in the year of purchase,
which can greatly reduce the corporation tax bill.
Although the Annual Investment Allowance
is currently 1,000,000 pounds,
from the 1st of January 2022 it will fall to 200,000 pounds,
which is still quite sufficient for many of you
solopreneurs and small micro businesses out there.
Let's take a closer look with an example.
Ryan Limited is an e-commerce trading company
forecasting pre-tax profits
of 100,000 pounds for the year ending 31st of December.
The owners of the company
are considering buying some hardware and equipment
such as laptops, printers and peripherals
at a total cost of 60,000 pounds.
The hardware will have an estimated useful life
of three years so ordinarily in Ryan Limited accounts,
depreciation will be spread over three years.
That's 20,000 pounds per year through the income statement.
However, the providing Ryan Limited
purchased their equipment before the 31st of December,
they will be able deduct the full cost,
that is a 60,000 pounds
by utilizing the Annual Investment Allowance,
leaving them with 40,000 pounds of taxable profits
in the year to 31st of December.
(soft music)
Your company can make pension contributions
on behalf of you the directors,
and your PAYE that is pay as you earn employees.
Pension contributions are allowable
for corporation tax purposes.
So for every 100 pound contributed
to a pension scheme directly,
that is gross from your limited company,
into an approved pension scheme,
it will save 19 pounds of corporation tax
in the 21, 22 tax year for your limited company.
In the 21, 22 tax year,
you as an individual can receive a total contribution
of up to 40,000 pounds to an approved private pension plan
without incurring a pension savings tax charge.
Contributions in excess of this
are subject to the pension savings tax charge,
which should be considered when making any contributions.
We've gone into a lot more depth on pension contributions
in a previous video.
So once again, click on the link
in the description box below to view this.
(soft music)
And finally claim legitimate and allowable expenses.
Now, again, don't go off on a spending spree
through your company just to save some corporation tax.
That's like letting the dog's tail wag its body.
But the beauty of being a company director shareholder
is that there are an array of legitimate expenses
you can claim through your company,
and subsequently reduce your corporation tax bill.
Expenses are usually deemed allowable
providing they are wholly and exclusively
for the purposes of your business.
Unfortunately, HMRC do not consider
all business expenses allowable.
An example of this is client entertaining
which many companies incur,
but must be added back to profits
when calculating the corporation tax liability.
Once again, we've done a more detailed video,
on allowable expenses for your company
which you can find by clicking on the link
in the description box below.