How to reduce your corporation tax bill

When it comes to scoring better funding options, loan rates, and credibility, registered company status has its advantages.

Corporation tax, well - it isn’t one of them.

While it’s easy to bemoan the dilemma of earning = paying taxes, most of us would rather cough up some of the cash than have none at all. This doesn’t take the sting out of handing over hard-earned revenue to HMRC. But the good news is: there are lots of perfectly legitimate ways to reduce the amount you need to pay.

What is Corporation Tax - and who pays it?

Corporation tax is a levy by the government on the taxable profits of a UK-registered company. This is calculated based on your income from the ‘corporate accounting period’ - usually the same as your financial year.

You might be wondering how this is different from income tax. The answer is simple: registered companies don’t pay income tax. This also means that, unlike sole traders or freelancers, they aren’t entitled to a personal allowance. Unless your company has previously made a loss, you start paying corporation tax from your very first sale.

How Much Corporation Tax Will I Pay?

As with income tax - the more you make, the more you pay (in theory - don’t forget the point of this article).

The rate for 2021/22 tax year sits at 19%. For example, if your business netted an annual profit of £100,000, you’ll pay £19,000 in Corporation Tax.

Thanks to the massive pandemic borrowing surge, Chancellor Rishi Sunak has warned that rates are on the rise. As of April 2023, there will be a headliner rate increase of up to 25% - though businesses with less than £50,000 in turnover will pay a tapered rate increase.

But enough about tax hikes. You didn’t come here for gloomy headlines. Let’s get that tax bill down!

Here are five ways to reduce your Corporation Tax Bill.

1. Claim business expenses

Most of the costs spent on running your business can be claimed off your profit margin.

We’re talking more than just petrol for business trips or the office printer here, too. In fact, the list of HMRC-approved business expenses is surprisingly extensive.

It’s incredibly important that you’re aware of exactly what you can claim for. Things like the utilities on your workspace (yes, even if you work from home), business insurance, freelancer and contract wages, marketing fees, protective gear - to name but a few.

Keep a clear record of each and every purchase made, so it’s simple to deduct the full amount off your final profit line. The easiest way to do this is to ensure you pay all business-related expenses from a company bank account.

Note: if you haven’t yet opened a business bank account, get hunting. These aren’t only great for keeping company money and personal finances separate - they also help legitimise your business in the eyes of HMRC.

A surefire hack for receipt-filing is not, in fact, a shoebox. Apps like Dext let you digitize, sort and log all of your expenditure records to a cloud (though you can probably stuff the paper versions into the shoebox if it makes you happy, too).

Once the tax year draws to a close, tally up your annual expenses - down to the very last pencil - and knock them off your turnover. This will lower your final profit line, and since you only pay tax on your post-expenses profit, you’ll end up paying a lot less tax.

2. Pay yourself a salary

Yes, you need to pay yourself. After all, you’re your own boss - who else is meant to do it?

“But I own the company.” You might argue, “I’m not an employee - why do I need a wage?”

If you’ve registered your business as a limited company, it’s a separate legal entity. You aren’t personally liable for any loss or debt, but you also aren’t personally entitled to its profits. Paying yourself a wage is the easiest way to legitimately extract money from your business.

The biggest advantage of paying yourself a salary is that employee wages are a valid business expense. This means they can be deducted from your profit margin. And the lower your profit margin, the less corporation tax you’ll pay!

Speaking of paying yourself from a limited company: how much should you pay yourself?

The answer isn’t always ‘as much as humanly possible’.

While it’s true that the higher your salary is, the less tax you’ll pay, there are some benefits to low-balling. For example: an employee wage is still subject to Income Tax and National Insurance contributions. Earning lower than the Personal Allowance threshold (currently £12,570) exempts you from this.

There are other ways to extract money from your company. Dividends are a great example of this. In fact, many business owners pay themselves a mix of wages and dividends. These are amounts paid to company shareholders (like you) from profits.

Before you issue these, however, make sure you can show you have available profits. If not, HMRC might decide that they are a salary and not dividends - meaning you’ll get taxed!

For more information on how to pay yourself a wage, head over to our guide on the topic!