How To Reduce Your Corporation Tax Bill!
It’s the start of a new tax year, which always brings with it tax changes affecting both individuals & companies.
Recent pension changes in the Budget provide further scope for companies to actively seek tax planning opportunities to reduce the impact of the tax increase to 25% on profitability, for companies with profits over £50k.
Let’s focus on effective ways your company can reduce its corporation tax bill.
Employer Pension Contributions
As a Director of your own company, you’re giving some thought on how to fund your retirement & paying into a pension plan. You could be paying into a pension plan personally, but this way your company makes no tax savings.
Your company, as your employer, can pay into your pension pot & get Corporation Tax Relief of the cost against profits.
The Chancellor recently increased the pension annual allowance, from 6 April 2023 the annual allowance increased from £40,000 to £60,000, therefore increasing the scope for further Corporation Tax savings. For a company with two Directors, there is a potential tax saving of over £30,000 if marginal rates apply.
Unused allowances?
You can also usually make use of any unused allowances from the previous three years, meaning scope for even larger tax savings on higher contributions. Why pay more tax to HMRC & lose the money, when you can pay it into your pension pot instead?
Not only do you get the Corporation Tax Relief but the money in your pension is immediately outside your estate, so you get valuable Inheritance Tax Relief as well!
Charging Interest on Your Director’s Loan Account
How does it work?
You ask ‘why would we create additional interest income personally?’ But, assuming your company is paying you a salary which is not above your personal allowance (£12,570) & your only other income is from dividends, you’re entitled to your full interest allowance of £1,000 & your full savings allowance of £5,000.
Which means, you have a further maximum of £6,000 that can be paid to you tax free as interest. Yes, it reduces your company profits & is tax-free to you! Potentially a Corporation Tax Saving of over £3,000 for two Directors utilising this allowance fully.
Please note that the interest paid needs to be reported to HMRC on a form CT61 & income tax is deducted on this at 20%, but you then subsequently claim back on your personal tax return.
Other options to reduce your corporation tax bill
There are many more tax efficient planning tips to consider, for example:
- charging rent to your company for use of your home office
- an electric car
- life assurance
- private health insurance
- closing dwindling associated companies
