When it comes to running a successful business, managing your finances efficiently is crucial and keeping more of the money your business earns is one of your priorities as a business owner.

One of the ways to do that is to reduce the business’ corporation tax bill.

While paying taxes is a civic duty, there are legal and ethical ways to optimize your finances. Here are nine savvy strategies to reduce your corporation tax in the UK, ensuring your business keeps more of its hard-earned money:

1. Transferring Personal Phone to Company Phone:

Consider transferring your personal phone to the company’s name. By doing so, you can claim it as a business expense, reducing your taxable income.

2. Early Tax Payment for Interest Returns:

If you have cash sat in the business bank account that isn’t required for the business (maybe it’s already been put aside for the corp tax bill), then paying the tax before it’s due will mean HMRC will pay you interest on the total amount.

The amount of interest you receive is dictated by the current bank of England base rate. Paying bills earlier, entitles you to 1% less than the current base rate. As of 2023, that could be as high as 4.25% (5.25 minus 1).

As an example, if you have a £10,000 corporation tax bill and you do your companies tax return immediately on day 1 and pay your corporation tax bill immediately (9 months before it’s due) and the base rate for the entire period is 4%, you’ll earn approximately £225.

There are a few benefits to this. Number one is it might be an interest rate higher than what you get in your current business bank account, in which case it’s as good as free money. Second, the peace of mind knowing your company’s tax affairs are sorted for the next 12 months.

3. Maximize Personal Allowance(s):

Paying yourself a salary is the priority when it comes to extracting money from your business to you. The first £12,570 you earn is completely tax free. It can then make sense to pay the rest of your income via dividends, however, the tax on dividends increases dramatically once you earn over £50,270.

Two people earning £50,000 from your business will extract a lot more money than one person extracting £100,000. If, for example, you have a business you run with your spouse, it can be much more efficient to pay yourself equally rather than unequally because ‘you’re the boss’.  This can change if either of you have other sources of income.

Remember, all directors have these allowances.

4. Host a Staff Party:

Whether it’s a Christmas do, a summer BBQ or your own birthday party, you can offset £150 per guest as an expense for one party per year.

You can invite non-staff (such as partners), just don’t take the mick and invite all your friends and family and one staff member.

This not only boosts morale but also helps in reducing your taxable profits.

5. Maximize Pension Contributions:

How does an extra £60,000 of tax-free income sound?

Pension contributions are one of the most powerful tax saving strategies you can implement, especially if you’re a higher-rate taxpayer or above.

Personal contributions to a pension are limited to the amount of money you earn in the financial year. If you earn £30,000, you can contribute a maximum of £30,000 to your pension in that tax year. A company contribution, however, can be up to £60,000 regardless of your income for that year.

On top of that, it’s entirely free of corporation tax, National Insurance and income tax.

6. Claim all Smaller Expenses:

Get receipts for EVERYTHING business related, regardless of cost. The smaller costs your business incurs over the year all add up and can save you a significant amount of corporation tax.

As annoying as it may be to log the recipe in your accounting software, that money is better in your pocket than HMRC’s.

7. Opt for Mileage Claims Over Company Cars:

As a business owner, it’s usually more beneficial to claim mileage on your personal car than it is to get a company car. The is because of the tax calculation involved in benefit-in-kind of a company car which is affected massively by the make and model of the car as the higher the emissions, the more tax you pay.

This does mean that the lower the emissions, the less of an issue this is, and electric cars are looked upon much more favourably from a tax perspective than petrol or diesel cars. If you’re looking at the possibility of an electric car, this point may be reversed for you but should still be calculated properly before making a decision.

8. Key Person Insurance as a Business Expense:

A lot of businesses are one doctor’s diagnosis away from the entire company going under. If your business’ success is dependent on one super salesman or one super genius software engineer that are genuinely irreplaceable and they can’t work for 12 month’s, your business, your livelihood and the livelihood’s of your employee’s could be at risk.

Insuring your business against this risk can save you corporation tax, as well as your business and the livelihoods of your staff.

Bear in mind that the type of insurance you take out will affect whether it is deemed a taxable expense or not.

9. Stay Informed and Seek Professional Advice:

Tax laws and regulations change. Stay updated with the latest developments and consider hiring a professional accountant (like us). We can offer personalised advice tailored to you and your business, ensuring you’re not missing out on any opportunities to save on taxes.

In conclusion, reducing your corporation tax legally and ethically is about being proactive, informed, and meticulous in your financial management. By implementing these strategies, you can optimize your tax position, allowing your business to thrive and invest in its growth and development. Remember, it’s not about evading taxes but about smart financial planning within the bounds of the law.