How to minimise tax on profits

Take advantage of Corporation Tax relief and allowances to maximise profit and minimise your tax liabilities.

Here's how to make the most of your Corporation Tax allowances.

Corporation Tax is calculated against the annual profits a company makes, and is paid to HM Revenue & Customs (HMRC) each year.

From April 2023 the main rate of Corporation Tax is 25%, which applies to profits in excess of £50,000.

Marginal relief is available up to £250,000 profits.

For profits up to £50,000, the small profits rate of 19% applies.

It pays to learn about Corporation Tax relief and allowances when starting your new business, as it can help you keep more of your profits and pay less in tax.

Taking advantage of Corporation Tax relief and allowances isn't tax avoidance.

They are legally permissible allowances that businesses can use to offset some of their tax liability against the profits their business makes.

Corporation Tax relief and allowances is a complex area, and it's best to talk to an accountant to get a professional view on the amount of Corporation Tax you need to pay, and what allowances and relief you're entitled to.

Learn more about Corporation Tax with the a YouTube Playlist from HMRC.

Corporation Tax and allowable expenses

As Corporation Tax is calculated on the profits a business makes, ensure that all allowable company expenses have first been deducted.

This means you won’t have to pay tax on purchases made in the running of your business.

Most business expenses are allowable, as long as they follow a simple rule: the expense must be wholly and exclusively for business purposes.

Obvious expenses are things such as salaries paid to staff including yourself are permissible, whereas some expenses such as entertaining and some company formation costs are not allowable.

In all cases, keep records and receipts of expenses to share with HRMC.

Pension contributions and Corporation Tax

Payments made by the business into recognised pension schemes, such as private pensions held by employees including directors, are usually an allowable expense.

The key is to ensure that the contribution is wholly & exclusively for business purposes – simply paying all the profits into a private pension scheme of a shareholding director could be seen as tax avoidance by HMRC and lead to an investigation.

But, a reasonable contribution is a justified allowance that reduced profits and therefore the amount of Corporation Tax you'll need to pay.

Research and development tax relief

If your new business is investing in research and development for tax purposes (as defined in the Department for Science, Innovation & Technology (DSIT) guidelines, you may be able to claim tax relief under one of the following schemes:

• For accounting periods beginning before 1 April 2024:
  • The Small & Medium-sized enterprise (SME) scheme
  • The R&D expenditure credit (RDEC) scheme
• For accounting periods beginning on or after 1 April 2024:
  • The new merged scheme RDEC
  • Enhanced support for R&D intensive loss-making SMEs

An accounting period (limited to 12 months) is the period of time for which you have to make your corporation tax self-assessment.

This is often the same period for which your accounts are drawn up, but will not always be.

If your company is applying for “R&D tax relief for SMEs” for the first time, it may be able to get “advance assurance” from HMRC.

You cannot claim for R&D capital expenditure costs, but you may be able to claim R&D allowances (a type of capital allowance) instead.

Capital allowances and Corporation Tax

While business expenses such as salaries can be offset against profits when calculating Corporation Tax, some costs such as purchasing assets are not allowable as they remain an asset on the businesses balance sheet.

In this case, most small businesses can take advantage of HMRC’s Annual Investment Allowance (AIA).

This allows businesses to spend up to £1mn per year on equipment and other capital assets and deduct 100% of the cost from annual profits when calculating Corporation Tax.

Some other assets – primarily environmentally beneficial assets – also attract 100% of relief against profits.

Some assets are excluded from AIA – including cars and any assets, such as a laptop or office furniture, that you already owned before starting the business.

R&D capital costs, which cannot be claimed for under the SME, RDEC, new merged scheme, or enhanced R&D intensive support scheme, may still receive capital allowances (research and development allowances).

Find out more about capital allowances at the government’s Business Guide website.

Other Corporation Tax relief and allowances

Depending on the nature of your small business, you could be entitled to Corporation Tax relief.

Creative industries – such as film, theatre, animation and video game companies – can claim additional relief.

Your business must be directly involved in making creative works in these industries, and there are different rules and rates depending on the type of production your company is involved in.

A further type of tax relief for Corporation Tax is the Patent Box – which allows companies that earn profits from exploitation of patented inventions and certain other medicinal or botanic innovation rights to claim a lower rate of Corporation Tax on those profits.

This lower Corporation Tax rate is 10%, and applies to income arising from sale or licencing of goods, processes or goods incorporating the patented part, or any money awarded for infringement or damages relating to the relevant intellectual property asset.