As many of you are aware, UK corporation tax was initially cut to 19%. However, the government recently decided to proceed with the tax rate increase, reversing its earlier decision. This move took many by surprise. From April 2023 onwards, the corporation tax will be set at 25% for limited companies, marking a substantial jump for numerous businesses.
Lessening the Tax Burden
The primary way to lower the tax impact is to reduce your taxable profits. That's where your gross turnover minus expenses and a few tax adjustments comes into play. I've identified some common overlooked expenses and tax reliefs that could be useful in reducing your corporation tax bill.
Salaries: Ensure you're drawing a salary, preferably around £12,570 per annum, starting from April 2023. Consider employing family members or children over the age of 13 (if applicable). The idea here is to transfer as much wealth out of the company while reducing the company's taxable profit, thus lessening the impact of the tax hike.
Company Cars: If you use your personal car for business purposes, make sure you're claiming mileage (at least 45p per mile). It might be worth exploring getting a company car, particularly an electric, hybrid, or commercial vehicle.
Director's Loan: If you're in a capital-intensive business, charging interest on your director's loan account can provide substantial tax savings.
Pension Contributions: Utilising pension schemes, especially those allowing holding of different types of assets such as commercial properties, can be a tax-efficient way to accumulate wealth outside your business.
Maximising Expenses: Look for opportunities to channel more day-to-day expenses through the company. From travel costs, training courses, international client visits, to magazine subscriptions - be creative!
Limitations and Opportunities
While these strategies will help you mitigate the effects of the corporation tax increase, remember that tax is an unavoidable aspect of doing business. Even if you manage to minimise your tax bill effectively, there may still be some leftover taxable profit. This isn't necessarily a bad thing - a profitable business is generally a healthy one.
If you find you're paying excessive tax despite these strategies, it may be time to consider overseas options. Some countries, such as Portugal, Italy, and Bali, offer attractive tax exemptions for foreign source income.
So, don't be discouraged by the tax hike - there are still plenty of strategies at your disposal to lessen its impact. Do your research, seek advice, and explore all available options.
Remember, the goal isn't to eliminate taxes entirely but to ensure you're not paying more than necessary. If you have any questions or need further clarification on anything mentioned in this post, don't hesitate to drop a comment below. Your financial wellness is my top priority!
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