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How companies can reduce their tax burden: Key considerations

23rd September 2024

With directors now facing tax bills that are 6% higher than previously, and with the Labour Party intending to maintain this rate, businesses need to take a proactive approach to tax planning. Rowleys Tax Partner, Clare Clifford, shares some key areas where companies can reduce their tax burden.

Patent Box relief

One of the most advantageous tax reliefs available is the Patent Box regime, which offers a lower rate of tax (currently 10% rather than the main corporation tax (CT) rate of 25%) on profits derived from patented inventions. If your company holds or is considering applying for a patent, this relief can significantly reduce your tax burden. Companies should assess whether any of their inventions are patentable or if they already hold patents that could qualify for this reduced tax rate.

R&D tax credits

Research and development (R&D) tax credits provide additional tax relief on expenses incurred in advancing science or technology. This includes not just the creation of new products or inventions but also improvements to existing processes and systems. Many companies are unaware that their everyday activities might qualify for R&D tax relief. If an R&D claim generates losses, these can in some circumstances be surrendered for a cash repayment, providing an additional financial benefit.

Maximise capital allowance claims

Capital allowances are available on qualifying business assets, including building fixtures and specific building improvements. Ensuring these allowances are correctly included and maximized can reduce the profits chargeable to CT. Companies can claim 100% of most new qualifying plant and machinery and 50% of special rate assets. Notably, electric cars qualify for 100% allowances under special first-year allowance rules, a benefit not extended to other vehicles, which fall into lower allowance pools based on CO2 emissions.

Charitable donations

Charitable donations not only reduce your tax bill but also allow you to support important causes. To qualify for tax relief, the charity must meet specific criteria. In addition to reducing your tax burden, charitable giving can enhance your company’s reputation and staff engagement by contributing to the community.

Pension contributions

Pension contributions made on behalf of employees and directors are deductible expenses against corporation tax if they fall within the rules on allowable deductions. Salary sacrifice pension schemes can be an effective way to encourage pension savings while saving on national insurance for both the employee and the employer. This is an area worth exploring, especially if you haven’t yet considered it as part of your remuneration strategy.

Optimising salary payments

Salary payments to directors and employees are tax-deductible as far as they represent suitable remuneration. Given the increase in CT rates to 25%, it may be more beneficial for directors to remunerate themselves through salary, as this attracts a CT deduction. However, the exact strategy should be tailored to individual circumstances and should be considered on a case-by-case basis.

Incentives to retain staff

Providing incentives such as private healthcare, gym memberships, or cycle-to-work schemes can help retain key staff and enhance productivity. While some of these benefits might create a taxable benefit for the employee, they can be a valuable part of a remuneration package. Additionally, share options, such as Enterprise Management Incentives (EMI), offer a tax-efficient method for key employees to benefit from the business’s future growth, with the costs of setting up such schemes being CT deductible.

Associated companies

Companies under common control or with one controlling the other are considered associated, impacting the division of corporation tax rate limits and the scheduling of tax payments. Reviewing your company structure to determine if rationalisation could save tax is essential. Properly structured, this could help avoid accelerated tax payments and optimise your tax position.

Director loans

If a director lends money to the company, they can charge a commercial interest rate, which is taxable personally but might fall within personal interest savings limits. The interest paid by the company is CT deductible, but it’s important to ensure the correct process is followed as there can be a 20% tax withholding on interest payments. Professional advice is recommended to navigate this area effectively.

Paying HMRC on time

While timely payments don’t reduce your tax burden directly, they prevent the accumulation of interest and penalties. HMRC’s interest rate on late payments is currently at its highest since 2007 (7.5%), making it crucial to meet filing deadlines and avoid unnecessary costs. Typically, CT must be filed within 12 months of your accounting period, but this deadline may vary for newly incorporated businesses or those with non-standard accounting periods.

A proactive approach to tax planning

Regularly reviewing and updating tax strategies, seeking professional advice, and staying informed about changes in tax are all important for proactive tax planning. By leveraging the available reliefs and deductions, you can not only reduce your tax burden but also reinvest the savings into growth and innovation.

Ultimately, effective tax planning is about more than just reducing liabilities; it’s about aligning your tax strategy with your broader business objectives. Whether you’re investing in new technology, expanding your operations, or incentivising key employees, the right tax strategy can provide the financial flexibility to achieve your business goals. As the current tax rates look set to stay, now is the time to ensure that your business is not only compliant but also optimising every opportunity to reduce its tax burden.

Get in touch

For personalised advice on how to reduce your tax burden, contact our friendly tax team for a initial chat.

 

Disclaimer

This article represents our understanding of the law and HM Revenue & Customs’ practice as at 20 August 2024. It should not be construed as advice or a personalised recommendation. The most suitable solution for you will depend on your own personal circumstances.

No action should be taken without seeking further formal advice. Where suggestions relate to investments or pensions, please seek advice from an Independent Financial Adviser.