As we settle into the first month of the new tax year, businesses operating as limited companies must start to consider how they are going to plan around the increased main rate of corporation tax, which has now risen from 19% to 25%.
Smaller companies do have some respite from the increase and the 19% rate will still apply if your annual profits are at, or below the new £50,000 threshold.
For companies with profits of £250,000 or more however the full rate of 25% will apply, and a system of marginal relief will apply for any company that falls between these numbers.
There are several ways to reduce corporation tax within your business, including investing back into the company, claiming business expenses and more.
Some examples below which may be possible for your specific circumstances. Please do seek advice from your accountant.
One option available to all business owners, and which remains one of the most effective ways of extracting profits and reducing corporation tax liabilities is pension contributions.
If a company makes an Employer Pension Contribution, this is considered a deductible business expense, which can help to reduce your company’s gross profit and corporation tax bill.
The contribution is also paid into a pension which can grow tax efficiently helping provide financial security for the future.
Company with Profits over £250,000
- ABC Ltd have gross profits of £300,000 in the tax year 2023/24, after claiming all other reliefs and expenses. • If they did nothing, their corporation tax liability would be £75,000 (25% rate).
- If the company made Employer pension contributions of £60,000 to each of the directors’ pensions, this would reduce their gross profit to £180,000, reducing their corporation tax bill to £43,950 (24% rate).
- The company therefore saves £31,050 in corporation tax, and extracts £120,000 in profits with no tax implications.
Company with Profits under £250,000
- XYZ Ltd are a family run company with husband and wife as equal shareholders.
- The company has gross profit of £100,000 in the tax year 2023/24, after claiming all other reliefs and expenses.
- If they did nothing, their corporation tax liability would be £22,750 (22.75% rate).
- If the company made Employer pension contributions of £25,000 to each of the directors’ pensions, this would reduce the gross profit to £50,000, reducing their corporation tax bill to £9,500 (19% rate).
- The company therefore saves £13,250 in corporation tax, and extracts £50,000 in profits with no tax implications.
Pension contributions can be set up as regular monthly contributions or can be completed ad-hoc each tax year. As a business owner, you are therefore always in control of how much and when you/your business pays contributions. This is an important factor as it gives you flexibility year to year.
✓ Corporation Tax has now increased to up to 25% dependent on your company’s gross profit.
✓ Pension contributions are a great way to help reduce your gross profit, and therefore reduce your corporation tax liability.
✓ Funds can be invested in a pension, which can grow tax efficiently to provide for you and your family’s financial future.
✓ Planning around pension contributions must be done within your company year end, so act now to plan for this company year.
✓ You can control how much and when you contribute – giving you the business owner ultimate control.
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The information above is for guidance only and does not constitute advice. Advice should be sought before taking any action or inaction. Levels and bases of tax relief are subject to change.