Limited Company Tax Deductions Cheat Sheet: 15 Ways to Legally Reduce Your Corporation Tax Bill as a Limited Company

Ryan Patrick

Jan 31, 2024 • 6 min read

Limited Company Tax Deductions Cheat Sheet: 15 Ways to Legally Reduce Your Corporation Tax Bill as a Limited Company

Is your company among many businesses that pay high corporation tax bills yearly? It could be a result of not claiming justifiable tax deductions. This is a common problem in most small UK companies where their owner handles their tax affairs instead of engaging professional accountant services.

Managing your corporate tax bill appropriately may significantly impact your financial situation. It allows you to maximise your finances when abiding by the law. You don't have to dodge taxes; this blog shows you fifteen ways to help you lower your corporate tax expenses.

Tax Deductions: Rules of Engagement

Most people think paying less tax is a tough row to hoe, which needs high skills. Remember, there are tax deductibles; if you don't claim them, you will pay higher unnecessary taxes. Here are ground rules that will be helpful from today onwards.

Keep all records of your costs and expenses, even the smallest.
Claim everything you're allowed, and don't claim what you're not supposed to.
Research and become a legitimate tax deduction expert, or hire an expert.
Be organised

Remember, for expenses to be tax-deductible, they must be spent only for business reasons, and the spending has to be necessary and exclusive to the business. So, it's not allowed for expenses incurred for your personal use. Suppose an expense involves both business and personal use. In that case, it might be workable to allocate a portion of it as eligible for tax deduction, but this depends on the nature of the expense.

Ways to Legally Reduce your Corporation Tax Bill

Let's dig into crucial ways that will assist you in legally reducing your corporation tax bill, allowing you to maximise your profits.

Claim Research and Development Tax Relief (R&D Relief)

The R&D relief is tailored for companies with innovative projects in science and technology. For your company to get the R&D Relief, it must be working on a specific project, and you must explain the following:

How will that project advance science and technology
How has the project attempted to address and overcome uncertainties?
Why a qualified professional finds it challenging to find a solution to the project's problem.

Various types of R&D Relief are available for small medium-sized companies. Small and medium-sized businesses have up to 500 staff and a turnover of 100 million euros or a balance sheet of less than 86 million euros. If your company falls under this category, you can claim the SME R&D Relief. With this relief, your company can

Apply for a tax credit when your company is experiencing losses, valued at a maximum of 10% of the surrenderable loss.
Subtract an additional 86% from their qualifying costs when calculating yearly profit, on top of the standard 100% deduction, resulting in a total deduction of 186%.
Big companies with R&D projects can claim an R&D Expenditure Credit, which is a tax credit computed as 20% of your company eligible research and development expenditure.

Claim all the Expenses

There is an extensive list of allowable expenses you can claim. Here are some:

Premise cost
Bank loan interest
Stock and raw material cost
Stationary cost
Travel and accommodations cost for every business trip
Professional fees, for example, legal, accountancy, etc
Marketing and advertising costs
Insurance payment
Childcare

Here are other expenses that most companies don't claim and are allowed

Broadband
Mobile telephones
Bicycle mileage
Christmas party
Parking cost
The setting up a company cost
Bad debts
Magazines and books
Donations to charity
Business gifts
Eye tests
Flights
Training courses
Membership and subscriptions

If you want to know more about expenses, benefits, and tax rules, check the GOV.UK website as an A-Z list.

Trading Losses

You can use trading losses to claim relief for corporation tax calculation purposes. This tax relief can be obtained by offsetting losses against other company's profits in the same accounting time. When calculating the trading loss, include things that boost the loss (like capital allowances) and factors that decrease the loss (such as balancing charges). However, don't consider any profits or losses from selling or getting rid of assets.

Capital Allowance

You can claim capital allowance when your company purchases assets for business use like plants and machinery. Calculate the value of the assets, then deduct it from the profits before calculating the tax. You can also calculate this tax in these scenarios:

Renovating your company premises if your company is in UK disadvantaged areas
Extract mineral
Research and development
Patent
Structure and building

Claiming Business Mileage

If you haven't been claiming business mileage, start today and save tax for employees using personal cars for business purposes. To do this, ensure you keep every record of business travels.

Creative Industries Relief

The creative industry has eight tax reliefs that allow industries to increase their expenditure and reduce their corporation tax. You can claim these reliefs if your company profits from children's television, films, video games, gallery exhibitions, etc. For your company to qualify, it must have responsibility through development, from pre-production to program completion. If you are in theatrical productions, your company must be available during production running and closing.

Here are reliefs in the creative industry

Patent Box

This scheme enables your company to apply for a low corporation tax from profits generated from patent inventions. If your company qualifies for a patent box, it can reduce Corporation tax up to 10%. The primary aim of the patent box is to promote investments in innovative technologies.

8. Don't Miss Deadlines

Ensure you have timely tax files and make payments to avoid high interest and penalties. Filing and payments on time ensure you minimise corporation tax liability. Additionally, companies have two years from the last accounting period to claim relief. So, if you plan to obtain any relief, ensure you file in time to get your full entitlement before it's too late.

9. Employment Allowance

The Employment allowance will allow your company to reduce the annual national Insurance Contribution by £5,000 every tax year. This is available if you fall in class 1 National Insurance liabilities not exceeding £100,000 in the last tax year. Remember, you cannot apply for employment allowance as a sole director.

10. Business Rates

Business rates are similar to council tax, which businesses on non-domestic properties like pubs and shops pay. These are categorised under tax-deductible business expenses. Your business can obtain business rate relief, allowing you to pay lower than standard rates

11. Relevant Assets and Goodwill

Corporation tax relief is also available for assets you cannot touch, such as goodwill and intellectual property. The goodwill and relevant assets' relief is fixed at a 6.5% rate yearly on a lower of:

6x cost of qualifying IP assets the company purchased
The cost of assets

Visit relevant intangible assets' explanation on this HMRC page

12. Work from Home

As the number of people working from home arises, you should know this. If your limited company is at your home, you can claim a percentage of utility bills and household costs as allowable business expenses. You can claim this by

Using the HMRC £26 flat rate monthly tax relief for those working from home
Calculating the value of household costs incurred for working from home
Always keep all records of these costs, like bills, receipts, and contracts

13. Pay a Tax-efficient Remuneration

As the director of your company, you may reduce the corporation's tax liability by paying yourself a salary and other remuneration types under allowable business expenses.

An employee share scheme is a scheme that gives employees a portion of your company. With an employee scheme, you can reduce the company's corporation tax when you claim the cost of starting and operating the scheme.

15. Dispose of Business Assets at the Right Time

Disposing of the assets that provide capital allowance may add a capital gain tax charge, increasing the business tax liability. So, to reduce the tax liability, you must dispose of the assets at the right time, like the following tax year. But if you lose when disposing of the asset, you can use it to reduce your corporation tax bill in your current accounting year.

Winding up

This guide provides ways to reduce your corporation tax bill without evading tax. Tax planning is crucial for all businesses, which may lead to maximising profitability and outstanding financial stability. However, tax affairs may be more complex, so it's advisable to contact a professional to help you.