How can we reduce our Corporation Tax bill?

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Ask the expert at Smith & Pinching about Corporation Tax reduction - Credit: Getty Images/iStockphoto

My consultancy company has done well over the past couple of years, despite the pandemic. The result of this is that our Corporation Tax bill is quite high. I’d like to reduce it somehow and propose to pay myself and my wife more as sole directors via either salary or dividends, though we may need to pay more tax ourselves. Are there other ways to reduce our Corporation Tax bill?

Matthew Hinchliffe is an Independent Financial Advisor Picture: Smith & Pinching

Matthew Hinchliffe is an Independent Financial Advisor Picture: Smith & Pinching - Credit: Archant

Matthew Hinchliffe of Smith & Pinching responds:

It’s good to hear that your business is doing well. My first suggestion on reading your question is that you consider making corporate pension contributions to your pension funds. Doing this has two specific advantages for the business.

First, pension contributions are normally allowable as a business expense, reducing the profit figure used to calculate your Corporation Tax liability. Second, if they are paid as an alternative to salary/bonus, they reduce the figure used to work out your Employer’s National Insurance contribution, giving further savings for the business.

The amount that your company can contribute to your pension has no defined limit from a Corporation Tax relief perspective, but you must bear in mind that if the annual allowance for pension contributions is exceeded, the tax efficiency for you is limited. Permitted pension contribution levels are also limited by your earnings, so do bear this in mind when deciding what balance of additional salary and dividends you plan to award yourselves.

I recommend that you speak to an independent financial adviser about achieving the right mix of salary, dividends and pension contributions to benefit yourselves and your business.

An alternative – or additional – strategy is to take out a number of protection plans to cover you, your family and your business. Cover for you and your wife could include income protection, private medical insurance and corporate life cover. However, these plans may be considered a benefit in kind for your own tax position, so it would be important to evaluate the benefit of these carefully before proceeding. In addition, your company could take out key person protection, which would provide funding to allow the business to continue if anything were to happen to you or your wife (or any other key person in the business). Key person protection is again normally considered an allowable business expense for Corporation Tax purposes.

Further ways that you can plan to reduce your corporation tax liabilities include spending on research and development, giving corporate donations to charities and taking on trainees or apprentices.

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This is a marketing communication. Any opinions expressed in this article do not constitute advice.

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