April 2023 is almost upon us.
This signals the start of a new tax year and a new financial year, bringing with it a whole host of tax changes affecting individuals and companies across the board.
Many of you will be aware of the increase in the corporation tax rates – these were first announced by Prime Minister (then Chancellor) Rishi Sunak back in March 2021. (Please see our November Monthly tax update 2022 blog when these planned increases were confirmed in more detail.)
Recent pension changes in this month’s Budget by current Chancellor Jeremy Hunt provide further scope for companies to actively seek tax planning opportunities to reduce the impact of this planned tax increase on their profitability.
If you’d like to read about the recent Budget changes please view The A to Z of The Spring Budget 2023.
For now we will focus on two simple yet effective ways your company can reduce its corporation tax bill.
Employer Pension Contributions
As a director of your own company, you’re (hopefully!) giving some consideration to how you will fund your retirement and are actively paying into a pension plan. You could be paying into a pension plan personally, but then your company makes no savings by doing that and you’ll get no additional tax relief assuming you’re a basic rate taxpayer.
Your company can, as your employer, pay into your pension pot and receive a full deduction of the cost against profits. The Chancellor recently increased the pension annual allowance. In most cases that is the maximum amount a person/their employer can pay into their pot each year.
Annual Allowance Increase
From 6 April 2023 the annual allowance will increase from £40,000 to £60,000, therefore increasing the scope for further corporation tax savings. As long as the total remuneration package including pension contributions can be considered as reasonable for the work performed by the individual, HMRC will not challenge the deduction of those contributions. For a company with two directors, that’s a maximum potential tax saving of £31,800 for companies in the marginal rates by utilising this allowance fully.
You can also usually make use of any unused allowances from the previous three years, meaning scope for even larger tax savings on higher contributions. After all… why pay more tax to HMRC and lose the money when you can pay it into your pension pot instead, and reap the enjoyment of it further down the line? Not only will you get the corporation tax relief but the money in your pension is immediately outside your estate, giving valuable inheritance tax relief as well!
Charging Interest on Your Director’s Loan Account
You may be in a position where your company owes you a sum of money, being your ‘Director’s Loan Account’. If that is the case, then you can charge your company interest on this loan.
How does it work?
This may seem counter-intuitive, why would we create additional interest income personally?
However, assuming your company is paying you a salary which is not above your personal allowance (£12,570) and your only other income is from dividends, you’re entitled to your full interest allowance of £1,000 and your full savings allowance of £5,000.
You have a further maximum of £6,000 that can be paid to you as interest, that reduces your company profits and is tax-free to you!
Potentially corporation tax savings of up to £3,180 for two directors utilising this allowance fully.
Reporting to HMRC
Please note that any interest paid needs to be reported to HMRC on a form CT61 and income tax at 20% should be deducted on this, which you then subsequently claim back on your personal tax return.
Other options to reduce your corporation tax bill
Whilst this is clearly not an exhaustive list, I hope this blog has given you an insight into what we believe to be two very simple yet very effective ways to reduce your corporation tax liability in light of the forthcoming changes.
There are many more tax efficient planning tips to consider, for example:
- charging rent to your company for use of your home office,
- investing in an electric vehicle,
- eliminating any dwindling associated companies
If you wish to discuss your individual circumstances further then please contact your account manager to schedule a tax planning meeting to run through your position and the options available to you.
If you’re not currently a client of ours and are keen to find out how we can save your growing business tax, then please contact us on 01634 731390.
If you would like to find out more about some of our services that might help you please take a look at our related pages:
Building a Business
Blogs related to Saving Tax
Take a look at our other blogs on the topic of reducing tax:
Tax Planning for Tax Relief 22/23
Tax Free Allowances
The content in this blog is correct as at 10/03/2023. See terms and conditions.