2023 Corporation Tax Increase - 7 Ways To Keep It Low
INTRODUCTION
For annual group taxable profits over £50k, from 1 April 2023, the corporation tax rate will increase from 19% to 26.5% on additional profits between £50k up to £250k, after which 25% is charged on all profits over £250k.
Therefore reducing profits from say £100k to £50k saves 26.5% of £50k = £13,250. Or on profits in the entire 26.5% tax band from £50k to £250k, you might even get to save 26.5% of £200k, a corporation tax saving of £53k!
NB For close investment holding companies, 25% will apply to all your taxable profits.
What action can you take to help you pay less of this increase? Here are some ideas for your consideration:
- Director salary
A tax deductible expense against profits, ensure this is optimised. Perhaps it’s time to have a paid spouse director? This makes paying a higher salary to both of you, tax efficient. For example as a sole director-employee you’re probably taking £736pcm. With a second director, this could be increased to £1,047pcm to save corporation tax but also to remain efficient for income tax and national insurance.
- Home office rent
If you’ve not revisited this recently, perhaps the costs have increased? Or your business use of your home office increased? Ensure you have a licence agreement and record the rental income in your income tax return, with a deduction for the costs, such as utilities, council tax, insurance, against the rent.
You can set the net rent for income tax purposes to be £NIL, but it might be better to have a profit in your self assessment income tax return, to save more corporation tax, depending on the details of your other income from the company and elsewhere.
- Company pension contributions and relevant life policies
In general, you can benefit from up to £40k pension contributions per tax year. Therefore, if no other pension contributions are made by you or on your behalf, your company might be able to pay the full £40k into your personal pension saving up to £10,600 of corporation tax.
A death in service policy where neither the premiums paid by the company or the benefits paid out are taxed on you or your beneficiaries.
Of course, take IFA advice before going ahead.
- Electric vehicles
New electric vehicles are receiving some of the most generous tax benefits for the next few years. Your company saves corporation tax on the purchase price even if you don’t pay out all the cash up front eg hire purchase. Plus there are minimal income tax and national insurance costs. You therefore get the personal use and enjoyment of a car for a large net tax saving. For petrol, diesel or hybrid cars, there are often large net costs!
If your electric vehicle costs £50k, the potential corporation tax saving if you’re aiming to reduce your £100k profits to £50k, is £13,250 in the year of purchase.
- Investment in plant & equipment
Perhaps it’s time to make that expansion and invest in new plant & equipment needed to do that. Of course, you have the 130% super-deduction before 2023, but going forward after that you can invest up to £200k every year in new eligible assets and receive 100% corporation tax relief. The maximum you can save annually at the 26.5% maximum marginal rate is therefore £53k.
- Trivial benefits and annual parties
As long as each benefit costs less than £50 incl VAT, you can provide a voucher or buy a gift for yourself and your employees which aren’t taxable on them but saves corporation tax at the same time. Director-shareholders are limited to a maximum of £300 per tax year, but your employees aren’t, as long as the gifts are made on an ad-hoc basis.
One of our old favourites, the annual party can be a Summer party as well as a Christmas party. Everyone has to be invited and it’s £150 incl VAT per person plus £150 incl VAT for a guest.
With two shareholder-directors and two employees, each receiving £300 trivial benefits and attending an annual party with a guest, over £600 of corporation tax might be saved each year.
- Healthier options – cycle to work scheme, private health checks, eye tests
To offset the annual party and driving around in your new car, you might visit these healthier tax deductible items, where you don’t suffer any income tax or national insurance.
A cycle to work scheme has to be offered to everyone and the bike used more than 50% of the time for commuting or business journeys. The bike is lent to you and you then buy it from the company at a second hand value a few years later.
Annual private health checks, as opposed to private health insurance, and eye tests where you use a screen for work, also save corporation tax without any tax charge on you or your employees.
If any of these appeal to you, please discuss with your On The Spot Accountant.