Corporation Tax

5. Minimising the Tax Bill

Increasing profits is generally more important than avoiding tax. However, you may be able to reduce unnecessary tax payments.

5.1 Limit the number of your subsidiary or associate companies.

This is because the top limit on the tax band applying to each subsidiary will be split according to the number of companies within a group.

• Profits above that limit will be taxed at the marginal rate applying to the next band. So the existence of small companies within a group could have a serious impact on the amount of tax paid.
• If you must set up subsidiary or associate companies, try to spread profits evenly between them.It may be possible to use inter-company management charges to do this, although HM Revenue & Customs could disallow them if they are not on a commercial basis.

5.2 Consider using loans, rather than shares, to finance the company.

• Interest on loans is an allowable expense against profits, whereas dividends on shares are not.

5.3 Ask your professional advisers about the standard methods of reducing profits without damaging the company or its prospects.

• Take advantage of capital allowances and the Annual Investment Allowance available on equipment purchases. (See Tax and NI.)
• If possible, reinvest the proceeds of any asset sale and use 'rollover relief' to reduce capital gains.

5.4 Consider using benefits in kind, rather than extra salary, as a mechanism for taking money out of the company.

• Employers have to pay National Insurance on almost all benefits in kind. But employees do not pay National Insurance on most benefits.
• Income tax has to be paid on such benefits, but they qualify as earnings when you calculate how much you can pay into a personal pension scheme.
• It is important that the company purchases the benefit (eg medical insurance), rather than reimbursing you.

5.5 Consider using dividends, rather than a higher salary, to take money out of the company.

• All profits paid as dividends to a shareholder which is not a company are taxed at a minimum of 20 per cent. The zero rate remains if profits are re-invested in the business.
• But, in a company with profits up to £300,000, dividends might still be more tax efficient than pay.They are exempt from National Insurance, and for basic rate taxpayers there is no income tax to pay.
• Higher rate taxpayers would have to pay more income tax, but not immediately as with earnings.
• You may need advice on how to structure any dividend payments.
• Payment by dividend may limit the amount you can contribute to an approved pension scheme, as the amounts do not count as earnings.See Executive pensions .
• Payment by dividend may also limit your rights to state benefits.