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Corporation Tax

Corporation tax is levied on the profits of companies, clubs and associations. It works in a similar way to income tax for the self-employed but it has its own set of rates and allowances.

There are 2 flat rates of corporation tax – 26% (going down to 23% by April 2014) for large companies with profits of £1.5 million per annum or more and 20% for small companies with profits of up to £300,000 per annum. In between a system of marginal relief operates so that the incremental rate of tax is 27.5% (in 2011/12). The £300k and £1.5m thresholds have been frozen for 16 years now since 1994 and must be one of the biggest (and least publicised) stealth taxes ever imposed on the small business community. Each year inflation drags more and more companies into the higher rate tax net.

There are lots of things you should and should not do if you want to keep your corporation tax bill as low as possible. You should also watch the interaction with income tax and capital gains tax. At Acumen, we can help steer you through the maze and make sure your overall tax burden is as low as possible, taking account of your working capital requirements, your personal financial needs and your planned exit strategy. Please give us a call if you would like us to review your corporation tax position.

The information sheets below provide some further basic details:

Information Sheets Tax Tips
bulletpoint Trading income
bulletpoint Investment income
bulletpoint Chargeable gains
bulletpoint Trading expenses
bulletpoint Capital allowances
bulletpoint Associated companies
bulletpoint Participator loans
Associated companies
Try to avoid setting up too many limited companies if you can unless they are all going to make similar profits.
Capital allowances
Maximise your entitlement to capital allowances by timing expenditure carefully and making sure you buy energy-efficient plant & machinery.
Pensions
Consider making company contributions to your pension plan and do this on a regular basis.
Expenses
Make sure you claim as many tax free expenses and flat rate allowances as possible, if necessary through salary sacrifice schemes.
Losses
Make sure you claim relief for all trading losses and surrender them to other group companies if necessary.

Example

Fred and George Beasley run a joke shop selling magical pranks and have recently branched out into another business making flying broomsticks. Both businesses are run as separate companies. The joke shop makes a profit of £300,000 per annum and the broomsticks business will make a profit of £50,000 in its first year.

Their total corporation tax bill will be £77,875.

If Fred and George run the businesses as separate divisions within the same limited company and pay £25,000 each into their pension scheme as employer contributions, their total corporation tax bill would fall to £63,000.

That’s a saving of £14,875 per annum – and all without a magic wand!

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