Reducing Your Corporation Tax Bill
With the end of the tax year looming, if your company has a pot of retained profits, there are a couple of things you could do to help reduce your tax corporation tax bill.
Invest in a Pension
You can directly invest the money in a company pension scheme. Provided you have set aside basic on-going expenses and taken any salary or dividends that you require, you are then free to invest as much of your remaining income and current year profits into a pension as you like, there is no limit on the amount (although tax relief is limited to the first 50k per employee per tax year).
A major benefit of this approach that is because funds are transferred directly, there is no personal income tax or national insurance deductions and you also save on the corporation tax that you would otherwise have paid on this year’s profits.
This enables a company’s owner to reduce their corporation tax bill considerably, as they will only be charged tax at 20% on profits left in the company at the end of the trading year.
An alternative, but less efficient pension funding approach is to make a personal contribution. You can take a larger than usual dividend and invest personally to save on income tax, but here your contributions are limited to 100% of salary (which will most likely be low) whereas company contributions are unlimited.
Although pension funding is very tax efficient way of transferring funds from a company, one thing to keep in mind is that you cannot access the cash until you reach age 55.
At 55, you can choose to release up to 25% of your pension as a tax-free lump sum with the remainder left to grow or used to provide an income.
ISA allowance before April 5th
Before April 5th 2013 you can use up any remaining ISA allowance, as you can currently invest up to £11,280 (up to £5,640 of that in cash).
The tax relief on ISAs is given on growth and not on contributions, so it won’t reduce your tax bill next January but you can access the funds at any time rather than waiting until you are 55. ISA contributions must be made from personal income so will have already paid income tax.
Next Tax Year
Even a contractor who decides against the above tax-saving routes, will still should be better off by this time next month. This is becuase the personal allowance has increased and so first £9,440 of income is tax free from April 2013. This means that contractors can earn up to this amount without without paying any tax, and in addition, higher rate taxpayers will benefit from this increase too.