Reducing a company’s taxable income is a critical aspect of effective tax planning. Under UK tax rules, a company’s taxable total profits (TTP) encompass various income and gains subjected to the UK corporation tax rate(s) for the period.
We know the phrase ‘taxable income’ can be quite daunting, so we’ve asked Jess Spencer, Tax Senior, from our Manchester office to outline everything you need to know on how to reduce your company’s taxable income.
Over to Jess
As said above, a UK tax resident company is taxable under the UK corporation tax rules on its worldwide income and gains. This taxable income (also referred to as taxable total profits (“TTP”) for a given accounting period is broadly the sum of the following after being adjusted to comply with UK tax law:
- Trading income (adjusted for certain tax add-backs/deductions including capital allowances);
- Chargeable gains
- Non-exempt dividends
- Non-trading loan relationship credits (“NTLR”)
- Property business income
- Overseas income
- Miscellaneous income
The TTP is then multiplied by the applicable UK corporation tax rate(s) to calculate a company’s tax liability for the period.
There are a number of (legal!) ways that can reduce a company’s overall taxable income and effectively lower its corporation tax liabilities. I’ve explored and summarised below.
Business expenses
Expenses which have been legitimately incurred by a company broadly and exclusively for the purposes of its trading activities and are not capital in nature are generally allowable deductions when computing its trading profits.
Relief is typically given under the accruals basis of accounting (i.e. permitted as a tax deduction in the accounting period in which the expense is accrued to the profit and loss statement) and may include allowable trading expenses such as staff salaries/bonuses (provided such salaries are paid within 9 months of the end of the relevant accounting period), staff entertainment costs, office costs, business repairs, trade-related subscriptions, certain legal and accounting costs, certain marketing and advertising costs, business insurance etc.
Note, there are specific exceptions to the above, whereby various expenses may only attract relief on a paid basis (i.e. employer’s pension contributions – see below), or in some cases are never allowable deductions (i.e. client entertaining, fines and penalties imposed for breaking the law, depreciation etc). It is therefore an area that is very much a ‘case-by-case’ basis and must be thoroughly assessed to determine what expenses can be allowed.
Employers’ pension contributions
As per the above, a company’s contributions to its employees’ registered pension schemes may generally be deducted as an allowable business expense on a paid basis (i.e. tax deduction in the period in which the contributions are paid). This acts as a great incentive to reward employees for their services and help protect their futures, whilst attracting tax relief for the company.
Although there are a couple of exceptions to the paid basis, such as ‘spreading relief for substantial pension contributions’ or where the employer ceases to trade, these are niche areas that most companies don’t need to worry about.
Note, employer contributions count towards an individuals’ annual tax-free allowance (which currently stands at a headline of £60,000 in 2023/24, which is tapered for ‘high earners’).
Capital allowances
Sometimes referred to as the ‘tax allowable version of depreciation’, investing in qualifying plant, machinery and other capital expenditure may enable a company to claim capital allowances, which would be deducted from a company’s trading profits.
Depending on the nature of the qualifying capital expenditure, there are different categories or ‘pools’ which attract differing tax relief rates;
- Main pool: 18% writing down allowances (“WDAs”) for a 12-month accounting period on the reducing balance basis on certain plant and machinery additions, cars with certain levels of carbon dioxide emissions etc.
- Special-rate pool: 6% WDAs for a 12-month accounting period on the reducing balance basis on certain integral features (i.e. ventilation/heating systems), cars with certain levels of carbon dioxide emissions, long-life assets etc
- First-Year Allowances: As a consequence of the government introducing the temporary 130% super-deduction/50% FYAs for qualifying expenditure, the accelerated UK tax relief rules were introduced during the 2023 Autumn Budget statement, such that 100% FYAs can apply to certain main pool additions from 1 April to 31 March 2026.
Most companies may also be able to benefit from the annual investment allowance (“AIA”), which has currently been permanently set at £1m for a 12-month accounting period beginning on or after 1 April 2023. Where available, companies are better off utilising the AIA against special-rate pool expenditure in priority to main pool expenditure by virtue that main pool already attracts higher rates of tax relief in comparison. Cars are excluded from utilising the AIA however.
Qualifying charitable donations (“QCDs”)
Companies can obtain corporation tax relief based on the value of donations made to a qualifying charity (including cash donations or the transfer of certain assets). QCDs are generally deducted from total profits on a paid basis, after all other relevant deductions have been made (except for loss group relief/group relief of carried forward losses).
Note, excess QCDs (i.e. where the company is loss-making) cannot be carried forward into future years and could consequently be lost. However, special rules may apply where such excess QCDs can be surrendered to other group companies.
Employee share schemes
Depending on the nature of the share scheme undertaken by the company (i.e. Enterprise Management Incentives (“EMI”), Company Share Option Plans (“CSOP”), Save As You Earn (“SAYE”) etc), the costs of providing such shares or options may attract tax relief from a corporation tax perspective, whilst incentivising and rewarding current and prospective employees to continue supporting the growth trajectory of the company.
