Everybody hates taxes, but as Corporation Tax is less than Income Tax and National Insurance, meaning contractors and freelancers operating under their own Limited Company can pay that little bit less compared to a regular employee. Corporation tax is calculated based on your profit, so unfortunately as your profits increase, so will your tax. It follows that anything that decreases your tax also decreases your profits. This is generally true, although actively attempting to reduce your profits probably isn’t the best business plan. Luckily, there are some things you can do to make sure you are operating as tax efficiently as possible.
Make sure you record all company expenses, no matter how small. Every train ticket, every bus ride – everything (more info on this in our Guide to Limited Company Expenses). The more allowable expenses you record, the less tax you will have to pay. Simple.
One important note is that you must differentiate between expenses paid directly by the company, and expenses which you pay for personally, as the expenses you pay for personally will be owed back to you.
If you are using your own equipment to run your business (for example a printer or home office equipment), your company can purchase that equipment from you and write the expense off in the first Corporation Tax year, giving you a quick boost in tax efficiency.
If you’re approaching your financial year-end and realise you need to make a big purchase in the near future, try to do it before your year-end as you’ll receive the tax benefits sooner.
Paying pension contributions through your Limited Company is a good idea for two reasons. Firstly, you’re saving money for the future, secondly, this is a tax-allowable expense, so you can offset these pension contributions against your company’s profit, which in turn will lower you corporation tax.