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Understanding Your Corporation Tax Liability
As a limited company, your business is liable for corporation tax, levied on the profits of your company at the end of your financial year. To ensure that you have adequate funds to pay this by the tax return deadline, it’s crucial to understand the ins and outs of corporation tax, and your own liability.
Whether you’ve recently incorporated your company or you want to understand how incoming changes to legislation affect your tax liabilities, let’s take a closer look at corporation tax.
Corporation tax explained
Corporation tax is charged on the taxable profits of your company, after outgoings, tax relief and capital allowances have been taken into account. From April 2016, the government has levelled the playing field for corporation tax, streamlining the tax system into one rate for companies of all sizes.
So whereas corporation tax rates in 2015/16 were 20% for the first £300,000 and 21.25% for the next £1,200,000, these rates are now 20% across the board for 2016/17. This is unlikely to affect most contractors and freelancers, but makes calculating your corporation tax liabilities significantly more straightforward.
It’s worth noting that corporation tax changes on an almost annual basis; the government has pledged to reduce the rate to 17% by 2020. However, changes such as the new dividend tax mean that savings in one area may be offset by an increase in liabilities in another. As a result, it’s never been more important to stay one step ahead of government legislation.
Reducing your liabilities
To minimise your tax burden at the end of the financial year, it’s crucial to plan ahead when managing your company’s finances. Careful bookkeeping will ensure that you can claim allowable expenses wherever possible, whilst your accountant should be able to identify tax relief schemes that are applicable to your situation.
Research and development, for example, enables you to claim back up to 33% of your spend, whilst making well-timed pension contributions could help to minimise your tax bill as the end of the financial year approaches. With tailored accountancy advice, you can identify areas to reduce your burden and even claim money back.
By understanding your liabilities and where relief can be claimed, you can become significantly more tax efficient as a contractor or freelancer. Often, tax relief can be backdated by several years, meaning you could receive a windfall for investments in the business for previous financial periods.
They say that nothing in this world is certain, except death and taxes. However, if you take the time to understand corporation tax and your company’s liabilities, you can ensure that you are paying not a penny more than you owe when the tax deadline arrives.
For further advice and guidance on corporation tax, or to find out where you could be saving money on your tax bill, get in touch with Bright Ideas Accountancy. Call 0161 669 4221 or email info@biaccountancy.com today, to have a chat with our friendly team.