Running your own creative business is full of upsides, from the freedom and flexibility it allows to the glitz and glamour it can bring. But, just like with everything in this world, these tend to go hand in hand with some downsides too, and for many of our clients, one of the most common pet peeves comes in the form of corporation tax.
This April saw corporation tax hiked from 19% to 25% for companies that earn over a certain amount in profits. So being the helpful accounts for creatives that we are, we thought we would explain exactly what this change in corporation tax rate means for businesses and detail how you can reduce your bill come tax season.
What is corporate tax?
For those just starting up in business who may be unfamiliar with the alleged evils of corporate tax, it quite simply refers to the tax you pay on your annual profits. In its simplest form, these profits are calculated from your total sales, plus any depreciation and client entertaining costs, minus any other expenses and losses your business incurred.
In terms of whether you need to pay corporation tax, there is no better means of working this out than consulting the HMRC’s helpful guide.
The new change in corporation tax rate
The tax year starting April 2023 has seen an increase of 6% of the main tax rate, causing it to rise from 19% to 25%.
However this is not applicable to all businesses, as the amount of profit your business makes will dictate how much corporate tax you will pay.
Here is a simple breakdown:
- Companies whose profits are over £250,000 will pay the main tax rate of 25% in corporate tax.
- Companies whose profits are less than £50,000 will pay the small profits rate of 19% in corporation tax.
- Companies whose profits are between £50,000 and £250,000 will be taxed at a gradual rate calculated using a marginal relief calculation.
Unfortunately, for a lot of businesses it simply means you will be paying more tax. Not ideal, we know. However making sure you are on top of the new change is essential so you don’t run into any problems down the line.
How do I calculate my corporate tax rate?
If your accounts work out to be either over or under the thresholds, it is quite easy to work out how much you owe – it will be either 19% or 25% on all your trading profits. However, it can get a bit more tricky if your profits lie between £50,000 and £250,000 as this will require an accurate application of the marginal relief rate in order to work out what you owe.
You can go to HMRC website to calculate your rate. However it is always the best idea to seek advice from qualified accounting professionals to avoid making a mistake.
We know that taxes can get a little confusing so if you want to find out more then consult our common tax codes guide.
When is the deadline for corporation tax?
You must make sure your corporation tax is paid within nine months and one day after your company’s financial year-end. You can pay your corporation tax bill directly to HMRC or get your trusty accountants (someone like ourselves) to sort it for you.
What happens if you are caught short?
Missed the deadline? Or paid the wrong amount? Don’t worry, mistakes do happen. But getting your finances in order well before your tax bill is due is essential to avoid an awkward situation with the taxman. If you file your tax return late then HMRC will issue you with a penalty along with charging interest on late payments which has increased to 7% this year.
If, after filling your tax return, you realise you have made a mistake then the best course of action is to contact HMRC immediately to let them know. Being proactive will reduce your chances of pesky penalty action further down the line. Depending on the particulars of your mistake and whether you ‘took reasonable care’ when filing your return will determine how much of a penalty if any you have to pay.
How to reduce your corporation tax (the legal way)
Make sure to claim all business expenses
It may seem obvious, but making sure that you claim all of your expenses is an easy way to reduce your corporate tax bill and avoid overpaying. You can find out more about some of the expenses you can claim here.
Claim all available loss reliefs
Any losses that your company has made can be offset against your profits to help bring down your tax liability. Losses from previous years can be carried forward, so make sure you calculate them correctly to avoid overpaying your tax bill. Similarly, they can also be carried back to previous years to give you a nice tax rebate.
Hit those deadlines
As the old saying goes, there are two certainties in life: death and taxes. Hopefully you are a long way off from the former, but the latter needs to be taken care of sooner rather than later. Missing deadlines is a surefire way to inflate your tax bill with interest and penalties that will only increase the longer you wait. So make sure your ducks are in order and your financial obligations met so you are not left quacking your pants at tax time.
Throw a staff party
What better way to bring down your tax bill than throwing a little soiree for you and your staff. Not only is it an excuse to have a damn good time but it will mean a smaller tax bill – a win-win scenario all round. You can claim up to £150 of expenses for each of your employees for an annual staff party, which we think is money well spent.
Tax relief for creative industries
Being a part of the creative industry comes with some financial perks and these include HMRC’s creative industry tax reliefs. These reliefs allow qualifying businesses to increase their allowable expenses, decreasing their profits and corporation tax bill.
However, there are strict eligibility criteria including being a part of the following industries:
- Film
- High-end television
- Children’s television
- Animation television
- Video game production
- Theatre productions
- Orchestral concerts
- Museum or gallery exhibitions
There are many other ways you can decrease your corporate tax bill however we don’t want to spoil you by revealing all the good bits in one fell swoop.
Here at Raedan we are the go-to accountants for the creative industry. As Xero accounting experts, we can help you and navigate your tax obligations without a sweat. So if you would like to find out more about the change in corporation tax rate or need some help with your next tax return then get into touch now.
