The term “deductible” in accounting is usually applied to the expenses your company has — “deductible expenses”. You can deduct these expenses from your profit before you report your taxable income to HMRC — the taxable income becomes less and the amount of the corporate income tax you pay also goes down. The expenses you cannot subtract are known as non-deductible.
In this article, we cover what the taxable income is, what the rate of a corporation tax is and what expenses are deductible (allowable) or not (disallowable) for a private limited company. We still advise you to consult your bookkeeper and accountant to know for sure you make the deductions properly.
What is a corporation tax and a taxable income?
A corporation tax is what you pay on your business profits in the UK. The rate for 2019 is 19%, the rate for 2020 is 17% (from April 1 2020).
A taxable income is what your business gains in profits. It includes the money you get from:
- Actually doing the business (‘trading profits’);
- Selling your company’s assets for more than they cost (‘chargeable gains’).
Your business based in the UK: Corporation Tax must be paid on all profits coming both the from the UK and abroad.
Your business based outside the UK (you have an office or a branch in the UK): Corporation Tax must be paid only on the profits gained in the UK.
What expenses can be deducted?
HMRC only allows deducting the expenses that were directly connected to your business activities. That includes the money you spend on:
- Formation and registration of your private limited company;
- Renting premises for your business and paying utility bills;
- Paying salaries;
- Stock and raw materials;
- Stationery and phones bills — office costs;
- Travel & accommodation for business trips;
- Legal & financial needs of your business;
- Marketing, etc.
What expenses cannot be deducted?
The expenses you cannot deduct are also known as disallowable expenditure and includes:
- Depreciation of assets;
- Entertaining of your suppliers and clients;
- Movements in general provisions;
- Remunerations not paid in 9 month from the accounting period end, etc.
Entertainment costs for your employees can be deducted: if all the employees are invited, the event is annual and the amount you want to claim is up to £150 per head.
How to deduct expenses
Jeremy has a furniture & home accessories shop. In 2019, he earned £50,000 selling tables, sofas, candles etc. He also invested in London stock exchange and got £500. In the same year, he spent £15,000 on paying salaries to his employees and £,2000 on marketing and advertising campaigns.
The time to pay the corporation tax (19%) comes and Jeremy counts. £50,000 + £500 = £50,500 is Jeremy’s taxable income for the period. He deducts: £50,500 - £15,000 - £2,000 = £33,500 and that is Jeremy’s taxable income after the possible deductions.
Jeremy’s corporation tax without deductions:
£50,500 x 0,19 = £9,595
Jeremy’s corporation tax with deductions:
£33,500 x 0,19 = £6,365