How to Reduce Corporation Tax
How to Reduce Corporation Tax
Discover legal ways to reduce your UK corporation tax bill, from allowable expenses and pension contributions to capital allowances, R&D relief and year-end tax planning.
How Can You Reduce Corporation Tax Legally?
The most effective ways to reduce corporation tax legally are to claim every allowable business expense, use available capital allowances, make qualifying employer pension contributions, claim eligible R&D relief, use trading losses correctly and plan expenditure before your company year-end.
The objective is not to avoid tax artificially. Good corporation tax planning makes sure your company claims the deductions and reliefs it is legally entitled to while keeping appropriate records to support them.
Corporation Tax Rates: Know What Rate You Are Trying to Reduce
Before looking at tax-saving strategies, it is important to understand how UK corporation tax is currently calculated. Your effective tax rate depends on the company's taxable profits and circumstances.
Small Profits
19%Generally applies where qualifying taxable profits are £50,000 or less.
Marginal Relief
£50k–£250kCorporation tax increases gradually between the small profits and main rates.
Main Rate
25%Generally applies where taxable profits exceed £250,000.
The £50,000 and £250,000 limits can be reduced where a company has associated companies and for short accounting periods. The precise rate therefore depends on the company's circumstances.
12 Practical Ways to Reduce Corporation Tax
Not every strategy will apply to every limited company. The best approach is to identify the reliefs relevant to your business and take legitimate action before important accounting and tax deadlines.
Claim Every Allowable Business Expense
Genuine business expenditure normally reduces accounting profit and, where deductible for tax purposes, taxable profit. Common examples include accountancy fees, software, insurance, advertising, telephone costs, staff costs and qualifying business travel.
Consider Employer Pension Contributions
A limited company may make pension contributions for directors and employees. Where the contribution satisfies the relevant tax rules, it can normally be deducted when calculating taxable business profits.
Use the Annual Investment Allowance
The Annual Investment Allowance (AIA) can provide a 100% deduction for qualifying plant and machinery, subject to the available annual limit. The AIA limit is currently £1 million.
Consider Full Expensing and First-Year Allowances
Companies investing in qualifying new plant and machinery may be able to obtain substantial first-year capital allowances, including 100% full expensing for qualifying main-rate expenditure.
Check Whether Your Company Qualifies for R&D Relief
Companies attempting to achieve an advance in science or technology by resolving scientific or technological uncertainty may qualify for Research & Development tax relief.
For accounting periods beginning on or after 1 April 2024, the old schemes have largely been replaced by the merged R&D Expenditure Credit scheme and Enhanced R&D Intensive Support for qualifying loss-making R&D-intensive SMEs.
Review Director Salary, Dividends and Pension Contributions Together
Salary is normally an expense of the company whereas dividends are distributions of post-tax profit and therefore do not reduce corporation tax.
That does not automatically mean a higher salary is better. Income tax, employee National Insurance, employer National Insurance, dividend tax and pension planning should all be considered together.
Claim Business Mileage Correctly
Where a director or employee uses their own car or van for qualifying business journeys, the company can reimburse approved mileage.
From 6 April 2026, the approved mileage rate for cars and vans is 55p per mile for the first 10,000 business miles in the tax year and 25p thereafter.
Consider Electric Cars Carefully
A company purchasing a qualifying new zero-emission car may be able to claim a 100% first-year capital allowance. Electric company cars can also have comparatively favourable Benefit in Kind treatment.
Use Trading Losses
A trading loss does not necessarily mean the tax value of that loss is wasted. Depending on the circumstances, losses may be carried forward against future profits, carried back against qualifying earlier profits or surrendered within qualifying groups.
Don't Overlook Trivial Benefits
Qualifying trivial benefits costing no more than £50 can potentially be provided to employees without tax or National Insurance where all of the statutory conditions are met.
Directors of close companies are subject to an additional £300 annual cap on qualifying trivial benefits.
Review Other Available Tax Reliefs
Depending on the business, additional relief may be available through Patent Box, creative industry reliefs, capital allowances, property losses, terminal losses and other specialist corporation tax provisions.
Do Your Tax Planning Before Year-End
One of the biggest mistakes is waiting until the company accounts are prepared. By then, many opportunities requiring action during the accounting period have already disappeared.
How a £20,000 Deduction Could Reduce Corporation Tax
Assume a company has taxable profits of £300,000 before an additional qualifying £20,000 deductible expense or allowance.
If the deduction reduces taxable profits from £300,000 to £280,000 and those profits remain subject to the 25% main rate, the corporation tax reduction attributable to the £20,000 deduction would be:
£20,000 × 25% = £5,000
The company has still spent £20,000, so it has not “made” £5,000. Instead, the qualifying expenditure has effectively cost £15,000 after the corporation tax reduction, ignoring any other tax consequences.
Which Corporation Tax Strategies Can Have the Biggest Impact?
The potential benefit depends entirely on your company's circumstances, but this provides a useful starting point for a year-end tax review.
| Strategy | Can Reduce Taxable Profit? | When to Review | Key Point |
|---|---|---|---|
| Allowable business expenses | Yes | Throughout the year | Keep complete records and receipts |
| Employer pension contributions | Potentially | Before year-end | Must satisfy relevant deductibility rules |
| Annual Investment Allowance | Yes, for qualifying expenditure | Before buying assets | £1m annual limit; cars excluded |
| Full expensing | Yes, where qualifying | Before investment | Asset eligibility matters |
| R&D tax relief | Can reduce overall tax / generate credit | During the R&D project | Strong technical evidence is important |
| Dividends | No | Before declaration | Paid from post-tax distributable profits |
| Trading losses | Potentially | When preparing the tax return | Consider the best available use of the loss |
Corporation Tax Year-End Checklist
If your company year-end is approaching, these are some of the areas worth reviewing before the accounting period closes.
Make sure legitimate costs paid personally by directors have been recorded.
Consider whether genuine business investment should take place before year-end.
Consider whether employer pension contributions are appropriate.
Identify potentially qualifying projects while the evidence is still readily available.
Consider salary, dividends and pensions together rather than independently.
Bring director and employee expense claims up to date.
Review whether existing or anticipated losses can be used efficiently.
Forecast corporation tax early enough to avoid an unexpected cash-flow problem.
Common Mistakes When Trying to Reduce Corporation Tax
Corporation tax planning should reduce tax through legitimate commercial expenditure, allowances and reliefs — not by creating artificial transactions.
Common mistakes include:
- Buying something solely to obtain tax relief when the business does not actually need it.
- Assuming every business purchase is immediately 100% tax deductible.
- Treating dividends as a corporation tax deductible expense.
- Claiming private expenditure through the company without considering benefit or director's loan consequences.
- Assuming every car qualifies for Annual Investment Allowance or full expensing.
- Making an R&D claim without establishing the required scientific or technological advance and uncertainty.
- Waiting until the accounts are prepared before thinking about tax planning.
- Ignoring the effect of associated companies on the corporation tax thresholds.
The objective should be to pay the correct amount of corporation tax — while making full use of every legitimate deduction and relief available to the company.
Corporation Tax Planning Is About More Than the Tax Rate
Reducing corporation tax effectively requires understanding how taxable profits are calculated, when expenditure is deductible and which allowances or reliefs apply. It also helps to plan for the payment itself.
You may also find our guide explaining when corporation tax is due useful when planning your company's cash flow.
If you need your statutory accounts and Company Tax Return prepared, see our fixed-price company accounts filing service.
Frequently Asked Questions About Reducing Corporation Tax
What is the best way to reduce corporation tax?
Can I legally reduce my corporation tax bill?
Does buying equipment reduce corporation tax?
Can pension contributions reduce corporation tax?
Do dividends reduce corporation tax?
Can an electric company car reduce corporation tax?
Can R&D reduce corporation tax?
When should I start planning to reduce corporation tax?
How much corporation tax does a limited company pay?
Want to Make Sure Your Company Isn't Paying Too Much Corporation Tax?
Good tax planning starts before the accounts are filed. The Online Accountants can prepare your company accounts and Corporation Tax return while identifying legitimate expenses, allowances and tax-planning opportunities relevant to your business.
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