In a tough business landscape, every saving counts. Corporation tax is a major cost for UK firms, and while paying your due is essential, there are legal ways to lower your bill. This guide outlines practical, HMRC-approved methods to reduce corporation tax without bending rules—because smart planning isn’t the same as cutting corners.

Understanding UK Corporation Tax Basics

Corporation tax is levied at 25% on profits for most companies (companies with profits over £250,000 as of the 1 April 2024 tax year), though small profit rates and marginal reliefs may apply (19% for companies with profits under £50,000). If your profit falls between these 2 limits, most companies will be eligible for Marginal Rate Relief (MRR). Your liability covers trading income, investments, and chargeable gains. Knowing what’s taxable is the first step.

1. Claim All Allowable Business Expenses

Many businesses overpay by missing deductions. If an expense is “wholly and exclusively” for business, it’s deductible.

Examples include:

• Office rent and utilities

• Salaries and employer National Insurance

• Marketing and advertising

• Equipment and software

• Travel expenses

• Professional fees (e.g., accounting, legal)

Don’t forget home office costs if you work remotely, or a portion of broadband and phone bills. These can add up quickly.

2. Maximise Capital Allowances

If you’ve purchased assets like machinery, computers, or vehicles, capital allowances let you write down their cost against your taxable profits.

• Annual Investment Allowance (AIA): 100% deduction on qualifying expenditure, up to £1 million.

• First-year allowances: 100% deduction for eco-friendly assets.

• Writing down allowances: Claim a percentage annually if you exceed AIA limits.

These deliver real cash-flow benefits.

3. Tap into R&D Tax Credits

If your business innovates through software, manufacturing, or technical solutions, you may qualify for Research & Development (R&D) tax relief.

Even startups can benefit. The new HMRC merged RDEC scheme, or if you are R&D intensive, the ERIS scheme, offers up to 186% relief on qualifying costs, making it a powerful tool.

4. Pay Yourself Tax-Efficiently

As a director-shareholder, your payment structure affects tax liability.

• Salaries are deductible but incur NICs.

• Dividends aren’t deductible but face lower personal tax rates.

• A balanced mix can optimise both personal and corporate tax.

Plan this with a tax advisor’s input.

5. Use Tax-Efficient Pension Contributions

Employer pension contributions are a highly effective tax-saving tool.

They are:

• Fully deductible against corporation tax

• Free from employer NICs

• A smart way to reward yourself or staff while cutting profits

Ensure contributions align with pension rules.

6. Invest in Tax Software

Tax software may not be glamorous, but it boosts accuracy, prevents errors, and ensures you claim all deductions.

Cloud-based tools integrate with accounting systems, flagging tax-saving opportunities like capital allowances or R&D claims. They also stay updated with HMRC rules, ensuring compliance.

7. Leverage Loss Relief

If your business records a loss, use it strategically.

• Carry forward losses to offset future profits.

• Carry back losses to past profitable years for a tax refund.

• For group companies, use group relief to offset losses across subsidiaries.

Treat losses as valuable assets.

8. Optimise Timing of Income and Expenses

Classic tax planning: if year-end profits are high, accelerate expenses or defer income.

• Prepay suppliers, buy stock, or settle services early.

• Delay non-urgent invoices to the next period.

This manages cash flow and smooths tax liabilities in high-profit years.

9. Structure Your Business Wisely

For groups or diverse business lines, consider:

• Setting up a holding company

• Creating subsidiaries to manage risk or optimise reliefs

• Splitting trades to access lower tax rates

HMRC scrutinises artificial structures, so seek expert advice.

10. Consult Professionals Annually

Tax rules evolve constantly. Last year’s strategy may no longer work. Professional tax filing software, a proactive accountant or tax advisor will:

• Review your setup

• Identify new reliefs

• Ensure compliance

For growing or complex businesses, this is a must.

Final Thoughts

Reducing corporation tax isn’t about risky schemes—it’s about diligent planning, strategic decisions, and using every legal relief. From tracking expenses to adopting tax software, UK businesses have plenty of tools to optimise their tax position.

Don’t wait for year-end. Review your strategy now. In corporation tax, ignorance is expensive.

Need help balancing compliance and savings? The right tools and advisors can make a big difference to your bottom line.