Corporation Tax is charged on the profits of UK limited companies. With the main rate now at 25% for companies with profits over £250,000 (and a small profits rate of 19% for profits under £50,000), effective tax planning can make a significant difference to your bottom line. Here are 10 legitimate ways to reduce your corporation tax bill.
1. Claim all allowable business expenses
The most straightforward way to reduce Corporation Tax is to ensure you claim every allowable business expense. These reduce your taxable profit. Common expenses that companies miss include: staff entertaining (subject to rules), home office costs for directors, mileage claims, training costs, subscriptions and small equipment purchases.
2. Director salary and dividends strategy
The combination of salary and dividends is the classic tax-efficient structure for owner-managed companies. Pay yourself a salary of £12,570 (the personal allowance) — this is deductible against corporation tax as a business expense. Then take additional income as dividends, which are paid from post-tax profits and taxed at lower dividend tax rates.
3. Pension contributions
Employer pension contributions are fully deductible against Corporation Tax, provided they meet the wholly and exclusively test. This is one of the most tax-efficient ways to extract money from a company — the contribution reduces your company's taxable profit and builds your retirement fund simultaneously.
4. Research and Development (R&D) tax credits
If your company carries out research and development work, you may be eligible for R&D tax credits. These provide a significant tax relief — or even a cash payment from HMRC — for qualifying R&D activities. Many companies don't realise their work qualifies. It's worth discussing with your accountant.
5. Capital allowances
When your company buys equipment, vehicles or machinery, you can claim capital allowances rather than depreciation. The Annual Investment Allowance allows you to deduct 100% of qualifying asset costs up to £1 million per year against your taxable profit.
6. Timing of income and expenditure
If your company's year-end is approaching and you expect lower profits next year, you can accelerate expenditure (buy equipment, pay bonuses) into the current year to reduce this year's taxable profit. Conversely, if profits will be higher next year, it may pay to defer income where possible.
7. Director's loan account
Money you lend to your own company can be repaid tax-free. If you have a credit balance on your director's loan account, drawing this down does not count as income. This can be a useful way to extract cash from the company without additional tax.
8. Losses carried forward
If your company makes a loss in one year, this can usually be carried forward to reduce taxable profits in future years. Make sure your accountant is tracking losses so they can be used effectively.
9. Charitable donations
Qualifying donations to registered charities are deductible against your company's Corporation Tax. This reduces your tax bill while supporting causes important to you and your business.
10. Tax-efficient benefits for employees and directors
Certain benefits are exempt from tax — for example, workplace pensions, cycle-to-work schemes, mobile phones and certain childcare arrangements. Structuring remuneration to include these benefits can be more tax-efficient than paying equivalent salary.
How Fernside Accounting can help
We provide proactive Corporation Tax planning for limited companies across Woodford Green, Chigwell, Loughton, South Woodford, Snaresbrook, Gants Hill, Chingford, Epping, City of London, Wanstead. We review your tax position throughout the year — not just at year-end — to identify every opportunity to reduce your tax bill legally. Book a free consultation.