2 min read Corporation Tax

How to Reduce Your Corporation Tax Bill Legally

Legal strategies for UK limited companies to reduce their Corporation Tax liability — allowances, reliefs, timing, and director remuneration.
How to Reduce Your Corporation Tax Bill Legally

Every UK limited company has a legal obligation to pay Corporation Tax on its taxable profits — but 'taxable profits' is not the same as the figure in your accounts. Through careful use of legitimate allowances, reliefs, and timing strategies, most companies can reduce their Corporation Tax liability significantly. Here are the most effective approaches.

Maximise Capital Allowances

The Annual Investment Allowance (AIA) lets you deduct the full cost of qualifying plant and machinery up to £1 million in the year of purchase. This immediately reduces taxable profit rather than spreading it over years. Full Expensing (available to limited companies from April 2023) extends this with no upper limit for qualifying new assets. Timing significant equipment purchases to fall in the current accounting period rather than the next can bring forward the tax deduction.

Director Pension Contributions

Employer pension contributions paid by the company on behalf of directors or employees are deductible for Corporation Tax. There is no upper limit on employer contributions for CT purposes (though individuals' Annual Allowances apply to total contributions). A company paying £30,000 into a director's pension reduces its taxable profit by £30,000 — saving £7,500 in CT at the 25% rate.

Research and Development Relief

If your company carries out qualifying research and development, you can claim enhanced deductions or a cash credit. From April 2024, the merged RDEC scheme provides a 20% taxable credit on qualifying expenditure. Even if your company is loss-making, a cash payment may be available. Many companies underestimate what qualifies — software development, engineering improvements, and novel product development can all count.

Claim All Allowable Expenses

Ensure all legitimate business expenses are charged to the company: salaries, employer NI, rent, utilities, professional fees, marketing, insurance, training, and subscriptions. If you use personal assets for business (your home as a home office, a personal vehicle for business travel), charge an appropriate amount to the company. Review regularly with your accountant to ensure nothing is missed.

Director Salary vs Dividends

Optimising how profits are extracted affects both the company's CT bill and the director's personal tax. Salary is deductible for CT; dividends are paid from after-tax profits. The optimal combination depends on the director's personal tax position, the Employment Allowance, and the company's profit levels. Get your accountant to model this annually.

Loss Relief

If your company makes a trading loss, this can be: carried back to offset profits in the previous 12 months (generating a CT repayment); carried forward indefinitely to offset future profits; in the year of a terminal loss (company ceasing), carried back up to 3 years. Properly using loss relief avoids leaving value on the table if you have had a difficult trading period.

Timing of Income and Expenses

Corporation Tax is calculated on accounting periods. Accelerating deductible expenses into the current period (for example, prepaying insurance, making a large pension contribution before year end) and deferring income to the following period can reduce the current year's liability. Be careful: HMRC can challenge artificial deferrals, so these should reflect genuine commercial decisions.

Group Relief

If you operate a group of companies, losses in one group company can be surrendered to offset profits in another, reducing the group's overall CT liability. This requires the companies to be in the same group (75% ownership) and file appropriate group relief claims in their CT600s.

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