How to Reduce Corporation Tax Legally: 12 Strategies for UK Companies

Every pound you save on corporation tax is a pound your business keeps. The good news: HMRC provides dozens of legitimate reliefs and deductions designed to encourage business growth.

This guide covers 12 proven strategies to reduce your corporation tax bill — all completely legal and above board.

How Corporation Tax Works

Corporation tax is charged on your company's taxable profits — that's revenue minus allowable expenses. For the 2024/25 tax year:

19% rate on profits up to £50,000 (small profits rate)
25% rate on profits over £250,000 (main rate)
Marginal relief on profits between £50,000 and £250,000

The lower your taxable profits, the less tax you pay. Every strategy below works by either increasing allowable deductions or accessing specific reliefs.

1. Claim All Allowable Business Expenses

The most straightforward way to reduce your tax bill. Common expenses directors forget to claim:

Home office costs — proportion of rent/mortgage interest, utilities, broadband
Business travel — mileage at 45p/mile (first 10,000 miles), train tickets, accommodation
Professional subscriptions — accountancy bodies, trade associations
Training courses — directly related to your current business
Business insurance — professional indemnity, public liability, employer's liability
Bank charges and interest — on business accounts and loans
Phone and internet — business proportion of personal contracts

Key rule: The expense must be "wholly and exclusively" for business purposes. Mixed-use items need apportioning.

Read our complete guide to allowable expenses →

2. Maximise Capital Allowances

Capital allowances let you deduct the cost of business assets from your profits:

Annual Investment Allowance (AIA)

100% deduction on qualifying plant and machinery
Current limit: £1,000,000 per year
Covers computers, office furniture, tools, vehicles (with restrictions), machinery

Full Expensing (from April 2023)

100% first-year deduction on qualifying main rate plant and machinery
No upper limit
Permanent policy — not a temporary measure

Structures and Buildings Allowance

3% annual deduction on construction or renovation costs
Applies to commercial buildings and structures

Learn more about capital allowances for small companies →

3. Pension Contributions

Company pension contributions are one of the most tax-efficient strategies available:

100% deductible as a business expense
No employer's National Insurance on pension contributions
Director can contribute up to £60,000 per year (Annual Allowance)
Carry forward unused allowance from previous 3 years
Money grows tax-free inside the pension

Example: A director earning £50,000 with company profits of £100,000 could contribute £40,000 to their pension, reducing taxable profits to £60,000 and saving £10,000 in corporation tax (at 25%).

4. Salary vs Dividends Planning

How you extract money from your company affects the overall tax bill:

Salary up to NI threshold (£12,570 for 2024/25) — deductible for the company, tax-free for you
Employer pension contributions — deductible, no NI
Dividends — paid from post-tax profits, but taxed at lower rates than salary

The optimal strategy depends on your total income, but most single-director companies benefit from:

Salary at the personal allowance level
Employer pension contributions
Dividends for the remainder

Read our dividends vs salary guide →

5. R&D Tax Relief

If your company develops new products, processes, or services, you may qualify:

Small Company R&D Relief

Additional 86% deduction on qualifying R&D expenditure (from April 2023)
Loss-making companies can claim a tax credit of 10%
Qualifying activities include: developing software, engineering new products, improving processes

What Counts as R&D?

The project must seek an advance in science or technology — not just new to your business, but new to the field. Common qualifying activities:

Software development (new algorithms, architectures)
Product prototyping and testing
Manufacturing process improvements
Scientific research

Our R&D tax relief guide explains eligibility →

6. Carry Forward or Back Losses

If your company makes a trading loss:

Carry back — offset against profits of the previous 12 months for an immediate tax refund
Carry forward — offset against future profits indefinitely
Group relief — transfer losses to profitable group companies

This is particularly valuable for new companies that lose money in their first year — you can carry the loss forward and reduce tax when you become profitable.

Read our guide to corporation tax losses →

7. Timing of Income and Expenses

Strategic timing can reduce your tax bill:

Accelerate expenses — buy equipment or pay annual subscriptions before your year-end
Defer income — if possible, invoice after your year-end
Capital purchases — make them before year-end to claim AIA in the current period
Bonuses — accrue director bonuses before year-end (must be paid within 9 months)

Warning: HMRC can challenge arrangements that have no commercial purpose other than tax avoidance. Timing decisions should reflect genuine business needs.

8. Marginal Relief for Profits Between £50,000 and £250,000

If your profits fall in this range, you don't pay the full 25%. The marginal relief formula reduces your effective rate:

Profit	Effective Rate
£50,000	19.00%
£75,000	20.50%
£100,000	22.00%
£150,000	23.50%
£200,000	24.25%
£250,000	25.00%

Important: If you have associated companies, the thresholds are divided between them. Two associated companies? The small profits threshold drops to £25,000 each.

9. Charitable Donations

Qualifying charitable donations are deductible for corporation tax:

Cash donations to registered charities
Gifts of equipment (deduct the market value)
Sponsorship payments (if there's a genuine business purpose)
Gift Aid — the charity claims back 25% of the donation value

Donations must be to a registered UK charity or Community Amateur Sports Club (CASC).

10. Directors' Loan Account Management

If the company owes you money (you've put personal funds in), the company can pay you interest:

Interest paid to you is a deductible business expense
Rate must be at a commercial level (typically around Bank of England base rate)
You'll pay income tax on the interest received
The company must deduct basic rate income tax at source

Conversely, if you owe the company money (overdrawn DLA), there's a Section 455 tax charge of 33.75% on loans over £10,000. Repay before the CT600 deadline to avoid this.

Read our directors' loan account guide →

11. Employment Allowance

If your company employs people (including the director, in some cases):

£10,500 allowance against employer's NI (2024/25)
Reduces your employment costs, freeing up profits
Not available for single-director companies with no other employees
Claimed through your payroll software

12. Consider Your Company Year-End

Your accounting period affects when tax is due and what rates apply:

31 March year-end — aligns with the tax year, simplifies FY splitting
Avoid spanning rate changes — if a rate change is coming, consider a short accounting period
Cash flow planning — tax is due 9 months and 1 day after your period ends

What NOT to Do

Some "tax reduction" schemes are illegal or will trigger HMRC investigation:

❌ Suppressing income — not declaring all revenue
❌ Fake expenses — claiming personal costs as business
❌ Aggressive schemes — marketed avoidance schemes (HMRC actively pursues these)
❌ Transfer pricing abuse — artificial transactions with connected parties
❌ Umbrella company fraud — tax avoidance through payroll intermediaries

If something sounds too good to be true, it probably is. Stick to the legitimate strategies above.

File Your CT600 with Taxpipe

Once you've optimised your tax position, file your CT600 return with Taxpipe for just £59. Our guided wizard handles all the calculations — corporation tax, marginal relief, FY splitting — so you know your return is accurate.

Start filing your CT600 →

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How to Reduce Corporation Tax Legally: 12 Strategies for UK Companies