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 2025/26 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 with company profits of £100,000 could contribute £40,000 to their pension, reducing taxable profits to £60,000. Both profit levels fall in the marginal relief band, where the effective marginal rate is 26.5% — so each £1,000 of profit shifted into a pension saves £265 in tax. Corporation tax at £100,000 is £22,750; at £60,000 it is £12,150 — a saving of approximately £10,600.

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 2025/26) — 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 for R&D tax relief. The rules changed significantly from 1 April 2024, when the separate SME and large-company schemes were replaced by a single merged R&D Expenditure Credit (RDEC) scheme.

Merged RDEC Scheme (accounting periods beginning on or after 1 April 2024)

A 20% expenditure credit on qualifying R&D costs, claimed as a receipt in the profit and loss account
For a profit-making company paying the 25% main rate, the net benefit is 15% of qualifying expenditure after corporation tax
Loss-making companies can receive the credit as a cash payment (subject to a PAYE/NIC cap)

Enhanced R&D Intensive Support (ERIS)

Available to loss-making SMEs where at least 30% of total expenditure is R&D
Higher credit rate of 27%, giving a net cash benefit of approximately 20% for genuinely R&D-intensive companies

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

R&D claims require CT600L (the supplementary page) and a detailed Additional Information Form submitted to HMRC before or with the return.

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	21.50%
£100,000	22.75%
£150,000	24.00%
£200,000	24.625%
£250,000	25.00%

The statutory formula applies a marginal relief fraction of 3/200 — so for every £1 of profits in the band, the effective rate increases gradually. The practical implication: any deduction (pension contribution, AIA claim) that reduces profits within this band saves tax at the marginal rate of 26.5%, not just 25%.

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 — entered on CT600 box 305 as qualifying donations and deducted from profits before tax
Gifts of equipment (deduct the market value)
Sponsorship payments (if there's a genuine business purpose)

Note that the Gift Aid scheme works differently for companies than for individuals. When a company makes a cash donation, it pays the full gross amount and deducts it from taxable profits — the charity does not reclaim any tax from HMRC on a company gift. Gift Aid reclaims only apply to donations made by individuals paying income tax.

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 is a Section 455 tax charge of 33.75% on any outstanding participator loan — there is no minimum loan amount before S455 applies. To avoid the charge, the loan must be repaid within 9 months and 1 day of the period end (the same date corporation tax is due). A director who repays at, say, month 11 — before the filing deadline but after the CT payment date — will still face the charge. The S455 tax is refundable once the loan is cleared, but it must first be declared and paid on the CT600A.

Read our directors' loan account guide →

11. Employment Allowance

If your company employs people:

£5,000 allowance against employer's NI in 2024/25, rising to £10,500 from 6 April 2025 (2025/26 onwards)
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.

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