How to reduce corporation tax

Tax payments can have a big impact on a business’s financial performance.

For UK companies, knowing how to reduce corporation tax isn’t just about saving money. It’s about staying compliant, improving financial efficiency, and setting your business up for long-term success.

The good news?

There are plenty of legal, ethical ways to lower your corporation tax bill.

By taking advantage of available relief and deductions, you can free up valuable resources to reinvest in your business, whether that’s growing your team, upgrading technology, or expanding operations.

This article covers practical, legal strategies tailored for finance teams and business owners like you. From optimising expenses to making the most of tax relief schemes, these tips will help you reduce your tax burden while keeping your company financially solid.

Here’s what we cover:

What is corporation tax?

Corporation tax applies to limited UK companies and certain organisations such as clubs, societies, associations and co-operatives.

Following tax changes in 2023, the current corporation tax rate is 25% for businesses with profits exceeding £250,000. Companies with profits of £50,000 or less benefit from the small profits rate of 19%.

If your company’s profits fall between £50,000 and £250,000, a marginal relief rate kicks in which provides a gradual increase in the rate from 19% to 25%.

HMRC uses a specific formula to calculates marginal relief, helping companies in this range manage their tax burden more effectively as profits grow.

It’s worth noting that if your company has associated companies (companies under common control), the above thresholds are divided by the number of associated companies.

Here’s where corporation tax applies for limited companies:

• Trading profits: income from day-to-day business operations.
• Investment income: profits earned from investments such as shares or bonds.
• Selling assets: profits from selling assets such as property, equipment, or shares (also known as chargeable gains).

Understanding how corporation tax works is key to spotting opportunities to reduce liabilities while staying compliant with HMRC regulations.

In the next section, you’ll be able to explore multiple ways to do just that.

12 ways to reduce corporation tax

Reducing corporation tax doesn’t happen overnight. It takes strategic planning, careful record-keeping, and a need to stay up to date with the reliefs and allowances available for your business.

But with the right strategies in place, you can start making a real impact on your tax bill while freeing up valuable resources to reinvest in growth and opportunities.

Here are 12 practical and ethical ways to reduce your corporation tax bill:

1. Claim every eligible business expense

Reducing corporation tax starts with claiming all allowable business expenses to lower your taxable profits. These include office supplies, staff wages, utility bills, and training expenses.

Accurate records and receipts are essential to making the most of this. Proper documentation helps you make sure these costs are deductible and keeps your financial processes organised and compliant.

It’s a simple yet effective step towards managing your tax bill more effectively.

2. Maximise tax savings with R&D relief

If your business invests in innovation, you may qualify for research and development (R&D) tax relief. This allows you to deduct additional qualifying R&D costs from your profits, reducing your taxable income.

If you are part of a small or medium-sized enterprise (SMEs), R&D tax relief can mean deducting up to 186% of qualifying costs. Loss-making SMEs with R&D-intensive activity can also claim an enhanced credit.

Meanwhile, larger companies can benefit from the R&D Expenditure Credit (RDEC), which provides a taxable credit of 20% on qualifying costs.

3. Use capital allowances for assets and equipment

Leveraging capital allowances can be a smart way to reduce corporation tax.

As of April 2023, full expensing offers 100% first-year relief on qualifying plant and machinery investments.

This means that when your business invests in assets such as machinery, vehicles, or IT equipment, you can claim capital allowances to deduct these costs from your taxable profits.

For example, the Annual Investment Allowance (AIA) allows you to deduct the full cost of qualifying assets in the period you bought them, up to £1 million. This could mean significant savings, especially if you’re upgrading equipment or expanding your operations.

Additionally, the super-deduction allowance offers enhanced tax relief—up to 130%—on qualifying plant and machinery purchases, making it an excellent opportunity for larger investments.

Imagine your company decides to invest in a fleet of new delivery vehicles. By using AIA or the super-deduction allowance, you could reduce your taxable profits and offset a significant portion of the cost, giving your business a financial boost while staying compliant with tax regulations.

If your business closes, you can’t claim AIA for items bought in the final accounting period. Instead, you need to enter a balancing charge or a balancing allowance on your tax return for the year you close your business.

4. Keep payments on track

Late payments to HMRC can lead to penalties and interest, increasing your overall costs. You can avoid unnecessary charges by staying on top of your payment schedule.

An easy way to stay organised is by using accounting software to automate reminders for tax deadlines. This will help to keep your payments on track and stress-free.

5. Track business mileage

If you or your employees use personal vehicles for work-related travel, you can claim mileage allowances to reduce your taxable profits.

HMRC allows you to claim 45p per mile for the first 10,000 miles and 25p per mile for any additional miles. Accurate records of your business mileage help lower your tax bill and offset travel-related expenses.

6. Make pension contributions

Employer contributions to employee pension schemes are tax-deductible, reducing your corporation tax liability while supporting your workforce.

This strategy can also offer personal tax efficiencies for company directors when combined with a salary and dividend approach.

7. Minimise cross-border tax

Running a business internationally can sometimes mean dealing with hefty cross-border liabilities. However, double taxation treaties are designed to ease this burden, making sure your income isn’t taxed twice in different countries.

On top of that, strategically structuring your operations helps to minimise unnecessary tax exposure. Navigating international tax rules can be tricky, so it’s always a smart move to seek professional advice.

This way, you can stay compliant while fine-tuning your tax strategy for the best results.

8. Make charity donations

Giving back can benefit your business in more ways than one.

Donations to registered charities—whether in the form of money, equipment, or sponsorships—can qualify you for corporation tax relief. Not only does this reduce your taxable profits, but it also shows your company’s commitment to social responsibility.

For example, if you run a small business and want to highlight your impact while reducing your tax bill, consider supporting local community initiatives.

This could mean sponsoring a neighbourhood event, donating surplus stock or equipment to a nearby school, or contributing to a locally active charity that aligns with your company’s values.

For instance:

• If you run a tech company, your team can donate outdated but functional laptops to a youth centre or school, providing much-needed resources.
• If you run a construction firm, you might sponsor a local charity run or community project, such as building a playground or refurbishing a community centre.

When planning your charitable contributions, make sure the charity is registered and officially recognised for tax purposes. Keep detailed records of your donations, including receipts and correspondence, to support your corporation tax claim.

9. Optimise your company structure

Under the right circumstances, optimising your business structure can be a highly effective way to reduce corporation tax. Restructuring your company or group structure can unlock efficiencies that lower your overall tax liabilities.

For example, you might consider setting up subsidiaries for different parts of your business.

Let’s say your company operates both a retail arm and a consultancy service. By separating them into distinct entities, you could take advantage of different tax reliefs or lower rates applicable to each sector.

Alternatively, consolidating related entities could streamline operations and reduce administrative costs while improving your tax efficiency.

However, you should be aware that HMRC applies anti-avoidance rules. So, if your restructuring is seen as purely tax-motivated, without genuine commercial purpose, HMRC could challenge it.

10. Claim Patent Box tax relief

The Patent Box regime offers a reduced corporation tax rate of 10% on profits derived from patented inventions. This relief encourages innovation and supports companies that hold patents in the UK.

Claiming this relief can significantly reduce your tax burden if your business has qualifying intellectual property.

11. Compensate owners through salaries

Paying salaries to company directors is a legitimate way to reduce taxable profits, as salaries are a deductible business expense.

Combining a reasonable salary with dividends can create a tax-efficient remuneration strategy for business owners.

12. Allocate funds to plant and machinery

Plant and machinery investment can result in substantial tax savings through capital allowances.

Additionally, since April 2023, companies investing in qualifying new plant and machinery can claim full expensing, offering 100% first-year relief with no upper limit.

Under this scheme, for every £1 invested, you can deduct £1 from taxable profits immediately. This provides a significant tax incentive for companies upgrading equipment or expanding operations.

Streamline your tax reduction process with advanced tax software

If you’re part of a team managing your company’s finances, the right tax software can be a game-changer.

It simplifies tax management, helping ensure compliance while you uncover valuable opportunities to reduce corporation tax.

From automating expense tracking to identifying deductible costs and generating accurate tax reports, these tools offer the insights and control you need to optimise your company’s tax position easily.

Investing in the right software allows you to spend less time on tax admin and more time on growing your business. Let technology handle the heavy lifting while you focus on strategic decision-making.

Key takeaways on corporation tax reduction

Reducing corporation tax is more than just cutting costs. It’s about creating financial efficiencies that support growth and long-term sustainability.

Some of the most effective ways to achieve this include making the most of available reliefs such as R&D tax credits, claiming capital allowances wisely, and strategically investing in assets and pensions to help lower your taxable profits.

Navigating corporation tax can be challenging, especially if you’re part of a small business with a smaller team juggling multiple responsibilities.

That’s why seeking professional advice is always a smart move.

If you’re looking for even more support, or you are part of a large organisation dealing with a heavy workload, the right accounting software can be a game-changer.

It keeps you on top of expenses, manages deadlines effortlessly, and uncovers opportunities to optimise your tax position.

Plus, it ensures compliance, giving your team the freedom to focus on what really matters: keeping your business financially strong and prepared for whatever comes next.

FAQs about how to reduce corporation tax

1. Do pension contributions reduce corporation tax?

Yes, pension contributions are a great way to reduce corporation tax.

Employer contributions to employee pension schemes count as deductible business expenses, which means they lower your taxable profits—and ultimately, your corporation tax bill.

This approach doesn’t just benefit your company. It also supports your employees’ financial futures while giving you a tax-efficient way to manage business finances and offer your teams a valuable benefit.

If you’re a company director, pension contributions can be a smart strategy for personal tax planning.

2. Does taking dividends reduce corporation tax?

Taking dividends doesn’t directly reduce corporation tax. Dividends are distributed from post-tax profits, meaning corporation tax applies before paying dividends.

However, dividends are often taxed at a lower rate than salaries, making them tax-efficient for shareholders or directors to withdraw profits.

Balancing dividends with salaries can help you optimise overall tax efficiency.

3. What are add-backs for corporation tax?

Add-backs are financial adjustments made to your company’s taxable profits to account for expenses that aren’t tax-deductible.

These typically include one-time or non-operational costs that don’t directly relate to your core business activities, such as client entertainment, fines, or certain legal fees.

HMRC requires these adjustments to ensure that only allowable expenses are deducted from your profits.

Understanding add-backs helps you stay compliant while making informed decisions about your tax planning strategy.