How to reduce your Corporation Tax bill

As a responsible owner of a limited company and growing business, you will no doubt be vigilant in ensuring your business pays the tax owed. You'll want to avoid unnecessary tax investigations from HM Revenue and Customs (HMRC) and any subsequent financial penalties but the last thing you want is to pay too much Corporation Tax.

In this article, we will look at ways of reducing your Corporation Tax bill, including claiming all the expenses and deductions your limited company is entitled to. So dive in and find out how your company can save corporation tax.

Corporation tax for companies

Companies pay Corporation Tax on their taxable profits and any chargeable gains. The main Corporation Tax rate in the UK is 25% and the small profits rate is 19%. For companies with profits between £50,000 and £250,000 marginal relief is due. Read our comprehensive guide for more on what Corporation Tax companies pay.

Six ways to reduce your Corporation Tax

Paying yourself a salary

Running a business is a job like no other, and as the director of a limited company you are entitled to a salary. A salary can be a tax efficient way to pay yourself. The directors salary is a tax allowable expense and reduces the company's Corporation Tax bill.

When it comes to determining the level of your salary, there are things to consider and your accountant will be able to advise you on the best rate. What's more, paying yourself a salary and taking dividends (assuming you're a shareholder too) at the right levels can ensure you extract money out of your company in a very tax efficient manner.

The difficulty is knowing the right level of each, and this is where you need an accountant. Factors to consider will be your financial circumstances, your company's financial circumstances as well as tax-efficiency. We have years of experience in this area so can sit down with you and give you tailored advice to ensure you are getting what you need out of your company in the most tax efficient way.

Annual Investment Allowance

The Annual Investment Allowance (AIA) is a method that limited companies can use to deduct the cost of equipment and assets from your taxable profits.

AIA is one of the simplest forms of Corporation Tax relief to understand. All limited companies have a £1m annual investment allowance which can be used when purchasing business machinery and equipment.

AIA can't be used when purchasing business cars, assets given to your business and assets initially purchased for non-business use.

Claiming capital allowances can need careful planning – for example, it may be better to not claim AIA on certain assets to maximise your tax saving. Please come and speak to us so we can ensure you take the best approach.

Government tax relief schemes

The Government provides various allowances and relief to limited companies which can help reduce your company's Corporation Tax. Included are:

• Research and Development (R&D) tax relief - claming for any eligible R&D expenditure can help your company save tax
• Patent Box - eligible companies can elect into the Patent Box and pay a lower rate of Corporation Tax
• Creative Industry tax relief - creative industry companies can reduce their Corporation Tax and increase their allowable expenditure

Make pension contributions

As an entrepreneur, it’s always important to plan for the future, and that includes retirement, for you and your employees. Paying into pensions can be tax-efficient too.

In a workplace pension scheme, the total minimum contribution towards employee pension schemes is 8%, with employers required to contribute a minimum of 3%, and employees making up the difference.

Given the main Corporation Tax rate is 25%, for every £100 invested into an employee’s pension fund, it will only cost you £75 – all of which can be deducted from your taxable profits.

If you need help administering your workplace pension scheme, speak to our team who can help.

Allowable business expenses

Knowing allowable expenses for Corporation Tax is essential. Business expenses must be ‘wholly and exclusively' for the business and include:

• Business mileage
• Charitable donations
• Eyesight tests for staff
• Professional trade subscriptions
• Advertising fees

Pay your Corporation Tax early

The earliest that you can pay your outstanding Corporation Tax and receive credit interest is six months and 13 days after the start of your accounting period. But do note that HMRC’s credit interest is taxable and the income must be included in your company accounts.

How we can help you

As part of our Corporation Tax services, our accountants can advise on any Corporation Tax planning areas that may benefit you and your company. To arrange a free initial consultation on your Corporation Tax obligations, please contact our team today on 01908 978 278 or get in touch whenever you are ready using our online enquiry form.

Last updated 31 Jan 2025 | First published 5 Aug 2020

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This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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