Corporation tax is an unavoidable part of running a business in the UK, but that doesn’t mean you can’t reduce your bill. With smart corporate tax planning, you can legally minimise what you owe and reinvest those savings into your company. This guide outlines practical strategies every UK business owner should know, whether you’re running a limited company, a growing SME, or managing multiple businesses.
What is Corporation Tax?
Corporation tax is the tax your company pays on its profits. As of 2025, the UK operates a tiered system:
- 19% for companies with profits up to £50,000.
- 25% for companies with profits over £250,000.
- Marginal relief applies to profits between these thresholds.
If you’re running a limited company, you’ll pay corporation tax on:
- Trading profits
- Investments
- Capital gains
Deadlines matter: You must pay corporation tax nine months and one day after your accounting period ends, and file your tax return within 12 months.
Why Tax Planning Matters for UK Companies
Tax planning isn’t about dodging HMRC it’s about making informed, legal decisions that reduce your liability. Done well, it can:
- Free up cash flow
- Help you reinvest in growth
- Increase net profit
- Keep you compliant and audit-ready
In short, a good plan means less stress and more control.
Legal Strategies to Reduce Corporation Tax
There’s no single trick to slashing your tax bill it’s about layering smart strategies. Here are some of the most effective methods used by UK businesses.
Claiming Allowable Expenses
Allowable expenses are costs that HMRC recognises as essential to running your business. These can be deducted from your taxable profits:
- Staff salaries and NICs
- Office costs (rent, utilities, equipment)
- Marketing and advertising
- Travel expenses (business-only)
- Subscriptions and professional fees
Tip: Keep receipts and detailed records. HMRC may request evidence during a review.
Using Capital Allowances
Capital allowances let you deduct the cost of certain business assets:
- Annual Investment Allowance (AIA): Claim up to £1 million per year on most plant and machinery.
- Full Expensing (2023 onwards): 100% deduction for qualifying equipment in the year of purchase.
- Writing Down Allowance: For assets that don’t qualify for full expensing.
Explore more: Tax Planning Strategies for UK Businesses in 2025
Paying Yourself Efficiently
For directors of limited companies, how you pay yourself matters:
- Take a low salary (to qualify for state pension)
- Top up with dividends (taxed at a lower rate than salary)
Dividends are not subject to National Insurance, making this a common strategy to reduce overall tax.
R&D Tax Credits
If your business is investing in innovation, you may qualify for Research & Development tax relief:
- SME scheme: Up to 27% of eligible R&D costs
- RDEC scheme: For larger companies or those receiving grants
Qualifying activities include software development, product innovation, and improving processes.
Pension Contributions
Company contributions to employee pensions (including directors) are an allowable business expense. They:
- Reduce corporation tax
- Help with long-term savings
- Boost employee retention
Tip: Ensure contributions are “wholly and exclusively” for the purposes of business.
Buying Property Through Your Company
This can offer long-term tax benefits:
- Rental income is taxed at the corporation tax rate (not personal income tax)
- Mortgage interest is deductible
- Potential for capital gains planning on sale
However, it’s not for everyone.
Loss Relief & Group Relief
Businesses can offset losses against profits to reduce corporation tax:
- Carry forward past losses to future years
- Carry back up to three years for immediate relief
- Group relief: Share losses between companies under common ownership
This is particularly useful for larger or multi-entity businesses.
Common Mistakes to Avoid
While tax planning is legal and encouraged, some businesses cross the line into avoidance or even evasion. Key things to avoid:
- Artificial schemes with no real commercial purpose
- Failing to document expenses or decisions
- Using offshore accounts without transparency
Want to stay compliant? Read: Corporate Tax Loopholes: What’s Legal & What’s Not?
Conclusion & Next Steps
Corporation tax can feel like a burden, but with the right strategies, it becomes an area of opportunity. Every company, from startups to mature businesses, can take action today to reduce their liability without falling foul of HMRC.
Key takeaways:
- Use allowable expenses and capital allowances
- Pay yourself tax-efficiently
- Explore R&D relief and pension contributions
- Review property purchases and loss relief
- Avoid aggressive or artificial schemes
Next steps:
- Conduct a tax strategy review
- Speak to a qualified accountant or tax advisor
