How can I legally reduce my Corporation Tax bill in the UK?

Corporation Tax is charged on a company's taxable profits, which are calculated as income less allowable deductions. Legally reducing your Corporation Tax bill means ensuring all deductible costs are claimed, timing larger expenditure to coincide with profitable periods, and using available reliefs and allowances.

Claim every allowable expense. The first and simplest step is to ensure no legitimate business expense goes unclaimed. Allowable deductions include all costs incurred wholly and exclusively for business purposes: salaries, rent, utilities, professional fees, subscriptions, marketing, software, insurance, and bank charges. Many directors under-claim by failing to include directors' fees properly, missing professional subscriptions, or omitting costs paid personally and not reimbursed.

Employer pension contributions. Contributions made by the company directly to a registered pension scheme on behalf of directors or employees are fully deductible for Corporation Tax. They attract no National Insurance. A company in the 25% Corporation Tax band saves £25 in Corporation Tax for every £100 contributed to a pension, and the director builds a pension with no NI cost. The annual allowance across employer and personal contributions is £60,000 in 2025/26.

Director's remuneration structure. The optimal level of director salary is one that costs the company less than the Corporation Tax saving it generates. Salary is deductible for Corporation Tax. At the 19% small profits rate, a salary of £12,570 generates a Corporation Tax saving of approximately £2,388 while costing the company employer NI of £488 (on the salary above the £9,100 secondary threshold), giving a net tax saving of approximately £1,900. This is the basis for the standard £12,570 salary recommendation.

Annual Investment Allowance (AIA). The AIA allows companies to deduct 100% of the cost of qualifying plant and machinery in the year of purchase, rather than spreading the deduction over several years through the writing down allowance. The AIA limit is £1 million per year, which covers the vast majority of equipment, technology, vehicles (except passenger cars), and machinery purchases. Timing significant capital expenditure to fall within a profitable year maximises the tax benefit.

Research and Development tax credits. Companies that carry out qualifying R&D activities can claim enhanced tax relief. From April 2023, the regime was reformed. The RDEC (Research and Development Expenditure Credit) rate is now 20% for all companies. This replaces the previous SME enhanced deduction. The net benefit after Corporation Tax is approximately 15p per £1 of qualifying R&D spend for a company paying the main 25% rate. Qualifying activities must involve advancing science or technology and resolving scientific or technological uncertainty. Software development, new product development, and process innovation can qualify. The claim must be supported by a technical narrative alongside the financial figures.

Capital allowances on vehicles. Cars bought for business use qualify for capital allowances based on their CO2 emissions. Zero-emission vehicles (electric cars) qualify for 100% first-year allowances, making them immediately fully deductible in the year of purchase. Low-emission cars (under 50g/km CO2) attract enhanced allowances. Higher-emission vehicles use the standard writing down allowance at 6% per year.

Loss relief. If the company makes a loss in a period, it can carry the loss back to the previous year and reclaim Corporation Tax already paid, or carry it forward against future profits. Loss carry-back is available for up to three years in the first year of a loss (under the temporary extension introduced post-pandemic; the standard carry-back period is one year). Identifying and claiming losses promptly improves cash flow.

Gift aid and charitable donations. Cash donations by a company to registered charities are deductible against Corporation Tax. Unlike personal Gift Aid donations, there is no tax credit mechanism for companies; the deduction simply reduces taxable profits.

Timing of income and expenditure. Corporation Tax applies to the accounting period in which profits arise. Where a company has discretion over when to invoice or when to incur costs, timing these to optimise the profit profile across accounting periods can smooth the tax bill. This is a legitimate planning technique within reasonable commercial parameters.

Interest on business borrowing. Interest paid on loans taken for business purposes is generally deductible as a business expense, subject to anti-avoidance rules under the loan relationship provisions. HMRC applies transfer pricing restrictions to related-party loans.

AccountsOS categorises all your expenses automatically and flags potential deductions that may have been missed, making it easier to ensure the Corporation Tax computation starts from the right position.