Navigating corporation tax can be complex, and it’s easy to overlook opportunities to make your business more tax-efficient. Most business owners want to stay on top of their responsibilities while ensuring they’re not paying more than they need to. As expert tax consultants, we understand that knowing how to reduce corporation tax is a crucial skill for maximising your profits and keeping more cash in your business.
In this guide, we outline the key rules, strategies and opportunities to help you manage your corporation tax efficiently and confidently. From allowable expenses to government incentives, there are several legitimate ways to optimise your tax position and support your business’s financial health.
Who pays corporation tax?
In the UK, corporation tax is charged on the profits of:
- limited companies
- foreign companies with a permanent UK branch or office
- some clubs, associations and societies
Profits subject to corporation tax include money earned through trading, investment income, and profits made from selling assets (capital gains). Directors are responsible for ensuring tax returns are filed correctly and on time, and that the correct amount of corporation tax is paid to HMRC.
How much is corporation tax?
The amount of corporation tax your limited company pays depends on your annual profits for the tax year.
| Profit range | Corporation tax rate (2025) |
| £0 – £50,000 | 19% |
| £50,001 – £250,000 | 19% to 25% |
| Over £250,000 | 25% |
You can reduce the amount charged in the middle tax band through something called marginal relief. This means that if your profit range is between £50k and £250k you won’t pay the full 25% tax, but a slightly lower rate. Claiming all available allowances and reliefs can lower your taxable profits and potentially move you into a lower tax band.
For example, if your limited company makes a profit of £48,000 in the 2025/26 financial year, you will pay corporation tax at 19%. If it makes £100,000, marginal relief will then apply, meaning the effective tax rate would be just under 25%.
14 ways to reduce corporation tax
Now let’s dive into some key methods of how to pay less corporation tax while staying firmly on the right side of HMRC rules.
Claim every business expense
Every business expense you incur (legitimately) reduces your taxable profit. The more thorough you are in recording and claiming expenses, the lower your tax bill will be.
Examples include:
- Office costs (rent, electricity, internet)
- Staff salaries and bonuses
- Travel and subsistence expenses
- Business insurance
- Professional services (accountancy services, solicitors)
- Marketing and advertising
- Training courses
Your expenses must be wholly and exclusively for business purposes. Even small costs add up over a year, so keep detailed receipts and use accounting software to stay up to date and organised.
Invest in assets
Do you need new equipment? Perhaps you need office furniture or new plant machinery? Simply going shopping can be a method of how to reduce corporation tax, through the Annual Investment Allowance (AIA). The AIA allows 100% tax relief on qualifying purchases of plant and machinery up to £1 million annually.
Items that may qualify can include:
- computers and IT equipment
- office furniture
- vehicles (excluding cars)
- manufacturing machinery
If your business makes £300,000 profit but invests £100,000 in new machinery, you could claim the full £100,000. This reduces the taxable profits to £200,000.
Claim Research and Development (R&D) tax relief
R&D tax credits allow companies to claim tax savings for innovative activities, such as research and development. With this method you can advance your company and reward yourself for innovation by lowering your corporation tax bill.
If your company develops new products, improves processes, or solves technical problems, you might qualify for R&D tax relief. Qualifying activities could include creating bespoke software, modifying manufacturing processes, or developing new materials.
R&D relief includes up to 186% of qualifying R&D expenditure deducted from taxable profits for SMEs, and a 15% repayable tax credit for large companies under the RDEC scheme.
Maximise your capital allowances
Capital allowances let you claim tax relief on investments in business assets over time. It is a relief on the depreciation of assets and equipment. Use a specialist to review your property expenditure. Many businesses miss out on claims hidden in refurbishment work, as an example.
- First Year Allowances (FYA): 100% tax relief on energy saving equipment, low emission vehicles, and more.
- Special Rate Allowances: 50% relief for assets like heating systems and electrical fittings within buildings
Claim Patent Box tax relief
This is a pretty specific inclusion on our list of how to reduce corporation tax, and may not apply to everyone. If your company makes a profit from inventions that are patented, you could qualify for the Patent Box scheme. This allows qualifying profits to be taxed at just 10% rather than 25%.
To make use of the Patent Box you must:
- hold (or exclusively license) a qualifying patent
- have created, developed, or significantly contributed to the patented invention
Profits may come from selling products, licensing patents, or using patented processes internally.
Transfer your car to the company
If you use a vehicle heavily for business, transferring ownership to your limited company can create tax benefits. For example, you can claim running costs, such as insurance and fuel, as a business expense. You can also claim capital allowances for certain vehicles, such as electric company cars.
For example, if you transfer a hybrid car worth £18,000 to your limited company, you may reclaim running costs and claim capital allowances. This will help to reduce your corporation tax bill.
Pensions
Another method of how to pay less corporation tax – use tax free contributions to pensions. Company contributions into directors’ or employees’ pensions are a fantastic tax saving tool. This is 100% deductible against profits, not treated as a benefit in kind, and builds retirement savings whilst lowering your tax bill.
Offer share incentives to employees
The Enterprise Management Incentives (EMI) can attract and retain top talent and also offer tax efficiencies. This HMRC approved employee share scheme is available to most SME trading companies. It allows employees to acquire shares in the company, the future of that company. These shares can also be dependent on performance and other criteria, like the business being sold.
The benefits of this include:
- No tax charge when options are granted
- Reduced income tax and NICs
- Corporation tax deductions available
With a well thought out plan, the share option can boost morale, secure key staff, and reduce PAYE liabilities at the same time.
Make charitable donations
Donations to UK-registered charities can also reduce your corporation tax bill, whilst also doing something for a great cause. This method of how to reduce corporation tax has a feel good factor about it all round – you are saving money and making a difference. Charity must have recognised charitable status for relief to apply, and they can prove the money has been used for public benefit.
You can claim tax relief on:
- Cash donations
- Equipment, products, or land
- Sponsorship arrangements
- Employee secondments
Every £1 you donate could save up to 25p on your tax bill, and support people in need at the same time.
Pay your corporation tax early
If your company can afford it, paying your corporation tax bill early can earn you interest from HMRC. While the interest rate is modest (currently around 0.5%) it’s better than nothing. It also demonstrates good financial management to HMRC, which may be useful for any future interactions you have with them. Being proactive with your cashflow helps you avoid late payment penalties too.
Claim home office expenses
If your company operates from your home address, you may be able to claim some of your household running costs as business expenses. For example, if you live in a two bedroom property and dedicate one room exclusively to your business activities, you could potentially claim around 50% of your relevant household expenses. This includes electricity, heating, and internet costs.
The exact calculation can vary, so it’s wise to consult tax specialists to ensure you maximise your claim while remaining compliant with HMRC rules.
Change your company structure
So far on this list of ways to reduce corporation tax we have approached the subject primarily from the perspective of a limited company. You may not have a limited company just yet. If you’re currently operating as a sole trader or partnership, moving to a limited company could reduce your overall tax bill. This is because corporation tax rates are generally lower than higher rate income tax bands.
Alternatively, creating a group structure with a holding company can provide further advantages, allowing profits to be transferred as dividends and protecting non-taxable assets. Professional advice is essential to structure things correctly for maximum benefit.
Minimise cross border taxes
If your business operates internationally, you could be liable for tax in multiple jurisdictions. However, the UK has an extensive network of double taxation agreements designed to prevent being taxed twice on the same income. These treaties often allow you to either pay tax in just one country or claim credit for any foreign tax paid when calculating your UK tax liability.
Private health insurance
The last addition on our list of how to reduce corporation tax. If you offer private health insurance to your employees, this not only helps to attract and retain top talent, but it can also lower your corporation tax bill. Premiums paid by the company are considered allowable business expenses, meaning you can offset them against your taxable profits.
Find your ways to reduce corporation tax with Williamson & Croft
At Williamson & Croft, our specialist team can help you make the most of the reliefs, allowances, and incentives available to your business. Whether you’re just starting out or managing a multimillion-pound company, we work with you to ensure your corporation tax is handled efficiently, supporting compliance and maximising value.
Email info@williamsoncroft.co.uk for more information, or you call us on 0161 399 0121 or 0151 303 3112. Alternatively, you can send us a message on our contact us page. If you’d like to come pay us a visit, we have offices based in both Manchester and Liverpool.