How to Reduce Corporation Tax in the UK: 15 Legal Strategies for 2025

Understanding Corporation Tax Rates (2024/25)

Before exploring reduction strategies, it's important to understand current Corporation Tax rates:

• Small Profits Rate: 19% for profits up to £50,000
• Main Rate: 25% for profits over £250,000
• Marginal Rate: Graduated rate between £50,000 and £250,000

These rates apply to taxable profits after all allowable deductions and reliefs.

1. Claim All Allowable Business Expenses

One of the simplest ways to reduce Corporation Tax is to ensure you claim all legitimate business expenses:

Common Allowable Expenses:

• Office Costs: Rent, rates, utilities, insurance, cleaning
• Travel Expenses: Mileage (45p per mile first 10,000 miles, 25p thereafter), train fares, accommodation
• Equipment and Software: Computers, phones, software licenses, office furniture
• Professional Fees: Accountant, legal, consultancy fees
• Marketing: Advertising, website costs, promotional materials
• Training: Courses, conferences, professional development
• Subscriptions: Professional memberships, trade publications
• Insurance: Business, professional indemnity, public liability

Tax Savings Example:

If you claim an additional £5,000 in legitimate expenses:

• Profit reduction: £5,000
• Corporation Tax saving: £950-£1,250 (19-25%)
• Net benefit: £5,000 expense saves £950-£1,250 in tax

2. Use the Annual Investment Allowance (AIA)

The Annual Investment Allowance allows you to claim 100% tax relief on qualifying equipment purchases:

Key Details:

• Allowance: Up to £1 million per year (2024/25)
• Qualifying Assets: Equipment, machinery, vehicles (not cars), computers, office furniture
• Benefit: Full tax relief in year of purchase (rather than depreciation over years)

Example:

Purchase £20,000 of equipment:

• Full £20,000 deducted from profits
• Corporation Tax saving: £3,800-£5,000 (19-25%)
• Effective cost: £15,000-£16,200

3. Make Company Pension Contributions

Company pension contributions are one of the most tax-efficient ways to reduce Corporation Tax:

Benefits:

• Tax-Deductible: Reduces taxable profits, saving 19-25% Corporation Tax
• No NICs: Employer contributions don't attract National Insurance
• Annual Allowance: Up to £60,000 per employee (2024/25)
• Carry Forward: Can use unused allowance from previous 3 years

Example:

Company contributes £20,000 to director's pension:

• Profit reduction: £20,000
• Corporation Tax saving: £3,800-£5,000
• Effective cost: £15,000-£16,200
• Pension grows tax-free until withdrawal

4. Claim Research & Development (R&D) Tax Relief

If your company undertakes qualifying R&D activities, you can claim significant tax relief:

Qualifying Activities:

• Developing new products or processes
• Improving existing products or processes
• Overcoming technical challenges
• Software development
• Engineering projects

Relief Rates:

• Small/Medium Companies: 186% deduction on qualifying costs
• Large Companies: RDEC scheme provides 20% credit
• Loss-Making Companies: Can claim cash credit of up to 14.5%

Example:

£50,000 qualifying R&D costs:

• Enhanced deduction: £93,000 (186% of £50,000)
• Corporation Tax saving: £17,670-£23,250
• Effective cost: £26,750-£32,330

5. Use the Employment Allowance

The Employment Allowance reduces your employer National Insurance bill:

Details:

• Allowance: Up to £5,000 per year (2024/25)
• Eligibility: Companies with employer NICs bill under £100,000
• Benefit: Reduces employer NICs, effectively reducing employment costs

Impact:

While this doesn't directly reduce Corporation Tax, it reduces overall employment costs, allowing you to pay higher salaries or dividends from the same profit level.

6. Claim Capital Allowances on Vehicles

If you purchase a vehicle for business use, you can claim capital allowances:

Options:

• First Year Allowance (FYA): 100% relief on zero-emission vehicles
• Writing Down Allowance: 18% per year on cars with CO2 emissions under 50g/km
• Main Rate Pool: 6% per year on cars with higher emissions

Tax-Efficient Choice:

Electric or low-emission vehicles offer the best tax benefits, with 100% first-year allowance available.

7. Time Your Expenses and Income

Strategic timing can help optimize your Corporation Tax position:

Strategies:

• Accelerate Expenses: Make purchases before year-end to claim relief earlier
• Defer Income: Invoice after year-end to push income into next tax year (if cash flow allows)
• Pension Contributions: Make before year-end to reduce current year's tax
• Equipment Purchases: Time to maximize AIA usage

Important: Only use legitimate timing strategies - artificial manipulation can be challenged by HMRC.

8. Claim Patent Box Relief

If your company holds qualifying patents, you can benefit from reduced Corporation Tax:

Details:

• Rate: 10% Corporation Tax on patent-related profits (vs 19-25% standard)
• Eligibility: Must own or exclusively license qualifying patents
• Benefit: Significant tax saving on patent-related income

Example:

£100,000 patent-related profits:

• Standard Corporation Tax: £19,000-£25,000
• Patent Box Tax: £10,000
• Tax Saving: £9,000-£15,000

9. Use Loss Relief

If your company makes a loss, you can use various loss relief options:

Options:

• Carry Forward: Offset losses against future profits
• Carry Back: Offset against previous year's profits (limited to £2 million)
• Group Relief: If part of a group, losses can be transferred

Benefit:

Losses can eliminate or reduce Corporation Tax in profitable years, providing valuable cash flow benefits.

10. Claim Creative Industry Tax Reliefs

If your company operates in creative industries, you may qualify for specific reliefs:

Available Reliefs:

• Film Tax Relief: Up to 25% of production costs
• Video Games Tax Relief: Up to 25% of development costs
• Theatre Tax Relief: Up to 25% of production costs
• Orchestra Tax Relief: Up to 25% of production costs
• Museums and Galleries Relief: Up to 25% of exhibition costs

11. Use the Seed Enterprise Investment Scheme (SEIS)

If you're raising investment, SEIS can provide tax benefits:

Benefits:

• Income Tax Relief: Investors get 50% income tax relief
• CGT Exemption: Gains on SEIS shares are CGT-free
• Loss Relief: If shares become worthless, investors can claim loss relief

Impact:

While this benefits investors rather than directly reducing Corporation Tax, it can make your company more attractive to investors, potentially allowing you to raise capital more easily.

12. Claim Charitable Donations

Charitable donations made by companies are tax-deductible:

Benefits:

• Tax-Deductible: Reduces taxable profits
• Gift Aid: Charity can claim additional 25% from HMRC
• No Limit: No cap on charitable donations

Example:

Donate £1,000 to charity:

• Profit reduction: £1,000
• Corporation Tax saving: £190-£250
• Effective cost: £750-£810

13. Use the Small Profits Rate

If your profits are close to the £50,000 threshold, consider strategies to stay in the 19% band:

Strategies:

• Make pension contributions to reduce profits
• Accelerate expenses before year-end
• Make equipment purchases using AIA
• Time income recognition

Example:

If profits are £55,000:

• Make £5,000 pension contribution
• Profits reduce to £50,000
• Stay in 19% band (vs marginal rate)
• Tax saving: £1,250+

14. Claim Pre-Trading Expenses

Expenses incurred before trading starts can be claimed once trading begins:

Qualifying Expenses:

• Market research
• Professional fees (legal, accounting)
• Training
• Equipment purchases
• Setup costs

Benefit:

These expenses can be deducted from your first year's profits, reducing initial Corporation Tax liability.

15. Use Group Relief (If Applicable)

If your company is part of a group, you can transfer losses and profits:

Benefits:

• Transfer losses from loss-making companies to profitable ones
• Optimize use of allowances across the group
• Reduce overall group tax liability

Requirements:

Companies must be 75% related (parent-subsidiary relationship) to qualify for group relief.

Common Mistakes to Avoid

• Not Claiming All Expenses: Missing legitimate deductions increases tax unnecessarily
• Poor Record Keeping: Inadequate records make it difficult to claim expenses
• Mixing Personal and Business: Personal expenses cannot be claimed
• Missing Deadlines: Late filing can result in penalties
• Not Seeking Professional Advice: Complex situations benefit from expert guidance
• Aggressive Tax Avoidance: Illegal schemes can result in severe penalties

Getting Professional Help

While many strategies can be implemented yourself, professional advice is valuable for:

• Complex tax planning
• R&D tax relief claims
• Group structures
• Patent Box applications
• Ensuring full compliance

Next Steps

Now that you understand Corporation Tax reduction strategies:

• Review your current expenses and ensure all are claimed
• Consider making pension contributions before year-end
• Evaluate if you qualify for R&D relief or other industry-specific reliefs
• Use our Business Tax Calculators to model different scenarios
• Consult a tax advisor for complex situations