How do I reduce my corporation tax bill?

by Abbas Gulamhusein

If you're running a profitable limited company, corporation tax is one of your biggest costs. The current rate is 25% on profits above £250,000, with 19% on profits under £50,000 and a marginal relief between the two thresholds. On a profit of £300,000, that's £75,000 going to HMRC. Legitimate planning that reduces that bill by even 10% saves £7,500 a year. Over five years, that's £37,500. It's worth taking seriously.

The good news is that there are established strategies that reduce your tax bill without aggressive planning or risk. Most profitable companies are missing opportunities simply because they're not aware the reliefs exist, or the accountant hasn't been given the full picture of what's been purchased or what needs to be done.

Capital Allowances and Full Expensing

When a company buys equipment or machinery, the cost isn't deductible in full immediately under normal accounting rules. It gets capitalised and depreciated. Capital allowances are the tax equivalent: the rules that determine how much relief you get and when.

From April 2023, companies have access to full expensing. This means you can claim 100% of the cost of qualifying plant and machinery in the year of purchase, not spread over several years. If your company buys a £200,000 CNC machine, a fleet of vehicles for £150,000, or computer equipment and office furniture totalling £100,000, all of it can be fully deducted in the year of purchase.

Here's what that means in real terms. A £200,000 equipment purchase claimed in full saves £50,000 in corporation tax in year one at 25% rather than spreading the relief over five or ten years and getting the tax saving much more slowly. If you need that equipment anyway, the tax benefit of full expensing is essentially a 25% discount on the purchase price.

The key is making sure your accountant knows about every significant asset purchase in the year. Many companies don't claim all the capital allowances they're entitled to because assets are purchased and nobody tells the accountant. Check in with your accountant before or shortly after making a significant capital purchase so the relief is claimed correctly.

Director's Salary and Pension Contributions

How much salary you pay yourself matters for tax planning. There's an NI sweet spot. The primary threshold for employees is £12,570 per year. If you pay yourself a salary up to that level, you get a corporation tax deduction but pay no income tax and no employee NI. The company also avoids employer NI on that salary. It's the most efficient salary to pay yourself if you're extracting profit anyway.

Employer pension contributions are even more efficient. When the company contributes to your pension, it's a deductible business expense that saves corporation tax at 25%, and you pay no income tax or NI on the contribution. The full amount goes straight into your pension. Compared to taking the same amount as a dividend, where you pay corporation tax first and then dividend tax, pension contributions are dramatically more tax-efficient. A £60,000 pension contribution saves £15,000 in corporation tax immediately.

This only works if you don't need all the profit as cash right now. But for profitable companies where you can afford to lock money away until retirement, employer pension contributions should be part of your extraction strategy.

R&D Tax Relief

If your company does any qualifying innovation, technical development, or problem-solving work, you may be eligible for R&D tax relief. This is a 20% uplift on qualifying expenditure, which for many growing companies is significant. It applies to software development, engineering, manufacturing innovation, and similar technical work. The definition is broader than many business owners realise. If you're spending money on staff time or external costs to develop or improve products or processes, you probably qualify.

This isn't aggressive planning. It's relief the government puts in place to support innovation. If you haven't claimed it, that's money left on the table.

Timing and Loss Relief

If you know there's going to be significant expenditure coming, bring it forward into the current year to accelerate the tax relief if the corporation tax deduction will help this year. If your company has made a loss in the current year, you can carry that loss back one year and reclaim corporation tax paid, or carry it forward against future profits. This can generate real cash if you've overpaid tax in a previous year.

If your company's profits are variable year to year, there's also an option to change your accounting date. This can sometimes smooth your tax profile and defer a larger tax bill to a later year, though the rules are detailed and this needs proper planning with your accountant.

The Strategy

Corporation tax planning isn't just for large businesses. The maths work for any company paying 25% on meaningful profits. The reliefs are all legitimate. The difference is in how thoroughly they're applied. Some companies claim everything they're entitled to. Others miss opportunities because the accountant doesn't have the information or because the director hasn't thought about it.

The starting point is to sit down with your accountant and run through these areas properly. What capital expenditure is planned in the next year? What's your extraction strategy: salary, dividends, or pension contributions? Are you doing qualifying R&D work? Are there any losses to carry forward? Have you reviewed whether you qualify for any other reliefs?

Getting this right isn't just about this year. It's about building a tax-efficient structure that works year after year. Over three to five years, the cumulative saving from proper planning is substantial.

If you'd like to talk through how these strategies apply to your business and what you might be missing, get in touch with us at Saymur.