February 23, 2026

If you run a small limited company in the UK, you do not have to pay more corporation tax than you legally owe. As a micro entity, a company with a turnover of £1 million or less, a balance sheet of £500,000 or less, and 10 or fewer employees, there are several straightforward, HMRC-approved ways to bring your tax bill down. Things like claiming all your allowable expenses, making pension contributions, and splitting your income between salary and dividends can make a real difference. This guide walks you through each method in plain English, so you know exactly what to do and why it works. What is Corporation Tax and Who Does It Apply To? Corporation tax is the tax your limited company pays on its taxable profits. It applies to profits from trading, investments, and selling assets. As of the 2025/26 tax year, HMRC charges: 19% on profits up to £50,000 (the Small Profits Rate) 25% on profits over £250,000 (the Main Rate) A sliding Marginal Relief rate on profits between £50,000 and £250,000 Most micro entities fall well within the 19% band or somewhere in the marginal relief zone. The good news is that even at 19%, every pound of profit you can legitimately reduce means real money stays in your business, or in your pocket. Quick definition: Reducing corporation tax does not mean hiding money or bending the rules. It simply means using the reliefs and allowances that HMRC has already built into the system for businesses like yours. How to Reduce Corporation Tax in a Small Business? There is no single magic switch. Reducing corporation tax is about knowing what reliefs are available and using them correctly before your accounting year ends. The strategies below are all fully legal and widely used by small limited companies across the UK. 1. Claim Every Allowable Business Expense This is the most straightforward starting point. Every expense that is “wholly and exclusively” for business purposes reduces your taxable profit. Lower profit means lower tax. Common expenses many micro entity owners forget to claim: Home office costs, if you work from home, you can claim a proportion of your broadband, electricity, and heating bills Mileage, HMRC allows 45p per mile for the first 10,000 miles using your personal vehicle for business Professional subscriptions and memberships, trade bodies, professional bodies, and relevant software subscriptions Phone bills, the business portion of your mobile or landline costs Accountancy and legal fees, your accountant’s fee is itself tax-deductible Training and courses, if directly relevant to your current trade Travel and accommodation, for genuine business trips If you are not sure whether something qualifies, the rule of thumb is this: would you have bought it if you had no business? If the honest answer is no, it is probably allowable. 2. Use the Annual Investment Allowance (AIA) If your micro entity buys equipment, machinery, computers, or tools, you can deduct 100% of the cost from your profits in the same tax year using the Annual Investment Allowance. The current AIA limit is £1,000,000, far more than most micro entities will ever spend. This is one of the most powerful tools available to small companies. For example, if your taxable profit is £40,000 and you spend £10,000 on equipment before your year-end, your taxable profit drops to £30,000. At 19%, that saves you £1,900 in tax. 3. Pay Into a Pension Scheme Employer pension contributions are an allowable business expense. This means your company can pay directly into your pension pot, and that amount is deducted from taxable profits before HMRC calculates what you owe. Here is why this is so effective: if your company contributes £5,000 into your pension, that £5,000 never gets taxed as profit. You also avoid income tax and National Insurance on it (compared to taking it as salary). The money grows in your pension fund and comes out largely tax-free when you retire. There is no upper limit on what your company can contribute as an employer, but contributions must be commercially justifiable and pass HMRC’s “wholly and exclusively” test. 4. Set the Right Salary and Dividend Split This is one of the most popular and effective ways micro entity directors reduce their overall tax burden. It works like this: Pay yourself a salary just above the Secondary National Insurance threshold (around £9,100 for 2025/26). This keeps you in the PAYE system and preserves your state pension entitlement without triggering large NI bills Take the rest of your income as dividends from company profits Dividends are not subject to National Insurance. They are taxed at lower dividend tax rates (8.75% for basic rate taxpayers, 33.75% for higher rate). Because corporation tax has already been paid on the profits before dividends are issued, this approach avoids double taxation where possible. The exact optimal split depends on your personal circumstances, so it is worth discussing with an accountant before each tax year. 5. Carry Back or Carry Forward Losses If your micro entity made a loss in a previous year, you can use that loss to reduce your taxable profit in a future year, or in some cases, carry it back to reclaim tax you already paid. HMRC allows: Carry forward, unused losses can reduce profits in future accounting periods with no time limit (for trading losses) Carry back, you can carry back trading losses to the previous 12 months to reclaim corporation tax already paid. Temporarily, during the COVID relief period,s this was extended to 3 years, though this has since reverted to 12 months for most cases If your company has had a rough year, do not assume there is no tax planning to be done. Losses are an asset on your books. 6. Time Your Income and Expenditure Carefully Corporation tax is charged on the profits of your accounting period. This means that if a large invoice payment lands just after your year-end, it falls into the next tax year. Similarly, if you know you need to spend money on equipment, marketing, or professional services, doing so