How to Reduce Your Corporation Tax Bill Legally

The rates

Corporation Tax is 19 percent on profits up to £50,000, 25 percent on profits above £250,000, and a marginal rate in between. The limits are divided between associated companies.

1. Claim every allowable expense

Costs that are wholly and exclusively for the business reduce taxable profit. See claiming expenses as a limited company.

2. Use capital allowances

When you buy equipment you can usually deduct the cost through capital allowances. The Annual Investment Allowance lets most small companies deduct qualifying equipment purchases up to £1 million in full. Read capital allowances.

3. Make employer pension contributions

Contributions your company pays into a registered pension scheme for you are usually deductible, within annual allowance limits, and are not subject to employer National Insurance.

4. Consider R&D tax relief

If your company develops new products, processes or software and faces technical uncertainty, you may qualify for relief under the merged R&D scheme. Claims need careful records and, from recent changes, advance notification in many cases. Take advice before claiming.

5. Pay salary sensibly

Salary is a deductible cost to the company, while dividends are paid from profits after tax. See how to pay yourself.

6. Carry losses forward

Trading losses can usually be carried back and forward, which reduces tax in profitable years.

7. File and pay on time

Late payment brings interest and late filing brings penalties. See UK tax deadlines.

Avoid aggressive schemes. HMRC challenges arrangements that exist mainly to cut tax. Stick to well-established reliefs.

Get your return done properly

We prepare Company Tax Returns as part of our accounts service. See how it works.

Worked example: marginal relief

A company with taxable profit of £80,000 and no associated companies pays Corporation Tax at the main rate of 25 percent (£20,000) minus marginal relief. Marginal relief is 3/200 of the difference between £250,000 and the profit: 3/200 x £170,000 = £2,550. Corporation Tax is therefore £17,450, an effective rate of about 21.8 percent.

At £150,000, 25 percent gives £37,500, less marginal relief of 3/200 x £100,000 = £1,500.

Associated companies

The £50,000 and £250,000 limits are divided by the number of associated companies. If you control two companies, each has limits of £25,000 and £125,000. Check before setting up more than one company for tax reasons.

Timing matters

Buying equipment before your year end brings the allowance into the current year. Pension contributions must be paid, not just promised, by the year end. Dividends do not change Corporation Tax at all, so only plan them for your personal tax.

What not to do

• Pay personal costs through the company. HMRC treats these as taxable benefits or director loans.
• Use schemes promising to remove tax with little explanation.
• Leave losses unclaimed. Trading losses can usually be set against other income of the same year or carried forward.

Checklist before year end

1. Review your profit to date with your accountant.
2. Decide on equipment purchases and pension contributions.
3. Chase unpaid invoices and record all expenses.
4. Check your director loan account.
5. Make sure you can pay the bill nine months and one day after year end.