How to reduce your Corporation Tax Bill (legally)

“Reducing” the amount of tax you pay is a tricky concept. Most responsible individuals and businesses want to pay the correct amount of tax that they owe – but equally, don’t want to pay more than they have to.

How much is Corporation Tax for a limited company?

The Corporation Tax rate for company profits for the 2024/25 tax year depends on the company profits.

Corporation tax is 25% for a business with an annual profit of over £250,000. It is 19% for companies with a profit of less than £50,000.

Businesses with an annual profit of between £50,000 and £250,000 pay a Corporation Tax of 25%, reduced by the marginal relief rate.

The key to making sure you pay no more Corporation Tax than you have to is to claim every allowable deduction and expense to give an accurate picture of your profits.

If you paid £5,000 for a new piece of equipment but forgot to claim the capital allowance you’re entitled to, your profits may be overstated by £5,000 – so you’ll pay £950 extra in Corporation Tax. It literally pays you to stay on top of these things.

Every situation is different, and there may be allowances or deductions for your specific industry (as always, check with a tax expert if unsure), but there are a few basics every business owner should know to make sure they’re not paying more tax than they need to.

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1. Claim every business expense you're allowed

Not sure about the basics? Watch the video below.

Now, make sure you’re claiming everything. Recording every £3 bus ticket and £2 pad of paper may seem like a hassle, but over the course of a year, those items add up.

You’ll have industry-specific items to claim, too – there are no hard-and-fast rules on what you can’t claim. What might be a clearly excessive luxury for one business could be a run-of-the-mill necessity for another. Just remember HMRC’s “wholly and exclusively” rule; anything you claim must be entirely for business use.

Some other expenses you may not have considered include pension contributions and professional insurance. Both of these can be paid through your company, rather than by you personally.

2. Don’t forget to pay yourself a salary

When running a limited company solo it can sometimes be easy to forget that your business is a separate legal entity – your business’ money isn’t yours! So, to get it into your pockets, you need to pay yourself a salary. 

Salaries are business expenses, which reduce your profit and, in turn, your Corporation Tax. So before it’s time to pay tax on your profits, pay yourself!

For 2024/25, the most tax efficient salary is £12,570 per annum (£1,047 per month) as you will pay no personal tax, and the business will only pay a small amount of National Insurance Contributions. 

Any additional income you take from the business can be done via dividends – dividends are drawn from profit, so you need to be able to show you have profits available before issuing dividends. Otherwise, HMRC will most likely reclassify your dividends as salary and you’ll need to pay Income Tax and National Insurance Contributions.

Check out our article to learn how and why to open a business bank account.

3. Go shopping

If you need a new laptop or phone for business use, buying them through your company is the most tax-efficient way to get your new kit.

If you’re in need of a slightly heftier piece of equipment, new premises or other assets, you can take advantage of the Government’s Annual Investment Allowance.

This allowance currently lets businesses write investments in “Plant and Machinery” (things like commercial vehicles, building fixtures and office equipment) for tax purposes. This is set at £1 million permanently.

Let’s say your business has profits of £1 million (you lucky thing). If you spend £400,000 on plant and machinery for your business, currently, the full amount can be subtracted from your profits, reducing them to £600,000. You’d then only pay Corporation Tax on £600,000.

4. Surprise HMRC with an early payment and they’ll owe you interest

That’s right – if you stay on top of your tax affairs and are able to pay your Corporation Tax bill early, HMRC will actually give you some of it back in the form of interest. Find out more in our ‘Benefits of paying Corporation Tax early’ article.

5. Donate to charity

Making charity donations via your business will act an expense and, therefore, help to reduce your corporation tax bill. You can do this by means of one-off donations, direct debits or sponsorships. 

Charity donations don’t count as business expenses if they are loans to be repaid by the charity or if the charity intends to buy property associated with the business. 

Remember, if you are donating from your business, then you are not eligible for Gift Aid, so uncheck this box if applicable. 

6. Explore government tax relief schemes

The UK government provides a number of specific tax relief programmes for businesses operating in certain fields. For example, R&D tax relief might be available to you if you are looking for an advance in your field. 

Learn more about R&D tax relief in our dedicated guide.

The Patent Box is another government scheme designed to provide tax relief to innovators. You may be eligible for a reduce rate of 10% corporation tax on profits made from patented inventions.

Creative Industry Tax Relief (CITR) gives businesses operating in specific fields to increase their allowable expenditure and reduce their rate of corporation tax. There are a number of different industries included in this scheme, including theatres, video games and children’s television– see the full list here.

The secret to lowering your Corporation Tax Bill

So the big secret to lowering your Corporation Tax is that there is no secret – it just takes diligence, a bit of knowledge of the tax system, and a few minutes every month making sure your business expenses are properly recorded.