How To Reduce Corporation Tax In UK Legally

Running a limited company in the UK is profitable, but when corporation tax deadlines approach, many directors feel overwhelmed and ask the same question: How can we reduce corporation tax legally without raising HMRC risk? As of December 2025, the UK corporate tax rate remains scaled at 19% to 25% depending on your profit level. As a result, corporation tax receipts reached £97.2 billion in the 2024/25 financial year, which means a 4% increase year-on-year. 

Many entrepreneurs are searching for legitimate ways to reduce corporate tax. The good news is that HMRC allows many legitimate deductions, allowances, planning opportunities, fully compliant and smart strategies to minimise your bill by maximising what you are entitled to claim. This guide explains how to reduce corporation tax in the UK, how corporation tax is calculated and which everyday business decisions can make a real difference.

How is corporation tax calculated?

Corporation tax is calculated based on your company’s taxable profits, not turnover, after deducting allowable expenses, reliefs, and allowances.

Taxable Profits include:

• Trading Profits
• Investment Income
• Capital Gains

You can deduct:

• Allowable Business Expenses
• Capital Allowances
• Other Eligible Reliefs

The remaining amount is charged for tax at the standard UK corporate tax rate. Therefore, the key point is to reduce corporate tax by legitimately reducing taxable profit.

Current UK Corporate Tax Rates

Example: if the profit of a company reaches up to £100,000 but it claims £20,000 in deductions, then it will be taxed on £80,000 only.

Why Corporation Tax Planning Matters More than Ever

HMRC heavily relies on corporation tax revenue and mainly focuses on small and medium-sized businesses. It makes compliant tax reduction essential.

Practical Ways to Reduce Corporation Tax in the UK

Here are some HMRC-approved tactics to reduce corporation tax in the UK, and real-life examples are also discussed for demonstration.

1. Claim All Allowable Business Expenses

Deduct everything for business like marketing, professional fees, subscriptions to journals or skill-building groups, training courses, use of home allowances and even eye tests for heavy screen users.

For example, a freelance graphic designer running a limited company claimed £8,000 for home office allowances, software subscriptions and training courses. It has reduced taxable profits by that amount and saved £2,000 in tax at the 25% rate.

• Claim use of Home Allowances: If you work from home full-time or part-time, the company can claim a proportion of household costs like electricity, heating, internet, rent or council tax. It helps in reducing corporate tax without increasing risk.
• Training, Courses & Mastermind Groups: HMRC allows training costs that are beneficial in improving existing skills and covers professional courses, industry-specific mastermind groups, webinars and workshops. Training that introduces a completely new trade is not allowable, but skill development is fully deductible and tax-efficient.
• Subscriptions & Memberships: Many businesses overlook the claiming of subscriptions that can reduce corporation tax, like professional body membership, trade magazines, accounting, CRM or business software.
• Business Mobile Phone: A company can provide one mobile phone per employee or director with a handset and a monthly contract. It is a fully deductible and highly effective tax-saving tool.
• Eye Tests for Screen Users: If directors or employees use screens regularly, then eye tests paid by the company are fully deductible and corrective glasses may also be qualifying.
• Claim R&D Tax Relief: You can claim R&D Tax Relief for investing in innovative projects. It is mostly under-claimed, but the merged schemes give ~15-16% net benefit and loss-making intensive SMEs up to  ~27%. For example, A tech startup spent £100,000 on developing new software features. They applied for R&D relief and received a £20,000+ cash credit despite being loss-making, which was very helpful for cash flow.

2. Pay Salaries Strategically & Smartly

One of the most effective ways for reducing corporate tax is paying salaries to directors. Employ family members with real tasks and document records clearly. Most directors combine a low salary with dividends that balance corporation tax savings with personal tax efficiency.

Case Study: A family ran a cafe and employed the owner’s teenage children for valid weekend shifts at minimum wage, which is £5,000 each. This helped in deducting £10,000 from profits and saving £2,500 in tax, and the children also learnt responsibility.

3. Leverage Capital Allowances & Equipment Purchases

The Annual Investment Allowance (AIA) is around £1 million. So, purchase equipment and assets via the company and claim 100% relief on qualifying items like laptops, office or chairs in the purchase year. Complete spending adds 100% to new assets.

Case Study: A small manufacturing firm invested £150,000 in new machinery. Using AIA, they deducted the full amount and reduced taxable profits. It helped in saving £37,500 at a 25% rate.

4. Claim Mileage & Travel Allowances

You can claim business miles with a personal vehicle for business travel. HMRC rates are applicable and must be followed. Mileage claims reduce taxable profits while reimbursing directors fairly.

Case Study: A sales consultant drove 8,000 business miles and claimed £3,600 in mileage. This deduction saved nearly £900 in tax.

5. Boost Pension Contributions & Employee Incentives

Employer pensions are also deductible and NIC-free. Proper schemes can be helpful to cut profits now and build wealth later. For example: A director contributed £20,000 to his pension through the company. It is completely deductible and saved £5,000 in corporation tax while boosting retirement funds.

• Extra Cash Tax-Efficiency: Blend salaries, dividends, pensions, rent or loans.
• Employee Share Incentives: EMI share options can attract talent without immediate costs and tax-smartly.

6. Charitable Donations & Trivial Benefits

Gifts like cash or assets are deductible. Donating assets can also be helpful in skipping CGT, too. Trivial benefits allow small perks without tax consequences. Each benefit costs £50 or less; it should not be cash or a cash voucher, and it should not be performance-related. It can include gift cards, seasonal gifts or team meals. If they can be used correctly, these are completely deductible.

7. Optimise Your Business Structure

Groups or holding companies can slash overall tax for bigger setups. The losses in one company can be offset against profits in another company via group relief in group structure. Carry trading loss forward to save corporation tax. For Example, the post-COVID loss of £30,000 offset against later profits was helpful in saving £7,500. 

8. Use Patent Box for Intellectual Property

You can claim an effective 10% rate on qualifying patented income. If your business owns patents, trademarks, or other intellectual property that generates revenue, the Patent Box allows you to apply a lower corporation tax rate on that income.

9. Reinvest Asset Sale Proceeds

Reinvesting profits into new assets can be beneficial in deferring tax. When you sell business assets at a profit, you can defer corporation tax liability by reinvesting the proceeds into qualifying replacement assets within a specific timeframe.

10. Pay Corporation Tax Early

Submit corporate tax early to earn HMRC interest and avoid penalties. Paying corporation tax before the due date can actually benefit your business. HMRC pays interest on early payments which provides a guaranteed return on your cash.

11. Get Professional Advice

Hire accountants who can find missed opportunities, uncover hidden reliefs and keep you compliant.

VAT, Enquiries & HMRC Risk Areas

Commons VAT Enquiry Triggers

VAT issues often lead to corporation tax enquiries. Therefore, accuracy in VAT is critical. HMRC may investigate VAT where there are:

• Errors in VAT returns
• Large VAT refund claims
• Late submissions
• Random compliance checks
• Cash-heavy or high-risk industries

Corporation Tax Enquiries

Strong documentation and professional advice significantly reduce corporation tax enquiry risk. But HMRC may open a tax enquiry if:

• Expenses appear excessive
• Profits do not align with industry norms
• Income is under-declared

Landlords & Undeclared Income

For companies holding property, rental income must be fully declared. HMRC may issue notices or investigation letters if discrepancies arise. Early disclosure prevents penalties and reputational damage.

Conclusion: Smart Planning Pays Off

Reducing corporation tax in the UK is all about understanding how corporation tax is calculated, claiming every legitimate expense, using capital allowances wisely and managing VAT and compliance risks. Proactive planning with an experienced accountant ensures businesses remain compliant while paying no more tax than necessary.

Note: This guide provides general information about UK corporation tax reduction strategies and does not constitute professional tax or financial advice. Tax rules and rates change regularly. Always consult with Reflex Accounting’s qualified chartered accountant for advice specific to your business situation.

How Reflex Accounting Helps You Reduce Corporation Tax Legally

At Reflex Accounting, we specialise in helping UK limited companies reduce their corporation tax burden through smart, HMRC-compliant planning. Here’s how we make it happen:

• Expert Tax Planning & Strategy
• Capital Allowances Optimisation
• Salary & Dividend Optimisation
• HMRC Compliance & Risk Management
• Proactive Year-Round Support

Ready to reduce your corporation tax bill legally?

Book a free consultation with Reflex Accounting today. We’ll review your current position and identify immediate tax-saving opportunities for your business

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