How Can I Reduce My Corporation Tax Bill?

Corporation tax is a significant cost for businesses in the UK, but there are several legal strategies that businesses can employ to reduce their tax liability. Proper planning and making use of tax reliefs and deductions can help to minimise your corporation tax bill. Below are some of the most effective ways to reduce your corporation tax liability.

1. Claim All Allowable Business Expenses

One of the simplest ways to reduce your corporation tax bill is to claim all allowable business expenses. These expenses reduce your company’s taxable profit and, therefore, the amount of corporation tax owed.

Common allowable expenses include employee wages, rent, utilities, office supplies, and insurance​​.
Dual-purpose expenses, such as vehicles used for both business and personal purposes, can be partially claimed based on the business use proportion​.
Key Tip:
Keep detailed and accurate records of all business expenses to ensure you can justify the deductions claimed if HMRC investigates​​.

2. Maximise Capital Allowances

Businesses can claim capital allowances on certain types of capital expenditure, such as buying machinery, equipment, or vehicles. These allowances provide tax relief by reducing your taxable profits.

Annual Investment Allowance (AIA): Businesses can claim 100% of the cost of qualifying plant and machinery in the year of purchase, up to £1 million. This is particularly useful for small and medium-sized businesses making significant investments in equipment​​.

Super Deduction: For qualifying capital investments made between April 2021 and March 2023, businesses can claim a 130% deduction. This means businesses can deduct more than the cost of the asset from their taxable profits​​.

Writing Down Allowance: For assets not fully deductible in the year of purchase, businesses can claim a percentage of the asset’s value each year. This applies to cars and other items that don’t qualify for the AIA​.

Key Tip:
Plan your capital investments strategically to make the most of the available allowances, especially the super deduction for high-value assets.

3. Utilise Research and Development (R&D) Tax Relief

If your company engages in research and development (R&D), you may be able to claim significant tax relief. The R&D tax relief is designed to encourage companies to innovate and invest in the development of new products, processes, or services.

R&D Tax Relief for SMEs: Small and medium-sized enterprises (SMEs) can claim an additional 86% deduction on qualifying R&D costs, bringing the total deduction to 186%. This effectively reduces taxable profits and can even result in a tax credit if the company is loss-making​​.

R&D Expenditure Credit (RDEC): Larger companies or SMEs not eligible for the SME scheme can claim the RDEC, which provides a credit of 13% of qualifying R&D expenditure​.

Key Tip:
Ensure that you document all R&D activities thoroughly and maintain clear records of qualifying expenditure to maximise your claim​​.

4. Make Pension Contributions

Employer contributions to employee pension schemes are deductible from taxable profits. Making pension contributions is a tax-efficient way to reduce your corporation tax liability while supporting your employees’ retirement savings.

Pension contributions are treated as an allowable business expense, so they reduce your taxable profits and your corporation tax bill​.
Key Tip:
Consider increasing pension contributions if you have excess profits, as this can reduce your tax liability while providing valuable benefits to employees​.

5. Claim the Employment Allowance

If your business employs staff, you may be eligible for the Employment Allowance, which can reduce your Employer National Insurance Contributions (NICs) by up to £5,000 per year. This can reduce your overall payroll costs and, in turn, your corporation tax bill​.

Key Tip:
Check if your business is eligible for the Employment Allowance, especially if you have a small workforce or recently started employing staff​​.

6. Utilise Loss Relief

If your company has made a loss, you can use loss relief to reduce future tax liabilities. There are several ways to apply losses:

Carry losses forward: Losses can be carried forward to offset future profits, reducing the corporation tax bill in later years.
Carry losses back: Losses can also be carried back to offset profits made in the previous year, resulting in a tax refund​​.
Key Tip:
If you anticipate making profits in the future, carrying losses forward is an effective way to reduce your corporation tax bill in subsequent years​​.

7. Dividend Payments Instead of High Salaries

For directors of small companies, taking dividends instead of a large salary can reduce both personal income tax and NICs, as well as the overall corporation tax burden.

Dividends are taxed at lower rates than salaries and are not subject to National Insurance Contributions (NICs), making them a tax-efficient way to extract profits​.
Be mindful that dividends must be paid out of post-tax profits, so they do not reduce the company’s taxable profits directly. However, they reduce the need for high salaries, which are subject to NICs​​.
Key Tip:
Use a combination of a small salary (to benefit from NICs contributions for state pension purposes) and dividends to create a tax-efficient remuneration strategy​.

8. Consider Using a Holding Company

If your business has multiple subsidiaries or different revenue streams, forming a holding company can provide tax efficiencies. Holding companies can manage group tax relief, where losses in one subsidiary can be offset against profits in another, reducing the overall tax liability​​.

Key Tip:
Setting up a group structure can be complex, so seek advice from a tax professional to ensure it’s right for your business​​.

9. Defer Income and Accelerate Expenses

Timing is an essential part of corporation tax planning. By deferring income to the next tax year and accelerating expenses into the current tax year, you can reduce your current year’s taxable profits.

Defer Income: If possible, delay issuing invoices until after the current tax year ends to reduce taxable income.
Accelerate Expenses: Bring forward expenditure, such as purchasing supplies or making repairs, to reduce this year’s profits​.
Key Tip:
Timing strategies should be used carefully to ensure they comply with HMRC regulations. Overuse of such strategies may attract attention from HMRC​.

10. Take Advantage of Charitable Donations

Donations made to qualifying charities are deductible from your company’s taxable profits, reducing the amount of corporation tax owed. This can be an excellent way to support causes your business believes in while also benefiting from tax relief​.

Key Tip:
Ensure that the charity is registered with HMRC, and keep records of all donations to ensure you can claim the tax relief​.
Conclusion: Proactive Tax Planning is Key
Reducing your corporation tax bill requires proactive tax planning and a thorough understanding of the available tax reliefs and deductions. By taking advantage of allowable expenses, capital allowances, R&D tax credits, and other strategies, you can effectively minimise your corporation tax liability. As tax rules and regulations are complex and frequently updated, it’s always a good idea to consult with a tax professional to ensure you are maximising your savings while remaining compliant with HMRC​​​.