How to Reduce Your Corporation Tax Bill in 2026 (2025/26 Tax Year)

With corporation tax rates now up to 25%, it’s more important than ever for UK companies to plan efficiently. Businesses with profits above £250,000 pay corporation tax at 25%, while smaller companies benefit from the 19% small profits rate, with marginal relief applying between £50,000 and £250,000.

Whether you run a small limited company or a growing business, using the right tax planning strategies can help reduce your corporation tax liability while remaining fully compliant with HMRC.

Here are some of the most effective ways to reduce your corporation tax bill in 2026.

1. Claim Full Expensing and Capital Allowances

Businesses can deduct the cost of qualifying capital assets such as machinery, tools, and IT equipment through capital allowances.

Key Capital Allowances Available

Full Expensing (100%)
Companies can deduct 100% of the cost of new qualifying plant and machinery in the year it is purchased.

Annual Investment Allowance (AIA)
Up to £1 million of qualifying expenditure can be deducted immediately.

50% First-Year Allowance
Available for certain special rate assets such as electrical systems, heating or ventilation equipment.

These allowances can significantly reduce taxable profits when investing in equipment or infrastructure.

2. Take Advantage of Full Expensing (Replacing the Super-Deduction)

The Super-Deduction ended in March 2023, but it has effectively been replaced by permanent full expensing for qualifying plant and machinery investments.

This means companies can still claim 100% tax relief upfront for eligible assets, making it one of the most valuable tax reliefs available to businesses investing in growth.

3. Make Employer Pension Contributions

Employer pension contributions remain a highly tax-efficient way to extract profits from a company.

Benefits include:

• Contributions are deductible for corporation tax purposes
• No National Insurance contributions
• Funds grow tax efficiently for retirement

However, contributions must be wholly and exclusively for business purposes and generally must be paid before the accounting year end to receive relief.

4. Claim Research & Development (R&D) Tax Relief

If your company invests in innovation, product development, or improving processes, you may qualify for R&D tax relief.

Since April 2024, the R&D schemes have been simplified into:

Merged R&D Scheme

• Tax credit of around 20% of qualifying expenditure for many companies.

Enhanced R&D Intensive Support (ERIS)

• For R&D-intensive SMEs, offering higher relief.

Qualifying activities can include:

• Developing new products or services
• Improving existing technologies
• Creating new manufacturing processes

5. Make the Most of Loss Relief

If your company experiences losses, these can often be used to reduce corporation tax.

Available options include:

Carry Forward Losses
Use losses to offset future profits.

Carry Back Losses
Offset losses against profits from previous years and reclaim corporation tax already paid.

Group Relief
If you operate multiple companies, losses from one company may be offset against profits in another within the same group.

Effective loss planning can significantly reduce tax liabilities during periods of growth or volatility.

6. Extract Profits Tax-Efficiently (Salary vs Dividends)

Many company directors extract profits using a combination of salary and dividends.

Typical strategy:

• Take a salary up to the National Insurance threshold
• Extract remaining profits through dividends

Dividends are often more tax-efficient because they:

• Do not attract National Insurance contributions
• May fall within the £500 dividend allowance

Dividend tax rates depend on your personal tax band.

Careful planning can help keep income within the basic rate band, reducing overall tax.

7. Claim the Employment Allowance

Eligible businesses can reduce their employer National Insurance liability by up to £10,500 per year.

Key eligibility rules include:

• You must be a business or charity
• The company must have more than one employee (or director with employees)
• Only one company in a group can claim

This allowance can significantly reduce payroll costs for small businesses.

8. Make Charitable Donations

Donations made by a company to registered UK charities are generally deductible for corporation tax purposes.

Benefits include:

• Reducing taxable profits
• Supporting charitable causes
• Strengthening corporate social responsibility

To qualify, donations must not provide a significant benefit to the company in return.

Key Corporation Tax Planning Tips for 2026

Businesses looking to reduce their tax bill should consider:

• Investing in equipment to benefit from full expensing
• Reviewing R&D activities for tax relief eligibility
• Making tax-efficient pension contributions
• Ensuring loss relief is fully utilised
• Optimising salary and dividend planning
• Claiming the Employment Allowance

Proactive tax planning can significantly reduce your corporation tax liability while supporting business growth.

Need Help Reducing Your Corporation Tax?

At Merranti Accounting, we specialise in corporation tax planning, compliance and business structuring.

Our team helps businesses:

• Identify tax-saving opportunities
• Claim available reliefs
• Stay compliant with HMRC regulations
• Reduce their corporation tax bill legally

If you’d like expert advice, contact Merranti Accounting today to discuss how we can help optimise your tax position.