How to reduce corporation tax in the UK

What is corporation tax?

Corporation tax is what businesses pay on their profits.

According to Gov.co.uk, in 2024, the UK corporation tax rate is 25% for companies making over £250,000 in profits, while smaller businesses pay a reduced rate.

Over the years, this tax has seen some major shifts, from a high of 52% in 1982 to a low of 19% between 2017 and 2022.

Though the Labour Party promised not to raise corporation tax before the election, the upcoming Autumn Budget could still bring surprises.

With a £22 billion gap in the public finances, the government may need to make tough choices that could affect businesses. 

In this uncertain fiscal environment, knowing the ways of reducing corporation tax is crucial for businesses to stay competitive and maintain profitability.

How to reduce corporation tax

Wondering how to reduce corporation tax?

There are a variety of strategies available to reduce what you owe. Knowing the best ways to reduce corporation tax can make a significant difference to your business’s bottom line.

Claim business expenses where possible

One of the easiest and most effective ways to reduce corporation tax is by claiming your business expenses.

Every pound you spend on running your business, whether it’s on office supplies, software, rent, or even mileage, can be deducted from your profits, thereby lowering the amount of tax you owe.

To claim expenses, you’ll need to keep detailed records of every cost, from receipts to invoices. It’s crucial, as HMRC could request proof during an audit.

Many business owners hire an accountant to help make sure all claims are accurate and meet HMRC standards. If not, accounting software can help you stay organised and compliant.

Pay HMRC early to earn interest

Paying HMRC early may sound counterintuitive, but it’s a smart move if you want to reduce your tax bill.

Why? HMRC offers interest on early payments, which can directly reduce your overall tax burden.

The process is simple: make your payment before the due date, and HMRC will pay you interest on the early amount.

The interest depends on how early you pay and how much you owe, and there’s no minimum or maximum payment to get started. This tactic is a handy way to boost tax efficiency.

Make charity donations

Another great way to reduce corporation tax is to donate to UK-registered charities. Not only are you supporting a good cause, but you can also deduct those donations from your profits, lowering your taxable income.

To make the most of this, ensure you’re donating to a registered charity and report these contributions to HMRC when you file your company’s tax return. Be sure to keep receipts as proof for your records.

Research government tax relief schemes

The UK government offers several tax relief schemes that could help your business pay less tax.

For example, the research and development (R&D) tax relief lets you claim back a portion of qualifying R&D expenses. At the same time, the Patent Box scheme allows reduced tax rates on profits from patented inventions.

To take advantage of these schemes, you must keep careful records and know which activities qualify. An accountant can guide you through the process, and you can apply annually for many of these schemes, making it a regular part of your tax planning strategy.

Transfer vehicles to the company’s name

Does your business use vehicles? Transferring them into the company’s name can help in reducing corporation tax.

When a vehicle is owned by the business, expenses like fuel, insurance, and maintenance can be deducted, shrinking your taxable profits.

To make this switch, notify the DVLA and ensure all paperwork reflects the vehicle as a business asset. Keep accurate mileage records, especially if the vehicle is used for personal and business purposes, to stay compliant with HMRC.

Optimise your company structure

Optimising your company’s structure can lead to significant tax savings.

For instance, splitting your business into smaller subsidiaries could allow you to take advantage of lower tax brackets for smaller companies, ultimately reducing your overall tax burden.

This complex strategy requires careful planning and guidance from a financial adviser or accountant. They can help you ensure your company structure is tax-efficient, legally sound, and aligned with your long-term goals.

Pay your own salary

Paying yourself a salary is another clever way to reduce corporation tax.

Salaries count as allowable expenses, which means they can be deducted from your business’s profits, reducing the total amount of tax you owe.

However, it’s important to note that salaries are subject to other taxes, like income tax and national insurance.

While this helps reduce corporation tax, it will also impact your personal tax situation, so balancing salary and dividends might be the key to smart tax planning.

Buy tools via the business

Whether it’s office equipment, computers, or software, purchasing essential business tools through your company is another way to reduce your tax bill. These purchases are considered allowable expenses, meaning they lower your taxable profits.

To make the most of this, buy all necessary tools directly through your business and keep receipts for everything. As long as the purchases are genuinely used for the business, HMRC will accept them as tax-deductible expenses.

Make an employer pension contribution

Contributing to an employer pension plan is a smart move for your future and tax bill. 

Pension contributions made by your business count as allowable expenses, which reduce your taxable profits. Plus, they don’t attract national insurance contributions, offering more tax savings.

Setting up employer pension contributions requires your business to have a pension scheme in place, and it’s a straightforward process. Ensure you report these contributions to HMRC to claim your tax deductions.

Do dividends reduce corporation tax?

The short answer is no; dividends don’t directly reduce corporation tax. Dividends are paid out of post-tax profits, so they don’t lower the tax your business pays.

That said, dividends are still a useful tool in tax planning.

They are subject to lower tax rates than salaries and aren’t liable for national insurance contributions, so they can help you minimise personal taxes, even if they don’t reduce corporation tax.

Get expert financial advice

Reducing corporation tax isn’t as complicated as it may seem, and there are plenty of strategies available to UK businesses.

Whether claiming business expenses, making pension contributions, or taking advantage of government tax relief schemes, each method can help lighten your tax load. 

By staying informed and taking a proactive approach, your business can be well-prepared for any tax changes on the horizon, and you can make sure you're operating as efficiently as possible.

Unbiased will match you with a qualified financial adviser or accountant for expert guidance on how to reduce corporation tax and optimise your business finances.