Practical ways to reduce a company’s Corporation Tax bill

Start with the right tax calculation

This guide is for UK limited companies paying Corporation Tax. A company’s accounts profit is adjusted under tax rules to arrive at taxable total profits. Accounting depreciation, private costs and other disallowable amounts may need to be added back. Capital allowances then replace depreciation for qualifying assets.

A claim reduces tax only when the company qualifies for it. It may also change when tax is paid, how a loss is used or what happens when an asset is sold. Keep the supporting records with the company’s accounts and tax computation.

Claim costs incurred for the company’s business

Start with costs the company incurred wholly and exclusively for its trade. Typical examples include staff pay, employer pension contributions, insurance, software, accountancy, advertising, stock and business premises costs. A cost with both private and business use usually needs a reasonable business apportionment.

Do not put personal spending through the company as a tax deduction. Dividends are distributions of profit, not deductible staff costs. Corporation Tax itself is not an expense that reduces the profit on which it is charged. Client entertaining is usually disallowed for Corporation Tax, even when it has a genuine business purpose. Use HMRC’s company expenses guidance to check categories and exceptions.

Check how the company uses the owner’s home

A director who works from home as an employee may be able to receive reimbursement for additional household costs under agreed home-working arrangements. If the employee regularly works at home under those arrangements, the company can use HMRC’s guideline amount of £6 a week or £26 a month without receipts. A higher amount needs evidence that it does not exceed the employee’s additional household expenses. The company should record the arrangement and reimburse only eligible costs.

From 6 April 2026, employees can no longer claim Income Tax relief from HMRC for unreimbursed home-working costs. Employers can still make qualifying tax-free reimbursements. Do not apply the self-employed flat rate to a limited company: sole traders and partnerships have separate simplified-expense rules, with monthly rates of £10, £18 or £26 after at least 25 hours of business use at home. Phone and internet costs are considered separately.

If the company pays rent for a room or a more formal arrangement, document the agreement and check the personal tax and property consequences before setting a figure. Exclusive business use of a room can affect Private Residence Relief when the home is sold.

Separate business use from private use

Review mobile phones, broadband, vehicles, travel, meals and equipment before entering them in the accounts. A company may generally deduct a genuine business cost, but private use can change the deduction and may create an employee benefit or payroll reporting requirement. Ordinary travel between home and a permanent workplace is generally commuting, not business travel.

Use invoices, journey records and a written explanation of the business purpose. If the company supplies equipment for mixed business and private use, check whether the arrangement is taxable or has to be reported as a benefit. For a sole trader, claim only the business share of an asset or household bill.

Use capital allowances for qualifying equipment

Capital purchases are not normally deducted as day-to-day expenses. Instead, the company claims capital allowances on qualifying plant and machinery. The Annual Investment Allowance (AIA) can give 100% relief on most qualifying plant and machinery up to £1 million for an accounting period. The limit is reduced for a short accounting period. Companies controlled by the same person may have to share one AIA limit.

Companies may claim full expensing at 100% for qualifying new and unused main-rate plant and machinery, or a 50% first-year allowance for qualifying special-rate assets. Cars are excluded from these allowances. From 1 January 2026, some qualifying new main-rate assets can receive a 40% first-year allowance where other first-year reliefs are unavailable. Items that do not qualify for an upfront allowance may receive writing-down allowances. The rate for the main pool is 14% for expenditure in the 2026 to 2027 financial year; the special-rate pool remains at 6%.

Cars have separate emissions-based rules. Buying an asset for tax relief alone can leave the company with less cash and an asset it does not need. Check the asset type, date, private use, connected-party rules and likely disposal treatment before the company commits.

Check pay and employer pension contributions

Salary or a bonus for genuine duties may be a company expense when correctly approved, paid and processed through payroll. A dividend is not deductible. Review the whole remuneration package for a controlling director and keep evidence of their work and the company’s decision.

An employer contribution to a registered pension scheme can be deductible when it is paid wholly and exclusively for the company’s trade. The Corporation Tax deduction normally belongs to the accounting period in which the company pays it, not necessarily the period when it appears as an accounting expense. A large increase may have to be spread across periods. The employee’s annual allowance, personal tax relief limits and any tapered allowance are separate checks.

Compare the company’s and director’s combined tax position before choosing salary, dividends or pension contributions. Salary versus dividends covers the company records and tax differences.

Use current and brought-forward losses correctly

A trading loss may be set against eligible profits in the same accounting period. Depending on the company’s position, it may instead be carried back against profits of the earlier 12 months, carried forward or surrendered as group relief. Carry-back is generally conditional on the company continuing the same trade during the relevant earlier period. The temporary three-year carry-back rule for the pandemic period has ended.

For periods beginning on or after 1 April 2017, most trading losses made on or after that date can generally be carried forward against the company’s total profits. Pre-April 2017 trade losses, and some later losses, remain restricted to profits of the same trade. The rules also impose a cap on how much carried-forward loss can offset profits: broadly, a £5 million group allowance plus 50% of profits above that allowance. The allowance is shared within a group and the detailed calculation depends on the accounting periods and types of losses.

Group relief may allow current losses and some eligible brought-forward losses to be used against another group company’s profits for overlapping accounting periods. A group relationship generally requires one company to be a 75% subsidiary of another, or both to be 75% subsidiaries of a third company. The ownership test also looks at entitlement to profits and assets. Capital losses are generally set against chargeable gains, while property losses and non-trading deficits have their own rules. Prepare a company-by-company schedule so each loss is claimed once, in the right order, with any group cap and election considered.

Loss relief may save tax or bring a repayment forward, but it cannot create profits. Compare whether a carry-back repayment now or a carry-forward deduction later better suits the company’s cash needs and forecasts.

Review reliefs that match the company’s work

Research and Development relief is available only where the company undertook qualifying research and meets the current claim requirements. Ordinary product development, routine configuration and general commercial uncertainty do not automatically qualify. Identify the technical advance, uncertainty, project work and eligible costs before preparing a claim. Keep project records and check whether a claim notification is required.

Other reliefs depend on the company’s activities, assets, location and transactions. Review the rules for the relevant accounting period rather than applying a headline percentage from another year.

Use a year-end tax review

Before filing, reconcile the accounts to bank statements, invoices, payroll and asset records. Identify private or disallowable costs, check capital expenditure against the fixed-asset register, review losses and group relationships, and confirm that pension contributions were paid in the period claimed. Keep evidence for every relief and record the decision behind any apportionment.

Plan purchases, pay and pension contributions around the company’s cash flow and commercial needs. A tax deduction normally saves only part of the amount spent. Ask an accountant to model a material transaction, group claim or director remuneration change before it is made.

Related guides

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