How to Pay Less Corporation Tax:
10 Legal Strategies for Ltd Company Owners

Every pound of corporation tax you pay is a pound that could have stayed in your business. The good news? HMRC's own rules allow limited company owners to reduce their tax bill significantly — as long as you do it correctly and plan ahead.

Corporation tax currently sits at 25% for profits above £250,000 (19% for companies with profits under £50,000, with marginal relief in between). For a company turning a £100,000 profit, that's a substantial sum leaving your business every year. But most Ltd company owners are not claiming everything they're entitled to.

In this guide, we walk through ten legitimate, HMRC-approved strategies that can meaningfully reduce your corporation tax liability — some of which can be implemented before your next accounting year closes.

Tax law changes frequently and individual circumstances vary. Always take professional advice before implementing any of the strategies below.

1 Claim every allowable business expense

The simplest way to reduce your corporation tax bill is to ensure every legitimate business expense is recorded and claimed. Corporation tax is calculated on profit — so the more allowable expenses you claim, the lower your taxable profit.

Commonly overlooked expenses include:

• Home office costs — if you run your business from home, your limited company can pay you a reasonable “use of home” charge. HMRC accepts a proportion of heating, electricity, broadband and, in some cases, rent costs — but mortgage interest is generally not a straightforward deduction for a Ltd company director and taking this route can create Benefit in Kind complications. Take advice before claiming anything beyond the HMRC flat rate
• Professional subscriptions — trade body memberships, industry publications, software licences
• Business travel — mileage at the HMRC approved rate (45p per mile for the first 10,000 miles), train tickets, parking and accommodation for genuine business trips
• Staff entertaining — Christmas parties and staff events up to £150 per head are allowable
• Bank charges and interest — on business accounts and qualifying business loans
• Training and development — courses and qualifications relevant to your existing business activities

Good bookkeeping is the foundation here. If you're not tracking every expense in real time using cloud software like Xero or QuickBooks, you will miss deductions. Many of our clients discover they've been understating expenses for years once they begin working with a dedicated accountant.

2 Make pension contributions through your company

This is one of the most powerful — and most underused — tax reduction strategies available to company directors. When your company makes a pension contribution on your behalf, it is treated as a business expense. This means the contribution reduces your corporation tax profit pound for pound. At a 25% tax rate, a £20,000 company pension contribution effectively costs your company only £15,000 after tax relief.

Key rules to be aware of:

• Contributions must be “wholly and exclusively” for the purposes of the business — in practice, commercially justifiable given your role and remuneration
• The annual allowance (the maximum you can contribute tax-efficiently) is currently £60,000 per year
• If you have unused allowance from the previous three tax years, you may be able to “carry forward” and make a larger contribution

For directors approaching retirement, or those with large cash surpluses in the company, maximising pension contributions before year-end is often the single biggest tax saving available.

3 Optimise your salary and dividend mix

The way you extract money from your company has a direct impact on how much corporation tax — and personal tax — you pay overall. This calculation changed significantly from April 2025 and any director still applying the old rule of thumb needs to revisit it.

From 6 April 2025, the Employer NI secondary threshold dropped from £9,100 to £5,000, and the employer NI rate rose from 13.8% to 15%. This means the old strategy of paying a salary to the secondary threshold to avoid all employer NI no longer works cleanly. In 2025/26, directors typically have two main options:

• Salary at £6,500 (the Lower Earnings Limit) — preserves your State Pension qualifying year at minimal employer NI cost, though some employer NI (at 15% on earnings above £5,000) is now unavoidable even at this level unless Employment Allowance applies
• Salary at £12,570 (the personal allowance) — maximises the salary deduction against corporation tax and keeps the salary fully income-tax-free, but triggers employer NI of around £1,135 per year on the salary alone. For sole directors who cannot claim Employment Allowance, this still works out more efficient overall for most due to the corporation tax saving on the salary

Note: sole directors who are the only employee of their company cannot claim Employment Allowance. If you have at least one other employee, Employment Allowance of £10,500 is available and changes the calculation considerably.

Dividends are paid from post-tax profit and do not attract NI, which is why the salary-plus-dividend combination remains more efficient than salary alone for most directors. The 2025/26 Dividend Allowance is £500, above which dividends are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate). The optimal split is highly individual and should be recalculated each tax year — a five-minute conversation with your accountant before April can save a meaningful amount.

4 Use the Annual Investment Allowance for capital purchases

If your company buys plant, machinery or equipment, you can deduct the full cost against your profits in the year of purchase using the Annual Investment Allowance (AIA). The AIA currently allows companies to claim 100% first-year relief on up to £1 million of qualifying capital expenditure per year. This includes office equipment, machinery, vans and commercial vehicles, and fixtures and fittings.

Rather than depreciating an asset over several years, the AIA lets you write the entire cost off against taxable profits immediately. If you're planning a significant equipment purchase, timing it before your accounting year-end can bring your corporation tax bill down substantially.

5 Claim R&D tax credits if you innovate

R&D tax relief is one of HMRC's most valuable incentives — and one that many eligible companies fail to claim. You don't need to be a pharmaceutical company or tech giant to qualify. HMRC's definition of qualifying R&D is broader than most people expect: if your company has worked on a project that sought to resolve scientific or technological uncertainty, you may have a valid claim. This includes bespoke software development, novel manufacturing processes, new product development, and certain types of engineering problem-solving.

Important: the R&D relief landscape changed significantly from 1 April 2024. The old separate SME and RDEC schemes were merged into a single scheme for accounting periods beginning on or after that date. Here is how it works now:

• The Merged RDEC Scheme (for most companies, including most SMEs) — provides a taxable above-the-line credit of 20% of qualifying R&D expenditure. After corporation tax at 25%, the net benefit is around 15p for every £1 spent on qualifying R&D (or 16.2p at the small company 19% rate). The credit appears in your profit and loss account as income before tax
• Enhanced R&D Intensive Support (ERIS) — available only to loss-making SMEs whose qualifying R&D expenditure represents at least 30% of their total expenditure. Under ERIS, companies can deduct an extra 86% of qualifying costs (186% total), and may claim a payable tax credit worth up to 14.5% of the surrenderable loss. The maximum net benefit under ERIS is around 27% of qualifying spend

If your accounting period began before 1 April 2024, the old SME and RDEC rules still apply for that period. For all periods starting on or after 1 April 2024, the merged scheme is the default for profit-making companies and most SMEs.

R&D claims must be notified to HMRC within six months of the end of the accounting period, and filed within two years. HMRC scrutinises R&D claims carefully — incorrectly claimed relief has been a compliance priority in recent years. Always take specialist advice to ensure your claim is accurate and defensible.

6 Time your income and expenses carefully

Corporation tax is calculated on the profits of your accounting period. By carefully timing when revenue is recognised and when costs are incurred, you can shift taxable profit between years. Practical examples include prepaying allowable expenses before year-end, delaying invoicing for work not yet started, and bringing forward capital purchases to claim AIA relief sooner.

This strategy requires careful accounting judgement to ensure HMRC's timing rules are respected. Done correctly, it is entirely legitimate — it simply requires planning before your accounting period closes, not after.

7 Pay yourself (and family members) a market-rate salary

If family members genuinely work in your business, paying them a salary is a legitimate business expense that reduces your taxable profit. HMRC's test is that the salary must be commercially justifiable — meaning it must reflect a fair rate for the work actually performed. Keep records of the work performed, and ensure salaries are paid through payroll with proper RTI submissions.

8 Incorporate genuine business costs you currently pay personally

Many directors pay for business-related items from personal funds and never reclaim them through the company. A company mobile phone contract, professional indemnity insurance, accountancy and legal fees, and relevant technical books and software — these should all flow through the company and be claimed as business expenses.

9 Consider charitable donations

Cash donations made by a limited company to registered UK charities are fully deductible against corporation tax profits. There is no upper limit on the amount a company can donate and claim relief on — provided the donation is made outright and the company receives nothing in return. For a company paying 25% corporation tax, a £10,000 donation to charity reduces the tax bill by £2,500.

10 Review your company structure as you grow

As your company grows, it may become worth reviewing whether your current structure is the most tax-efficient. Options worth exploring with a specialist include holding company structures (profits can be moved between group companies tax-free), Employee Ownership Trusts (significant tax advantages for succession), and Enterprise Management Incentives for key employees.

These are more advanced planning strategies and should only be considered with proper legal and accounting advice.

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When should you start planning?

The answer is always: earlier than you think. Most of these strategies need to be implemented before your accounting year-end, not after it. Once the year closes, your options narrow significantly. A corporation tax bill is effectively locked in once the period ends — what a good accountant can do before that date is often orders of magnitude more valuable than anything they can do after it.

The ideal time to review your corporation tax position is three to four months before your year-end. That gives enough time to make pension contributions, time purchases, review your salary structure, and ensure all expenses are captured correctly.

Important notice: The information in this article is for general guidance and educational purposes only. It does not constitute tax, legal or financial advice and should not be relied upon as such. Tax law and HMRC practice change frequently — in particular, the R&D and employer NI rules summarised here apply to accounting periods beginning on or after 1 April 2024 and the 2025/26 tax year respectively, and may not apply to your specific circumstances or accounting period. All figures, thresholds and rates are based on HMRC published guidance current at the date of writing and are subject to change. Always seek professional advice tailored to your individual situation before taking any action. DKAT Accountants Ltd is regulated by the Association of Chartered Certified Accountants (ACCA). This article does not constitute a financial promotion.