10 Ways to Legally Reduce Corporation Tax in the UK

Limited company owners in the UK must pay corporation tax annually. Fortunately, there are several legitimate ways to reduce your tax liability. In this article, we outline the main categories of allowable expenses that can help lower your taxable profits, alongside other legal strategies to reduce your business’s tax burden.

Important: If you operate as a sole trader in the UK, the methods discussed in this article may not apply to you. These strategies are generally relevant for limited companies, including Private Limited Companies (Ltd) and Public Limited Companies (PLCs). Always consult a tax professional for advice tailored to your business structure.

1. Pay tax-efficient remuneration

Paying remuneration to directors and employees is an effective way to reduce a company’s taxable profits in the UK. Common forms of remuneration include:

• Salaries

• Bonuses

• Dividends

• Pension contributions

• Share-based incentives

Certain combinations of these can optimise tax efficiency. For example, dividends are often more tax-efficient than salaries for directors. Seek professional advice to determine the most effective strategy for your business.

2. Deduct production costs

Under UK law, you can reduce your taxable profits by deducting costs directly incurred in running your business. These core costs relate to your business activities and may include:

• Raw materials and supplies

• Operating costs

• Products for resale

• Storage, distribution, and logistics

• Marketing and advertising

• Discounts for distributors, retailers, or wholesalers

Ensure these expenses are wholly and exclusively for business purposes to qualify for deductions.

3. Account for overheads

In addition to production costs, overheads can also reduce your taxable profits. These typically include expenses related to running your business, such as:

• Employee salaries

• Other employee benefits (e.g., bonuses or pension contributions)

• Payments to freelancers and third-party contractors

• Rent

• Maintenance and cleaning costs for business premises

• Insurance premiums

• Office-related costs (e.g., stationery and equipment)

• Legal, accounting, and other professional services

This list is not exhaustive. Other expenses related to the management, organisation, or maintenance of your business may also qualify. Keep detailed records to support your claims.

4. Claim costs associated with working from home

The trend of working from home, either full-time or part-time, continues post-pandemic. If you or your employees work from home, you can claim related costs to reduce your tax liability. The deduction depends on the extent of home working:

• Occasional home working: HMRC allows a flat-rate deduction of up to £6 per week (£312 per year) without needing receipts. If actual expenses exceed this, you must provide evidence to claim the higher amount.

• Regular home working: You must provide receipts or other documentation to prove actual expenses, such as heating, electricity, internet, or phone charges. These must be reasonable and related to business activities.

Alternatively, your company can pay you a commercial rent for using part of your home as a workplace, formalised through a lease agreement. Note that receiving rent may create a personal income tax liability.

5. Invest in training and development

All training costs for employees or directors are generally tax-deductible, including external courses and internal training programmes.

Beyond reducing tax, investing in training enhances your team’s skills and boosts business productivity. Ensure training is relevant to your business to qualify for deductions.

6. Set up an employee share scheme

Implementing an HMRC-approved employee share scheme, such as a Share Incentive Plan (SIP) or Enterprise Management Incentive (EMI), can reduce your company’s tax liability while incentivising employees.

These schemes allow you to offer shares to employees in a tax-efficient manner, potentially lowering your corporation tax bill. Consult a specialist to choose the right scheme for your business.

7. Make pension contributions

UK companies must provide pension contributions for eligible employees, defined as those who:

• Are formally employed

• Are aged between 22 and the state pension age (currently 66, rising to 67 or 68 depending on birth date)

• Earn at least £10,000 per year

• Work primarily in the UK

In addition to mandatory contributions, companies can make additional pension contributions for directors or employees through a registered pension scheme. These contributions are typically tax-deductible, reducing your taxable profits.

8. Invest in Research and Development (R&D)

Research and Development (R&D) expenditure is both an investment in your business’s future and a valuable opportunity to reduce corporation tax. Eligible R&D expenses include:

• Consumables

• Research-related overheads

• Licences and royalties

• Software and software development

• Staff costs (fully or partially, based on time spent on R&D)

• Payments to freelancers or contractors for R&D activities

• Costs for contracted research services

SMEs (companies with fewer than 500 employees, turnover under €100 million, or balance sheet total under €86 million) can claim R&D tax relief, deducting up to 186% of qualifying costs (100% actual costs plus an additional 86% uplift, effective from April 2023). Larger companies can claim the Research and Development Expenditure Credit (RDEC), currently at 20% of eligible expenditure (increased from 13% as of April 2023).

9. Account for depreciation

You can deduct capital allowances on equipment and other qualifying assets to reduce your taxable profits. The main rate for most assets is 18% annually on a reducing balance basis, though specific rules apply.

For vehicles, capital allowances are only available if the vehicle is used exclusively for business purposes. Alternatively, limited companies can use the Annual Investment Allowance (AIA), which allows a 100% deduction on qualifying assets up to £1,000,000 for 2024/25, encouraging business investment.

10. Write off assets strategically

Writing off assets that have previously received tax relief may trigger capital gains tax, increasing your tax liability. To minimise this, consider deferring the write-off to the next tax year. Conversely, if the write-off results in a loss, you may benefit from recognising it in the current tax year to reduce taxable profits.

Additional Tip: Utilise operating losses

If your company incurs operating losses, these can be carried forward to offset future profits, reducing your tax liability. Alternatively, losses can be carried back to offset profits from the previous year, potentially generating a tax refund. Proper tax planning is essential to maximise this benefit.

Final Note

Effective tax planning requires accurate bookkeeping and a clear understanding of your finances. Consider using professional accounting services, such as Foundry Accounting, to ensure compliance and optimise your tax strategy.