How to Reduce Corporation Tax Legally: 10 Strategies for 2025/26

Understanding Corporation Tax in 2025/26

Before exploring how to reduce your Corporation Tax bill, it is important to understand the current rates. For the 2025/26 tax year, the small profits rate is 19% for companies with profits up to £50,000. The main rate is 25% for companies with profits above £250,000. Companies with profits between £50,000 and £250,000 pay an effective marginal rate of 26.5% due to marginal relief. These thresholds are divided by the number of associated companies, so if you control multiple companies, the thresholds are split between them.

The difference between 19% and 25% is significant. A company with £100,000 in profits will pay approximately £22,750 in Corporation Tax (after marginal relief), whereas if those profits were £50,000 or below, the tax would be just £9,500. This makes legitimate tax reduction strategies more valuable than ever. Our Corporation Tax service ensures your company is structured to minimise its tax liability within the law.

1. Claim All Allowable Business Expenses

This may sound obvious, but many companies fail to claim all the expenses they are entitled to. Every legitimate business expense reduces your taxable profit. Common expenses that are frequently overlooked include: staff entertainment (up to £150 per head per year for annual events), professional subscriptions and memberships, bad debts that have been written off, bank charges and loan interest, repairs and maintenance of business premises, and the cost of defending legal actions related to the business. Review your expenditure carefully each year and ensure everything that qualifies is included in your Corporation Tax computation.

2. Capital Allowances and the Annual Investment Allowance

The Annual Investment Allowance (AIA) allows your company to deduct the full cost of qualifying plant and machinery purchases from its profits, up to £1 million per year. This includes office furniture, computers, vehicles (with some restrictions), manufacturing equipment, and tools. If your company is planning a significant capital purchase, timing it correctly can reduce your Corporation Tax bill substantially. For expenditure exceeding the AIA limit, writing-down allowances of 18% (main pool) or 6% (special rate pool) apply.

Full expensing, introduced in April 2023 and made permanent, allows companies to deduct 100% of the cost of qualifying main rate plant and machinery from their profits without any monetary cap. This is even more generous than the AIA for large investments and applies specifically to new (not second-hand) assets. Companies investing in qualifying assets should take full advantage of this relief.

3. R&D Tax Credits

If your company undertakes research and development, you may be eligible for R&D tax relief. Under the merged R&D scheme (effective from April 2024), companies can claim an enhanced deduction of 186% of qualifying R&D expenditure, reducing their taxable profits by an additional 86p for every £1 spent on qualifying R&D. For loss-making companies, an R&D-intensive regime allows claims of up to 27% of the surrendered loss as a cash credit.

R&D does not just mean laboratory research — it includes any project that seeks to achieve an advance in science or technology by resolving a technological uncertainty. Software development, engineering improvements, new product design, and process innovation can all qualify. Read our detailed guide on R&D tax credits for more information on eligibility and how to claim.

4. Employer Pension Contributions

Pension contributions made by your company on behalf of directors and employees are fully deductible for Corporation Tax purposes. Unlike salary, employer pension contributions are not subject to National Insurance (saving 15% Employer's NIC). The annual allowance for pension contributions is £60,000 per individual (or 100% of earnings if lower), and unused allowance can be carried forward for up to three years. For a director with no pension contributions in recent years, this could mean contributing up to £180,000 in a single year (subject to having sufficient earnings), generating a significant Corporation Tax deduction.

5. Director Salary and the Optimal Level

Paying yourself a salary as a director is a Corporation Tax-deductible expense. The optimal salary for most single-director companies is £12,570 per year — this uses the Personal Allowance in full, triggers no Employee's NIC, and preserves your State Pension qualifying year. The Corporation Tax deduction on this salary saves approximately £2,388 to £3,143 (depending on your marginal Corporation Tax rate). Paying above this level starts to attract Employer's NIC at 15%, which is also a deductible expense but increases your overall cost. See our dividend vs salary guide for the complete analysis.

6. Timing Your Income and Expenses

Corporation Tax is calculated on profits for each accounting period. By timing when you recognise income and incur expenses, you can manage your taxable profits. For example, if your company is approaching the £50,000 small profits threshold, bringing forward a planned expense (such as purchasing equipment or paying annual subscriptions) into the current period could keep your profits below £50,000 and save the difference between 19% and the marginal rate. Similarly, if you have discretion over when to invoice a client, deferring income to the next accounting period can be beneficial — though be careful not to distort your accounts artificially.

7. Charitable Donations

Donations to qualifying charities and community amateur sports clubs (CASCs) are deductible from your company's taxable profits. Unlike individuals who use Gift Aid, companies receive tax relief by deducting the gross donation from their profits. The donation must be a genuine gift with no substantial benefit received in return. Sponsorship payments are different — they are treated as advertising expenses and deducted as a normal business expense, provided the sponsorship arrangement is genuine and the payment is commensurate with the benefit received.

8. Claim the Employment Allowance

While the Employment Allowance does not directly reduce Corporation Tax, it reduces your Employer's NIC bill by up to £10,500 per year. This effectively reduces the cost of employing staff, freeing up profits. To be eligible, you must have at least one employee in addition to a single director. If your company qualifies, this is essentially free money that many small businesses overlook. Note that single-director companies with no other employees are not eligible.

9. Consider Your Accounting Period

Your company's accounting period determines when Corporation Tax is due and which rates and thresholds apply. If your company's profits fluctuate significantly from year to year, the timing of your year-end can affect your overall tax bill. For example, if you expect a particularly profitable year, you might consider whether shortening the accounting period could keep one period's profits below the £50,000 small profits threshold. This is a complex area where professional advice from our tax planning team is essential to avoid unintended consequences.

10. Structure Your Business Efficiently

The way your business is structured can have a significant impact on your Corporation Tax bill. If you operate multiple businesses, consider whether separate companies or a group structure would be more tax-efficient. Group relief allows losses in one company to be offset against profits in another. However, be aware that the small profits rate thresholds are divided between associated companies, so having multiple companies can push each one into the marginal rate band.

Every company's situation is different, and the strategies that work best depend on your specific circumstances. At London Accountants, our Corporation Tax specialists review your affairs proactively each year to ensure you are taking advantage of every available relief and allowance. Get in touch for a free consultation and find out how much you could save.