How to Reduce Corporation Tax as a Limited Company (Legally)?

With the current rate of corporation tax at 19% in the UK, this may well be one of your biggest expenses each year. Looking at ways to reduce your corporation tax liability is only natural.

Of course, the number one way to reduce your corporation tax liability is easy, just make sure your limited company makes less profit. But who wants to run a business and make less profit? 

Exactly, what would be the point? 

If the key consideration is to reduce the corporation tax your limited company pays, run a profitable business, and have surplus cash to continue investing in the business we need to find ways to reduce corporation tax legitimately.

As Benjamin Franklin famously said: “There are only two certainties in life, death and taxes.” 

Throughout this guide on how to reduce corporation tax legally, we will explain all the legitimate and safe ways to reduce your corporation tax bill. We are not going to be suggesting any dodgy tax schemes which could result in HMRC investigating you.

After all, we all have a moral obligation to pay our fair share. Taxes pay for our schools and hospitals and I don’t think any of us would argue that there is enough money invested in these.

We are sure you have better things to do than work through the fine detail to ensure you maximise ways to reduce corporation tax (legally). So, if you have ever been left scratching your head wondering ‘how to reduce corporation tax?’ here’s a simple answer: 

You can reduce your corporation tax legally by reducing your taxable profit. There are several ways to do this which do not always impact the trading profit of the business such as claiming capital allowances and other corporation tax reliefs. Other ways that benefit you whilst reducing the trading profit would be making pension contributions for example.

There are many ways to reduce your corporation tax and as mentioned above the number one is to reduce your taxable profit. But what does that look like? 

How do I pay less tax as a limited company?

The amount of corporation tax you pay as a limited company is calculated by the amount of taxable profit the company makes. Having a strategy based on reducing the amount of corporation tax you pay might not provide you with the long-term outcome you are looking to achieve.

That being said no one ever wants to pay more corporation tax than they need to legally. To help you understand how you can pay less tax as a limited company we have put together this handy checklist.

Corporation tax saving checklist

Idea	Comment	Yes	No
Capital Allowances	Have you considered the timing of investments in plant and machinery? Bringing purchases into the current financial year may reduce corporation tax. If corporation tax rates are likely to increase, consider reducing capital allowances to offset in future years when the rate of corporation tax is higher.
Change Year End	Changing your financial year end may enable you to push out the payment of corporation tax. It might not save corporation tax overall, but it could affect the timing of when corporation tax needs to be paid.
Corporation Tax Reliefs	There is a range of corporation tax reliefs available. Check the list below to see if you are eligible:  Trading Loss Relief R&D Tax Credits Patent Box Goodwill and other relevant assets Disincorporation Terminal, capital, and property income losses
Claim all business expenses	Are you satisfied that you have claimed all legitimate business expenses that are wholly and necessarily incurred for the business? Here are a few people often forget:  Business mileage Work from-home allowance Director expenses
Pay Directors a Salary	Are you making the best use of the director’s personal tax allowance? Salaries are tax deductible.
Pension contributions	Companies can normally deduct pension contributions paid on behalf of employees and directors. This is a very effective way to reduce corporation tax and the individuals benefiting directly which is why it is a popular option.
Share schemes	With certain types of share schemes, you can deduct the costs as tax-deductible which reduces your corporation tax. This might be an option if you are looking at ways to attract, retain and reward quality staff.
Invest in training	Training costs are normally tax-deductible providing a benefit to employees and hopefully the business through better performance.

What can I write off against corporation tax?

You can deduct the costs of running your business from your profits before tax when you prepare your company’s accounts.

Anything you or your employees get personal use from must be treated as a benefit.

For a cost to be tax deductible it must be wholly and exclusively for the business. This is the general rule for what you can write off against corporation tax. As such we cannot provide a definitive list of tax-deductible expenses for a limited company as it will be relevant to each business. 

To help you get started we have summarised below some of the most likely items you might purchase which would be tax-deductible expenses for a limited company and you can legitimately write off against corporation tax.

Tax deductible expenses for corporation tax

• Cost of goods sold
• Salaries
• Subcontractors
• Advertising and marketing
• Software costs
• Office expenses (phones, broadband, stationery)
• Travel
• Motor expenses
• Light and heating
• Rent
• Business rates
• Insurance
• Bank charges
• Inventory

It only seems fair that now we have got you all excited about tax-deductible expenses for a limited company we also provide you with a list of disallowable expenses for corporation tax.

List of disallowable expenses for corporation tax

• Certain legal fees
• Depreciation
• Entertainment (client)
• Certain business gifts
• Accrued pension contributions
• Fines and penalties
• Dividends 

Is there any corporation tax relief?

Yes, there is a range of different corporation tax reliefs available which we have summarised for you below. If any of the corporation tax reliefs mentioned fit your requirements, you can click on the corporation tax relief name link for more detailed guidance.

You can deduct the costs of running your business from your profits before tax when you prepare your company’s accounts.

Anything you or your employees get personal use from must be treated as a benefit.

Some expenses are not allowed for corporation tax, for example, entertaining clients and get added back to profits when preparing your corporation tax return. Spending loads of money on lavish entertainment does not save you corporation tax!

Corporation tax reliefs

Trading Loss relief – if your company or organisation is liable for Corporation Tax and makes a loss from trading, the sale or disposal of a capital asset, or on property income, then you may be able to claim relief from Corporation Tax.

You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back if you do not it will be carried forward to another accounting period.

The government introduced legislation in Finance Act 2021 that provides a temporary extension to the loss carry back rules for trading losses of both corporate and unincorporated businesses.

Broadly speaking, the current rules allow trading losses to be carried back one year without restriction. For accounting periods ending between 1 April 2020 and 31 March 2022, this is extended to three years, with losses required to be set against profits of most recent years first before carrying back to earlier years.

There is no change to the current one-year unlimited carry-back of trade losses, however, for the extended relief, the amount of loss that can be carried back to the earlier 2 years of the extended period is capped for those 2 years.

This is a cap of £2,000,000 of losses for all relevant accounting periods ending in the period 1 April 2020 to 31 March 2021 (the financial year 2020). A separate cap of £2,000,000 applies for all relevant accounting periods ending in the period 1 April 2021 to 31 March 2022 (the financial year 2021). Groups are subject to a group cap of £2,000,000 for each relevant period.

Capital allowances – if you buy assets that you keep to use in your business such as equipment, machinery, and business vehicles. You can deduct some or all the value of the item from your profit before you pay corporation tax.

R&D tax credits – Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. It can even be claimed on unsuccessful projects.

Patent Box – if you make a profit from patented inventions your company can pay a reduced rate of 10% corporation tax

Goodwill and relevant assets – from 1 April 2019 the Corporation Tax relief restriction rules for some acquisitions of goodwill and relevant assets changed. Relief is a fixed rate of 6.5% a year on the lower of the cost of the relevant asset or 6 times the cost of any qualifying IP assets in the business purchased.

Relief is given yearly until the limit is reached. More information about how to work out the relief can be found on GOV.UK in the Corporate Intangibles Research and Development Manual CIRD44093.

Disincorporation – if you’re closing your company and becoming a sole trader, partnership or limited partnership disincorporation relief allows a company to transfer certain types of assets to its shareholders (who continue to operate the business in an unincorporated form) without the company incurring a Corporation Tax charge on the disposal of the assets.

Terminal, capital and property income losses – If your company or organisation is liable for Corporation Tax and makes a loss from trading, the sale or disposal of a capital asset or on property income, then you may be able to claim relief from Corporation Tax.

You get tax relief by offsetting the loss against your other gains or profits of your business in the same accounting period. You can also choose to carry the loss back, or it will be carried forward to another accounting period.

There you have a range of corporation tax reliefs and hopefully something that will help you. If not keep looking and listening to the news. You never know when a new corporation tax relief will be announced, and it might just help you and your limited company reduce corporation tax legally.

Do dividends reduce corporation tax?

No.

Dividends are a distribution of profits to shareholders based on cumulative profits after corporation tax has been deducted. Dividends are a reduction in the equity of the company and form part of the balance sheet. Corporation tax is a cost to the company and is reported in the profit and loss of the company.

You can only pay dividends to shareholders if the company has sufficient distributable reserves to do so otherwise you have created an unlawful dividend so you need to get familiar with your numbers.

Paying a bigger dividend will not reduce corporation tax but it will increase your income tax bill.

Do you pay corporation tax if you reinvest profits?

Before answering if you pay corporation tax when you reinvest profits, I need to set the scene in terms of what that potentially means.

When talking about reinvesting profits that could mean:

• you have made a profit, paid corporation tax on that profit and then paid some money to yourself as a dividend perhaps then looking to reinvest that money back into the business. (Unless you are trying to use up your personal tax allowance and have paid dividends more than what you need to live, you need to consider whether this is a wise strategy, could you achieve a better return by investing that money elsewhere? If not, then yes do it and lend the money back to the company)
• you know you are going to make a profit over and above what you need so you wish to spend some money before the end of the financial year thus reducing the profits that are taxable to corporation tax

Either way, you will not pay corporation tax if you reinvest profits in the company regardless of the terminology we are using. Why? Because corporation tax is a tax on profits.

If you reduce the profit in the business because you have invested money in better equipment, staff, training, better software etc then that would reduce your taxable profits so you would not pay corporation tax.

If you extract the profit from the business, then you would pay corporation tax on the taxable profit.

If you then reinvest some of that money back into the business you would only pay corporation tax on any profits you make from reinvesting that money into the business, not on the amount of money reinvested.

Your consideration should always be whether reinvesting that money will make the business better, stronger, profitable, and saleable. If the answer is no, then why would you reinvest that money in the first place? Perhaps you would be better off sticking it in a high-interest savings account but that is another subject for another day.

For now, have a read of putting personal money into a limited company guide for further details on how to do this correctly.

Frequently asked questions on how to reduce corporation tax (legally)

How to reduce corporation tax with a pension?

As an owner-manager of a small business one of the best ways to reduce your corporation tax liability is to put money into pensions from the company.

Why? Because the cost of the pension payment is tax deductible so paying £20,000 into a pension might save you £3,800 in corporation tax (£20,000 x 19%). Yes, you have spent £20,000 but if you were to do that personally you would incur the £3,800 corporation tax on the way out of the business and you would pay income tax on the dividend to get the money out in the first place.

Carry forward rules allow you to use any unused annual allowance for a maximum of three years. The annual allowance threshold is currently £40,000 so if you have not been paying money into a pension and you have surplus cash and profits in your business this could be a great option.

Always speak to a professional advisor before following this guidance to ensure that it passes HMRC’s ‘wholly and exclusively’ test, meaning that HMRC deems the employer pension contribution to be for the employer’s trade or profession.

Can I buy property to reduce corporation tax?

There are so many variables when considering whether to buy property to reduce corporation tax. The best way to answer whether you can buy property to reduce corporation tax is to look at the wider context of whether buying a property through a limited company is a sensible option for you to consider.

The reason we suggest this is quite simple. Buying a property to reduce corporation tax could cause you an issue in many other ways so you need to consider all the variables not just reducing corporation tax.

For example, who would be using the property? Is the property a commercial or residential unit? These could all impact the best solution.

If you purchase a house through your company, it will be an asset of the business, so not be treated as a company expense in the profit and loss account. Instead, it will be accounted for in the balance sheet of the business showing the financial position of the business.

How that asset is depreciated will depend on the split of the purchase price being land, buildings plant and equipment.

Associated costs of running the house can be treated as a company expense:

• Mortgage interest.
• Council tax.
• Water and sewerage charges.
• Heating, lighting, and cleaning.
• Repair, maintenance, and decoration.
• Furniture for daily use.
• Staff for the upkeep of accommodation, for example, gardeners and cleaners.

As these costs of running the house are treated as a company expense, they would reduce your profits available for corporation tax so in this instance buying a property to reduce corporation tax would work.

How to avoid corporation tax?

The only true way to avoid corporation tax is to make a profit but where would the fun be in that? So, if you cannot avoid corporation tax whilst running a sustainable, profitable business your only other option is to reduce your corporation tax (legally).

We have covered how to reduce your corporation tax in detail above but to summarise hers is a list of suggested ways how to reduce your corporation tax (legally):

1. Claim all legitimate business costs
2. Claim mileage and working-from-home allowances where applicable
3. Claim all your expenses, coffee, train tickets, stationery – everything!
4. Pay for relevant life cover and mobile phones
5. Use a tax-efficient vehicle
6. Make pension contributions
7. Invest in decent plant and machinery, staff training and development
8. Invest in R&D
9. Pay yourself a tax-efficient salary
10. Treat staff to a decent annual party (not general entertainment that gets added back….)

If you live a comfortable life and your focus is not on maximising your income there are a stack of ways to avoid paying corporation tax. You never know you might even enjoy spending more money through the business for a change. Your staff will.

Conclusion

Making more profit in your limited company is a bittersweet moment for people.

Congratulations you’ve made more money. Commiserations you have a huge tax bill. 

If you have a big tax bill congratulate yourself, something is working. Yes, you are paying more tax but that is only a percentage of the extra slice of the pie you have earnt. There are various legal ways to reduce corporation tax which we have explained in detail above.

The rules do change from time to time so checking through our guide on how to reduce corporation tax legally is not your work done. You need to monitor this on an ongoing basis. Lean on your accountant and bookkeeper. They will be close to this stuff daily, so they take it for granted that everyone knows how to reduce corporation tax.

Not so. There is no such thing as a stupid question. It might just spark a moment of inspiration that could save you thousands of pounds.

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