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With the UK corporation tax rate now at 25% for companies with annual profits over £250,000, and a small profits rate of 19% for those earning up to £50,000, business owners are under increasing pressure to manage their tax affairs efficiently. Marginal relief applies for profits between £50,001 and £250,000, providing a sliding scale between the two rates. The good news: there are numerous HMRC-approved strategies to reduce your corporation tax bill legally, maximise post-tax profit, and improve your business liquidity.
In this guide, discover 11 expert-backed, fully compliant ways to reduce your corporation tax in 2025, using the latest tax relief schemes, allowable deductions, and tax credits.
What is Corporation Tax and How Much you Have to Pay?
Corporation tax is a direct tax on the taxable profits of UK limited companies, foreign companies with a UK branch, and certain unincorporated associations. Taxable profits include trading income, investment returns, and chargeable gains from the sale of business assets. All profits are taxable-there’s no tax-free allowance for companies.
Marginal relief: Gradual increase from 19% to 25% for profits between £50,001 and £250,000
Small profits rate: 19% for profits up to £50,000
Main rate: 25% for profits over £250,000
11 Legal Ways to Reduce Corporation Tax Bill
1. Maximise Allowable Deductions and Legitimate Business Expenses
Claim all deductible business expenses incurred wholly and exclusively for business purposes, such as:
- Employee wages and Employer contributions (including pension scheme payments)
- Office supplies, office equipment, and administrative costs
- Business travel costs, business mileage, and accommodation costs
- Marketing, advertising, and professional advice fees
Accurate records are essential for every eligible business expense to withstand HMRC scrutiny
2. Utilise Capital Allowances and Full Expensing
Investing in business assets-such as machinery, IT equipment, and business vehicles-can unlock significant tax relief:
Electric vehicles: 100% allowance for zero-emission business cars and charging points until March 2026
Full expensing: 100% first-year relief on qualifying plant and machinery investments, with no upper limit, as of April 2023.
Annual Investment Allowance (AIA): Deduct up to £1 million of qualifying capital expenditure per accounting period.
Super-deduction allowance: Enhanced tax relief of up to 130% on certain plant and machinery purchases (for eligible companies).
3. Claim Research & Development (R&D) Tax Credits
R&D tax credits are among the most valuable corporation tax reliefs:
Qualifying costs include staff, software, utilities, and consumables used in advancing a field of science or technology.
SMEs: Deduct up to 186% of qualifying R&D costs, or claim a cash tax credit if loss-making.
Large companies: Claim a 20% taxable credit via the R&D Expenditure Credit (RDEC) scheme.
4. Creative Industry Tax Reliefs
Eligible companies in film production, animation television, video games, and other creative sectors can claim sector-specific corporation tax relief:
Relief applies to a range of business activities, including theatrical productions and gallery exhibitions.
Up to 25% payable cash rebate on UK-qualifying production expenditure.
5. Deduct Charitable Donations
Charity donations to registered charities-whether cash, trading stock, or equipment-are deductible from your business profits, reducing your corporation tax liability and supporting your corporate social responsibility goals.
6. Group relief for losses
If your company is part of a group, you can offset losses from one eligible company against the profits of another within the same group structure, reducing the overall group tax charge. This is especially valuable for groups with fluctuating annual profits.
7. Pay Salaries and Employer Pension Contributions
Paying directors and employees a salary is an allowable expense. Employer pension contributions to an approved company pension scheme are also deductible, offering a tax-efficient way to reward staff and reduce taxable profits
8. Time Your Expenditure Strategically
Plan the timing of significant purchases-such as business vehicles or office equipment-towards the end of your accounting period to maximise allowable expenditure and reduce your taxable profit for that period.
9. Employee Share Schemes (EMI Schemes)
Implementing an Enterprise Management Incentives (EMI) scheme lets you reward key employees with shares. The company can claim a tax deduction on the difference between the market value and the price paid by employees, reducing corporation tax and improving retention.
10. Leverage the Patent Box Regime
If your company generates profits from patented inventions, you may qualify for the Patent Box regime, reducing the corporation tax rate on those profits to just 10%-a substantial saving for innovative businesses
10. Patent Box Regime
If your company earns profits from patented inventions or intellectual property (IP), you could benefit from a reduced Corporation Tax rate of as low as 10% on qualifying profits under the UK Patent Box scheme.
Ideal for: Tech, Pharma, Manufacturing, Engineering, R&D-focused businesses.
11. Claim Business Rates Relief
If you operate from commercial premises, check eligibility for Business Rates Relief schemes such as Small Business Rates Relief or Rural Rates Relief. While not a direct corporation tax reduction, these lower your business premises costs, improving cash flow and future profits.
Why Seek Professional Advice?
The UK tax system is a complicated subject, with frequent changes to tax deduction rules, relief for capital expenditures, and compliance requirements. Professional advice from an experienced accountant ensures you claim all available tax credits, comply with anti-avoidance rules, and structure your business for maximum tax efficiency
Frequently Asked Questions
Who Needs to Pay Corporation Tax in the UK?
In the UK, Corporation Tax applies to all limited companies, foreign companies with a UK branch or office, and certain unincorporated associations like clubs or charities. These businesses must pay tax on their taxable profits, which include trading income, investment gains, and profits from selling assets. It’s a legal obligation for registered companies operating within the UK to file and pay Corporation Tax.
What Are the Charges for Late Corporation Tax Payment?
If a company fails to pay Corporation Tax on time, HMRC applies daily interest on the overdue amount and additional penalties for late filing. Penalties start from £100 for being even one day late and can increase significantly over time, including 10% of the unpaid tax if the delay exceeds six months, along with further penalties and possible HMRC investigations.
Is It Legal to Reduce Your Corporation Tax?
Yes, it is completely legal to reduce Corporation Tax by using HMRC-approved tax planning strategies. Businesses can lower their tax liabilities by claiming allowable expenses, capital allowances, R&D relief, pension contributions, and charitable donations. These methods are within the law. However, using illegal tactics or falsifying records to avoid tax constitutes tax evasion, which carries serious legal and financial penalties.
Do Small Businesses Pay Less Corporation Tax?
Small businesses in the UK may benefit from a lower Corporation Tax rate depending on their level of profits. Companies with profits up to £50,000 pay 19%, while those earning over £250,000 pay 25%. For profits between £50,000 and £250,000, marginal relief applies. Additionally, small businesses can take advantage of various deductions and reliefs to reduce their overall tax liability legally.
What Happens If Someone Uses Illegal Ways to Avoid Corporation Tax?
Using illegal methods to avoid Corporation Tax, such as underreporting income or inflating expenses, is considered tax evasion and is a criminal offence. HMRC can impose hefty fines, charge interest on unpaid taxes, initiate audits, and prosecute offenders. Convicted individuals or businesses could face serious consequences, including reputational damage, financial loss, and in extreme cases, imprisonment.
Conclusion
With corporation tax rates at their highest in years, effective tax planning is essential. By maximising every eligible business expense, leveraging tax credits, and seeking expert guidance, you can ensure your company pays only what it owes-and not a penny more.
For bespoke advice on your company structure, tax return, and tax-efficient way to manage your business finances, consult a qualified UK accountant. If you need tailored support, a professional corporation tax service can help you navigate these strategies and optimise your tax position with confidence.
Disclaimer: Kindly note this blog provides general information and should not be considered financial advice. We recommend consulting a qualified financial advisor for personalised guidance. We are not responsible for any actions taken based on this content.
