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10 ways to reduce corporation tax

Jan 21, 2025

Running a successful business often involves a careful balance between earning profits and managing taxes. Higher tax bills can limit the resources available for investment and growth. We understand how frustrating it can be when your hard-earned gains go straight back out the door. That’s why we’re here to help you keep more of what you make while staying within the law. Below, we present ten ways to reduce your corporation tax.

Although we refer to certain allowances and rates for the 2024/25 tax year, the principles remain valuable year after year. Our aim is to offer practical tips that help you make informed decisions and run your company more effectively.

1. Claim research and development (R&D) relief

Problem: Many business owners overlook R&D tax credits because they assume their work is not “innovative enough.” If you miss out on these credits, you risk paying more tax than necessary.

Solution: Even small improvements to products or services might count as R&D for tax purposes. The rate of relief depends on whether you use the SME scheme or Research and Development Expenditure Credit (RDEC). According to HMRC, eligible companies can deduct extra percentages of their qualifying R&D costs from profits, reducing the tax due. Keeping accurate records of every R&D project is key. If you’re uncertain about eligibility, ask us or another professional adviser to check.

2. Make use of the annual investment allowance

Problem: Many businesses fail to claim all available capital allowances, which can leave money on the table.

Solution: The Annual Investment Allowance (AIA), currently set at up to £1 million, lets you write off the full cost of qualifying business assets against your taxable profits in the same year. For example, equipment, machinery, and certain fixtures can often be claimed. This reduces the portion of profits exposed to corporation tax. Check which items qualify, keep records of purchase invoices, and claim within the correct accounting period to make the most of this allowance.

3. Plan dividends carefully

Problem: Many shareholders pay more tax on dividends than expected, especially if they are unaware of changes to the Dividend Allowance.

Solution: In 2024/25, the Dividend Allowance is set at £500. If you distribute dividends above this threshold, those payouts face extra tax, which might affect corporation tax if you alter your salary-versus-dividend split without planning. You can manage overall tax costs by scheduling dividends around year-end or adjusting the balance between salary and dividends. For instance, supplementing your pay with pension contributions or exploring alternative rewards can help ensure you pay less overall.

4. Pay attention to the timing of expenses

Problem: Companies often make large purchases or take on specific costs without considering how they affect their accounts. A poorly timed expense might not give the best possible tax outcome.

Solution: Timing is critical when incurring expenses. If you know that a particular cost will benefit your next financial year, consider moving it or splitting it across two periods for the greatest tax advantage. For example, buying essential supplies or paying for professional services just before your year-end might accelerate the associated tax relief, giving you earlier benefits. Of course, business needs should come first, but good planning can help you claim relief at the most helpful time.

5. Contribute to pensions

Problem: Some directors and employees miss out on the tax advantages of pension contributions because they see pensions as less urgent than other spending priorities.

Solution: Pension contributions can be deducted from your taxable profits, which reduces your overall corporation tax bill. Contributions made by the company on your behalf also avoid National Insurance on that portion of your pay. If you keep payments consistent, you’ll benefit from long-term retirement savings while your business sees tax savings each year. Confirm that you stay within annual limits, and remember that unused allowances can sometimes be carried forward from previous years.

6. Review your business structure

Problem: You may be paying more corporation tax than you need to if your firm’s legal structure no longer suits your activities and goals.

Solution: As your business grows, consider whether you should have a group of companies, set up subsidiaries, or move certain trades under different entities. A reorganisation might help you ring-fence costs, separate risks, or maximise certain reliefs. Ensure that any restructuring complies with relevant regulations, and seek professional advice to avoid unexpected tax charges. Done correctly, a well-designed structure often unlocks new ways to save.

7. Explore patent box relief

Problem: Many businesses that hold patents or develop patentable products never realise there’s a specific relief that can reduce their corporation tax.

Solution: Patent box relief allows companies to benefit from a reduced corporation tax rate on profits earned from patented inventions. If you hold qualifying intellectual property rights, it’s worth investigating whether you can use patent box relief. You will need to track profits from relevant patents, which can require detailed record-keeping. However, the tax savings can be substantial if you meet the criteria.

8. Make the most of loss relief

Problem: Some firms focus on turning profits around and forget that prior losses could reduce future corporation tax, particularly if their trade changes.

Solution: If your business lost in the previous accounting periods, you could carry forward or carry back those losses (subject to certain conditions) to offset profits in more profitable years. This can offer a significant boost when cashflow is tight. Keep proper records of any losses and track how they arise so you can apply them strategically. Updated HMRC guidance sets out the specific conditions for each type of relief.

9. Monitor transfer pricing (for group companies)

Problem: If you trade with group companies, poorly planned transfer pricing might lead to higher profits in one part of the group and more tax overall.

Solution: Transfer pricing rules ensure that transactions between connected companies occur at an arm’s length price, reflecting what independent parties would agree upon. By reviewing and adjusting your pricing arrangements, you can ensure each company’s profits are allocated fairly without paying unnecessary tax. Document these arrangements clearly so they stand up to scrutiny.

10. Seek professional advice

Problem: Company owners might try to manage every aspect of tax savings independently, risking missed opportunities or, at worst, accidental non-compliance.

Solution: UK tax rules change frequently, and figuring out how each allowance fits into your corporate goals can be a challenge. Working with qualified experts often helps you find savings you might miss alone. We bring a wealth of experience dealing with businesses of all sizes, so you have peace of mind that you’re getting accurate guidance.

Our commitment to practical, client-focused solutions

No two businesses are alike, and our approach at EV Accountants is tailored to match your aims and activities. These ten tips illustrate ways to cut your corporation tax, but we know there’s always more to consider. By focusing on your plans, daily operations, and growth prospects, we can help you find the right path for your business.

Please contact us if you want to learn more about how we can support you. Our team offers a modern, tech-focused approach that blends personal communication with real expertise.

Looking to reduce corporation tax? We’re here to help – get in touch with us.

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