Tax reduction is a delicate subject and some business owners can be too cautious when addressing this issue. However, there are perfectly legal ways of lowering your tax bill without running afoul of HMRC.

We’ve put together three ways to dramatically reduce your corporation tax whilst staying on the right side of the law.

1. Lower Taxable Profits

Because corporation tax is calculated on profits and not turnover, it actually makes sense to declare lower earnings. Do this by paying yourself a salary as well as taking dividends out of the company. It also makes sense to pay travel costs and lease equipment through the company rather than as a private venture.

Another useful tip is to offset previous losses by carrying them forward against subsequent profit until the loss is extinguished. Group relief allows the deficit of one company to be set against the profits of another, as long as they’re in the same group and ownership hasn’t changed.  

2. Claim All Expenses

It’s not uncommon for business owners to spend money through the company but not claim back everything they’re entitled to. Remember, if your profits were £100,000 in the last year but you invested £25,000 on equipment, you’d only be liable for tax on the remaining £75,000.

Make sure you know which specific tax allowances are allowed in relation to your industry, no matter how big or small. Seek professional accountancy advice for further clarity as there’s usually hidden relief to be found somewhere.   

Accountants can also advise on more complex allowance schemes depending on the sector you’re in. These include the writing down allowance, long-life assets allowance, first-year allowance and enhanced capital allowance, as well as the annual investment allowance where SMEs can claim 100% relief on certain expenses.

3. Pension Contributions

A handy way of reducing corporation tax is to make pension contributions. This will lower your profits without wasting good money. Although these funds can’t be accessed until pension age, you’ll receive tax relief on personal contributions depending on the particular scheme.

In effect, you’ll be making contributions from pre-taxed income. With a basic rate taxpayer (who qualifies for 20% relief) for example, a £100 contribution would only cost you £80 in real terms. The current annual allowance of pension contributions is £40,000, whilst you can check for any unused allowances here.


For all limited companies in the UK, corporation tax is paid as a percentage of your annual profits. Efficient record keeping and a solid accounting structure are needed so you pay the correct amount, as well as unearthing various reduction schemes as outlined above.

There are plans to reduce the tax to just 17% by 2020. This is great news for many UK businesses, although there are still tax savings to be made by following our tips. For any further information, we recommend you discuss matters with an independent financial advisor who’ll help reduce your corporation tax without incurring unlawful practice.

For further advice, contact us for a chat.

One of the ways to reduce your corporation tax is to make pension contributions. You may also want to check out what the future of pensions looks like now.