How to reduce corporation tax in the UK

What is corporation tax?

Corporation tax is the levy businesses pay on their profits.

In 2025, the UK corporation tax rate is 25% for companies making over £250,000 in profits, while smaller businesses pay a reduced rate.

Businesses with profits below £50,000 pay 19% corporation tax, while companies with profits between £50,000 and £250,000 gradually pay a higher rate, depending on their profits.

Over the years, this tax has seen some major shifts, from a high of 52% in 1982 to a low of 19% between 2017 and 2022.

The 2025 Autumn Budget introduced significant changes to capital allowance rules.

From April 2026, there will be a new 40% first-year allowance available for some assets, while the ‘writing down allowance’ rate will fall from 18% to 14%.

In this uncertain fiscal environment, knowing how to reduce corporation tax is crucial for businesses to stay competitive and maintain profitability.

How to reduce corporation tax

Wondering how to reduce corporation tax?

There are a variety of strategies available to reduce what you owe.

Knowing the best ways to reduce corporation tax can make a significant difference to your company’s bottom line.

Claim business expenses where possible

One of the easiest and most effective ways to reduce corporation tax is by making sure you claim all your allowable business expenses.

Money you spend on running your business, whether it’s on office supplies, software, rent, or even mileage, can be deducted from your profits, thereby lowering the amount of tax you owe. 

Expenses must be wholly and exclusively for the purposes of running the business. You can’t include expenses that were partly incurred for personal reasons.

To claim expenses, you’ll need to keep detailed records of every cost, from receipts to invoices. It’s crucial, as HMRC could request proof during an audit.

Many business owners hire an accountant to help make sure all claims are accurate and meet HMRC standards. If not, accounting software can help you stay organised and compliant.

Claim capital allowances

Money you spend on capital equipment may also reduce your taxable profits.

Most new plant and machinery bought by a company qualify for full expensing. You can deduct 100% of the cost in the year you buy the equipment.

If equipment doesn’t qualify for full expensing, you can deduct a percentage each year by using writing down allowances of 18% or 6%, depending on the asset. Examples of items that don’t qualify for full expensing include land, property, and cars.

For example, your company buys an asset for £20,000, which qualifies for an 18% writing down allowance. You can expense 18% of the cost each year (£3,600). At 25% corporation tax, you save £900 in tax each year (£3,600 x 0.25%).

From April 2026, there will be a new 40% first-year writing down allowance on assets that don’t qualify for full expensing.

However, the 18% writing down allowance rate will also fall to 14%. These changes will increase taxes for businesses with a large pool of existing assets. 

Research government tax relief schemes

The UK government offers several tax relief schemes that could help your business pay less tax.

For example, the research and development (R&D) tax relief lets you claim back a portion of qualifying R&D expenses. At the same time, the Patent Box scheme allows reduced tax rates on profits from patented inventions.

To take advantage of these schemes, you must keep careful records and know which activities qualify. An accountant can guide you through the process, and you can apply annually for many of these schemes, making it a regular part of your tax planning strategy.

Transfer vehicles to the company’s name

Does your business use vehicles? Transferring them into the company’s name can help in reducing corporation tax.

When a vehicle is owned by the business, expenses like fuel, insurance, and maintenance can be deducted, shrinking your taxable profits.

To make this switch, notify the DVLA and ensure all paperwork reflects the vehicle as a business asset.

Keep accurate mileage records, especially if the vehicle is used for personal and business purposes, to stay compliant with HMRC.

Optimise your company structure

Optimising your company’s structure can lead to significant tax savings, although this is a complex area and requires specialist advice.

For instance, splitting your business into smaller subsidiaries could allow you to take advantage of lower tax brackets for smaller companies, ultimately reducing your overall tax burden.

However, choosing the right company structure isn’t just about saving corporation tax. It also depends on your long-term aims, operational needs and goals for the company.

This complex strategy requires careful planning and guidance from a financial adviser or accountant. They can help you ensure your company structure is tax-efficient, legally sound, and aligned with your long-term goals.

Pay your own salary

Paying yourself a salary can be a great way to reduce corporation tax. But it needs careful balancing with personal taxes.

Salaries count as allowable expenses, which means they can be deducted from your business’s profits, reducing the total amount of tax you owe.

However, it’s important to note that salaries are subject to other taxes, like income tax and national insurance.

While this helps reduce corporation tax, it will also impact your personal tax situation, so balancing salary and dividends might be the key to smart tax planning.

An accountant can help identify your optimal salary level based on your total profits and personal tax situation.

Buy tools via the business

Whether it’s office equipment, computers, or software, purchasing essential business tools through your company is another way to reduce your tax bill.

These purchases are considered allowable expenses, meaning they lower your taxable profits.

To make the most of this, buy all necessary tools directly through your business and keep receipts for everything.

As long as the purchases are genuinely used for the business, HMRC will accept them as tax-deductible expenses.

Make employer pension contributions

Contributing to an employer pension plan is a smart move for your future and tax bill. 

Pension contributions made by your business count as allowable expenses, which reduce your taxable profits. Plus, they don’t attract national insurance contributions, offering more tax savings.

Setting up employer pension contributions requires your business to have a pension scheme in place, and it’s a straightforward process.

Ensure you report these contributions to HMRC to claim your tax deductions.

Make charity donations

If your business makes donations to charity, you can deduct them from your taxable profits, reducing your tax bill.

To qualify, you must donate to a registered charity and not receive any benefits from your donation.

You should report these contributions to HMRC when you file your company’s tax return, and be sure to keep receipts as proof for your records.

Do dividends reduce corporation tax?

The short answer is no; dividends don’t directly reduce corporation tax. Dividends are paid out of post-tax profits, so they don’t lower the tax your business pays.

That said, dividends are still a useful tool in tax planning.

They are subject to lower tax rates than salaries and aren’t liable for national insurance contributions, so they can help you minimise personal taxes, even if they don’t reduce corporation tax.

Changes announced in the 2025 Autumn Budget mean that tax on dividends will increase by 2%.

From April 2026, basic-rate taxpayers will pay 10.75% tax on dividend income, while higher-rate taxpayers will pay 35.75%. The rate for additional-rate taxpayers will remain unchanged at 39.75%.

Get expert financial advice

Reducing corporation tax isn’t as complicated as it may seem, and there are plenty of strategies available to UK businesses.

Whether claiming business expenses, making pension contributions, or taking advantage of government tax relief schemes, each method can help lighten your tax load. 

By staying informed and taking a proactive approach, your business can be well-prepared for any tax changes on the horizon, and you can make sure you're operating as efficiently as possible.

Unbiased will match you with a qualified financial adviser or accountant for expert guidance on how to reduce corporation tax and optimise your business finances.