Limited Company Tax Loopholes – Tips to Reduce Your Tax Bill Legally

Reducing corporation tax is a priority for limited company owners looking to maximise profits legally. With UK corporation tax rates reaching up to 25%, smart tax planning is essential. 

This guide explores proven strategies, legal tax loopholes, and key pitfalls to avoid – helping your business stay tax-efficient and fully compliant.

Please note: tax laws can change frequently, so it is important to check gov.uk or consult with one of our tax advisors for the most current information.

Understanding Corporation Tax for Limited Companies

Corporation tax is a levy on company profits that all UK limited companies must pay. Unlike income tax, which applies to individuals, corporation tax is calculated based on a company’s taxable profits, including trading income, investments and chargeable gains.

Since April 2023, UK corporation tax rates are:

• 19% for companies with profits under £50,000 (small profits rate).
• 25% for companies with profits over £250,000.
• Marginal relief applies to profits between £50,000 and £250,000, creating a gradual increase in the tax rate.

Key Factors That Affect Taxable Profits

• Allowable business expenses: Deducting eligible costs can reduce tax liability.
• Capital allowances: Claiming tax relief on qualifying assets.
• Dividends and salaries: How company owners extract profits impacts tax efficiency.
• R&D tax credits: Reducing tax liability through innovation incentives.
• Tax reliefs and deductions: Making use of available schemes, such as Business Asset Disposal Relief and Patent Box.

Limited Company Tax Loopholes – What’s Available?

While tax loopholes often have a negative connotation, there are legitimate ways for limited companies to legally minimise their corporation tax liability using HMRC-approved reliefs and allowances. 

These strategies help businesses retain more of their profits while remaining fully compliant with UK tax laws. 

Below are some of the most effective and widely used limited company tax loopholes, along with detailed guidance on how to use them and any potential risks to be aware of.

1. Director’s Loan Account (DLA) Flexibility

A Director’s Loan Account (DLA) is a financial record that tracks money taken out of the company by directors, which isn’t classed as salary, dividends or expense reimbursements. 

This loophole allows directors to borrow up to £10,000 tax-free, provided the loan is repaid within nine months of the company’s financial year-end.

How to Use This Loophole Effectively:

• Directors can withdraw funds from the company’s bank account without triggering income tax or National Insurance charges.
• If the loan remains below £10,000, there is no personal tax liability for the director, and the company does not incur a corporation tax charge.
• If the loan is repaid within nine months and one day of the financial year-end, the company avoids paying 32.5% Section 455 tax to HMRC.
• If repaid on time, any Section 455 tax paid is refunded when filing the next corporation tax return.

It is worth noting that if the loan exceeds £10,000, it will be classed as a benefit in kind, meaning the director must pay income tax at their personal tax band and the company must pay Class 1A National Insurance on the loan amount.

If the loan isn’t repaid within nine months, HMRC charges 32.5% corporation tax on the outstanding balance. This tax is refunded only when the loan is repaid.

Repeatedly borrowing and repaying to avoid tax (known as bed and breakfasting) is viewed as tax avoidance by HMRC and could result in penalties or investigations.

2. Utilising Multiple Businesses

For business owners with multiple revenue streams, structuring separate limited companies can offer significant tax advantages. The UK has a small profits corporation tax rate of 19%, which applies to companies with profits under £50,000, while profits over £250,000 are taxed at 25%.

How to Use This Loophole Effectively:

• If a business has multiple income sources, setting up each revenue stream as an independent company could allow each entity to benefit from the lower corporation tax rate on profits.
• Separate businesses could also claim different tax reliefs (such as R&D tax credits or the Patent Box scheme) if they meet HMRC’s eligibility criteria.
• This strategy can limit financial risk, as liabilities are isolated to each business entity rather than affecting an entire operation.

HMRC scrutinises artificially splitting businesses for tax benefits. If companies share staff, premises, or finances, they may be classed as associated companies, meaning their combined profits could be taxed at the higher corporation tax rate.

This approach requires careful legal and financial structuring, including separate bank accounts, contracts and financial reporting for each entity. If businesses are not truly independent, HMRC could apply anti-avoidance rules, resulting in backdated tax liabilities and penalties.

3. Paying Family Members to Reduce Taxable Profits

Employing family members within the business and paying them a salary is a legitimate way to reduce taxable profits, as wages paid to employees are tax-deductible expenses for corporation tax purposes.

How to Use This Loophole Effectively:

• A company can hire a spouse or children (aged 16 or over) to perform genuine business tasks, such as administration, marketing, bookkeeping or customer service.
• If a family member is paid a salary within their personal tax-free allowance (£12,570 for 2024/25), they will not pay income tax and the business benefits from a corporation tax deduction.
• Salaries must be reasonable and proportionate to the work performed. A market rate should be used to avoid raising suspicions with HMRC.
• The company can also make pension contributions for family employees, providing additional tax relief.

Payments must reflect actual work performed. Paying family members without them contributing to the business could be considered tax evasion by HMRC.

Proper payroll records must be kept, and payments must be processed through PAYE.

If a salary is set too high, it could attract higher rate income tax or National Insurance contributions, negating the tax benefits.

4. Renting Property to Your Business

If a company director personally owns a commercial or residential property, they can rent it to their limited company instead of purchasing it outright through the business. This allows for tax-deductible rental expenses while shifting profits from corporation tax to personal income tax.

How to Use This Loophole Effectively:

• Instead of the company owning business premises, the director personally owns the property and leases it to the company at a fair market rate.
• The company deducts the rental payments as a business expense, reducing taxable profits and corporation tax liability.
• The director receives rental income personally, which may be taxed at a lower rate, especially if below the basic rate threshold (£12,570).
• If the property is later sold, the director may benefit from Business Asset Disposal Relief, which reduces Capital Gains Tax (CGT) to 10% instead of 20% (if certain conditions are met).

The rent charged to the business must be at market value – HMRC will challenge excessive payments as an artificial tax avoidance measure.

Rental income is subject to personal tax, so directors must ensure it aligns with their personal tax band to avoid unintended tax liabilities.

If the business later purchases the property from the director, Stamp Duty Land Tax (SDLT) may apply.

Are Tax Loopholes Legal?

All of the above methods are HMRC-compliant and legal, provided they are implemented correctly and transparently. However, businesses should be aware that overuse or abuse of these strategies can attract HMRC scrutiny. Any approach that artificially reduces tax liabilities without a valid commercial reason could be challenged under anti-avoidance rules.

For example, setting up multiple companies to artificially lower tax rates without genuine business separation may be considered tax avoidance. Similarly, failing to document director’s loan repayments properly could result in unexpected tax charges.

Seeking professional tax advice ensures businesses use legitimate tax planning rather than risky loopholes that could lead to investigations, backdated tax bills or penalties. When used appropriately, these strategies can legally and efficiently reduce your corporation tax liability while keeping your business financially sound.

Additional Strategies to Reduce Your Corporation Tax Bill

Below, we explore additional strategies to help you reduce the amount of tax your business pays.

1. Claim All Allowable Business Expenses

One of the simplest yet most effective ways to reduce your corporation tax bill is by claiming all allowable business expenses. These are costs incurred wholly and exclusively for business purposes and can be deducted from your taxable profits, reducing the amount of corporation tax you owe.

What Expenses Can You Claim?

HMRC allows businesses to deduct the following common expenses:

• Office Costs – Rent, business rates, utility bills, phone, internet and office supplies.
• Staff Costs – Salaries, bonuses, pension contributions, employer National Insurance contributions and staff training.
• Travel and Subsistence – Business mileage, train fares, flights, accommodation and meals (if required for business).
• Professional Fees – Accountants, solicitors, consultants and business insurance.
• Marketing and Advertising – Website costs, social media ads, PR services and printed materials.
• Equipment and Technology – Computers, software, tools, and machinery used for work.

To ensure you maximise these deductions while staying compliant, it’s essential to keep accurate records of all expenses, ideally using cloud accounting software like Xero or QuickBooks. A good accountant will use this software.

Business expenses should always be paid from a dedicated business bank account to avoid complications with HMRC.

Please note: If an expense is partially personal, such as a home office or mobile phone, only the business-related proportion can be claimed.

1. Maximise Capital Allowances

Capital allowances enable businesses to deduct the cost of qualifying assets from their taxable profits, reducing their corporation tax liability. This is particularly beneficial for companies that invest in equipment, vehicles and other long-term assets.

What Can You Claim Capital Allowances On?

HMRC permits businesses to claim capital allowances on:

• Plant and Machinery – Office equipment, machinery, tools and storage units.
• Vehicles – Vans, lorries and electric company cars (qualifying for additional relief).
• Renovations and Fixtures – Heating systems, security installations and fire alarms.
• Research and Development Equipment – Computers, software and lab tools used in innovation.

The Annual Investment Allowance (AIA) allows businesses to claim 100% tax relief on qualifying assets, up to £1 million per year. 

Companies investing in energy-efficient equipment may also benefit from First-Year Allowances (FYA), which provide immediate tax deductions. 

If the full deduction isn’t used, businesses can apply Writing Down Allowances (WDA) to spread relief over multiple years.

To optimise tax savings, businesses should plan capital purchases strategically – for example, acquiring assets before the end of the financial year to claim relief sooner. 

1. Take Advantage of Research & Development (R&D) Tax Relief

Research & Development (R&D) tax relief is one of the most valuable ways for innovative businesses to reduce their corporation tax liability. Companies investing in new products, processes or services can claim significant tax relief on their R&D-related costs, even if the project was not successful.

Who Qualifies for R&D Tax Relief?

To be eligible, your company must be working on a project that seeks to overcome scientific or technological uncertainty. Qualifying activities include:

• Developing new products, processes or software.
• Improving existing technologies to make them more efficient or cost-effective.
• Creating prototypes, testing models or running feasibility studies.

R&D tax relief is available under two schemes:

1. SME R&D Tax Relief – For companies with fewer than 500 employees and a turnover under €100 million, allowing them to deduct 186% of qualifying R&D costs from taxable profits.
2. R&D Expenditure Credit (RDEC) – For larger companies, offering a 13% credit on qualifying R&D expenditure.

To maximise your claim, keep detailed records of R&D activities, including project notes, employee time spent and associated costs such as salaries, software and subcontractor fees. 

Businesses must submit an R&D tax relief claim through their corporation tax return (CT600). 

It is worth speaking to a specialist limited company tax advisor to help make sure you maximise any tax savings your business is entitled to. 

4. Use Pension Contributions to Reduce Taxable Profits

Making pension contributions through your limited company is a highly effective way to reduce your corporation tax liability while saving for the future. Employer pension contributions are classed as an allowable business expense, meaning they are tax-deductible and reduce your company’s taxable profits.

How Do Pension Contributions Reduce Corporation Tax?

Pension contributions made by your company:

• Are 100% deductible from taxable profits, reducing the amount of corporation tax you owe.
• Are not subject to National Insurance contributions, unlike salary payments.
• Offer long-term financial benefits for company directors and employees.

How Much Can a Company Pay into a Pension?

The annual pension contribution limit is currently £60,000 per individual. However, if you have unused allowances from the previous three years, you may be able to carry them forward to increase your contributions.

For company directors, pension contributions can be a tax-efficient way to extract profits from the business without incurring income tax and National Insurance. 

Contributions should be made directly from the company’s bank account to qualify for corporation tax relief. 

5. Extracting Profits in a Tax-Efficient Way

As a limited company owner, how you withdraw profits significantly impacts your tax liability. Instead of taking all earnings as salary, structuring salary and dividends correctly can reduce how much income tax and National Insurance you pay while keeping your corporation tax liability low.

Salary vs. Dividends: What’s More Tax-Efficient?

A combination of salary and dividend payments is usually the most tax-efficient way to take money out of a company.

A salary ensures you qualify for the state pension and other benefits, but anything above the primary threshold (£12,570 for 2024/25) is subject to income tax and National Insurance.

On the other hand, dividends are not subject to National Insurance and are taxed at lower rates, as follows:

• 0% on the first £500 (dividend allowance).
• 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate) thereafter.

6. Charitable Donations 

Making charitable donations through your limited company can be a tax-efficient way to reduce your corporation tax liability while supporting good causes. Donations to registered UK charities are tax-deductible, meaning they are deducted from your company’s taxable profits, ultimately lowering the amount of corporation tax you owe.

How Do Charitable Donations Reduce Corporation Tax?

When a company makes a donation to a registered charity, the amount is subtracted from its taxable profits before corporation tax is calculated. The key advantage is that this reduces how much corporation tax the company pays rather than being taxed as a personal donation.

What Type of Donations Qualify?

Your business can claim tax relief on:

• Cash Donations – Direct monetary gifts to a charity.
• Sponsorship Payments – Funding charitable events or initiatives (provided your business receives some benefit, like advertising).
• Donating Equipment or Assets – If you donate stock, equipment or property to a charity, your company won’t need to pay capital gains tax on the gifted asset.
• Employee Secondments – If an employee works for a charity while being paid by your company, you can still deduct their salary and National Insurance contributions as a business expense.

To qualify for corporation tax relief, donations must be made to registered UK charities. It’s essential to keep detailed records of donations, including receipts and confirmation from the charity. 

7. Consider the Patent Box Scheme

If your company generates income from patented inventions, the Patent Box scheme offers a significant tax advantage by reducing the corporation tax rate on eligible profits to just 10%, instead of the standard 19% or 25%. This scheme is designed to encourage innovation and reward businesses that develop and commercialise intellectual property.

Who Qualifies for the Patent Box Scheme?

To benefit from the Patent Box regime, your company must:

• Own or exclusively license a UK or European patent granted by an approved patent office.
• Be involved in the ongoing development of the patented invention.
• Generate income from the patented product, such as sales, licensing fees, or compensation for patent infringement.

How Does the Tax Reduction Work?

Once a patent is granted, your company can elect into the Patent Box scheme and apply a 10% corporation tax rate to profits derived from:

• The sale of patented products or those containing patented components.
• Licensing income from the patent.
• Patent-related royalties and compensation.

To take full advantage of the Patent Box, businesses should integrate patent protection into their R&D strategy and ensure patents are filed before commercialising innovations. 

8. Timing Business Investments & Expenditure

Strategically planning when you make business investments and expenses can help optimise your corporation tax savings. By deferring or bringing forward purchases, you can align spending with tax relief thresholds to maximise deductions and minimise your company’s taxable profits.

How Timing Affects Corporation Tax

Corporation tax is calculated on your company’s profits at the end of the financial year. Making key investments before year-end can lower your taxable profits, reducing your corporation tax liability. Conversely, delaying expenses into the next financial year can help offset future tax bills.

Key Strategies for Effective Tax Planning

• Claim Annual Investment Allowance (AIA) Strategically – As mentioned above, the AIA allows businesses to deduct 100% of qualifying capital purchases, up to £1 million per year. If your company is approaching its financial year-end, making purchases before this date ensures you benefit sooner.
• Advance Necessary Business Expenses – If your business needs new equipment, IT upgrades or repairs, consider bringing forward these purchases to reduce this year’s taxable profits.
• Deferring Income – If possible, delay issuing invoices until the next financial year to push taxable income into the following period. However, this should be done within HMRC guidelines to avoid scrutiny. A good accountant will be able to guide you on this.

9. Making Use of Loss Relief

If your company incurs a trading loss, you can use loss relief to offset taxable profits, reducing your corporation tax liability. HMRC allows businesses to carry losses forward or backward, providing flexibility in how tax relief is applied. Properly utilising this strategy ensures that losses are not wasted and can be used to minimise future tax bills.

How Does Loss Relief Work?

There are several ways to apply loss relief, depending on your company’s financial position:

• Carry Losses Back – If your company made a profit in the previous year, you can carry losses back to reclaim some of the corporation tax already paid. This results in an immediate tax refund from HMRC.
• Offset Losses Against Other Profits – If your company has multiple revenue streams, you can offset losses from one activity against profits from another within the same financial year.
• Carry Losses Forward – If there is no profit to offset in the current or previous year, losses can be carried forward to reduce future taxable profits, lowering corporation tax in subsequent years.

To use loss relief effectively, businesses must accurately track and report losses in their corporation tax return (CT600) to ensure they are claimed correctly. 

Choosing the right timing is also crucial. Carrying losses back can provide an immediate cash benefit, whereas carrying them forward may be more advantageous if corporation tax rates increase in the future.

Additionally, companies must comply with HMRC regulations, as loss relief claims must be submitted within two years of the end of the accounting period to remain valid. 

Tax Avoidance Schemes to Avoid

While there are many legitimate ways to reduce your corporation tax liability, some strategies cross the line into tax avoidance. HMRC actively monitors and cracks down on schemes that are designed to artificially reduce tax bills, often resulting in severe financial penalties and backdated tax charges for those involved.

Understanding what constitutes tax avoidance and recognising flagged schemes can help limited company owners stay compliant and risk-free.

What Is a Tax Avoidance Scheme?

A tax avoidance scheme is any arrangement that aims to reduce tax liabilities in an artificial way, without genuine commercial substance. Unlike tax planning, which involves legal reliefs and deductions, tax avoidance involves manipulating financial structures to minimise tax in ways that HMRC does not approve of.

These schemes often:

• Use complex legal structures to disguise income.
• Involve transactions that serve no real commercial purpose.
• Promise unrealistically low tax rates or tax-free earnings.
• Require funds to be routed through multiple offshore accounts or trusts.

Participation in these schemes may not immediately trigger HMRC intervention, but the tax authority has the power to investigate retrospectively and demand full repayment with interest and penalties.

HMRC’s Named Tax Avoidance Schemes

To combat tax avoidance, HMRC publishes a list of known tax avoidance schemes, including the promoters, enablers, and suppliers involved. The latest list is available on the UK government website: Current List of Named Tax Avoidance Schemes

Some common tax avoidance schemes that HMRC has flagged include:

Disguised Remuneration Schemes

These schemes involve routing employment income through loans, trusts, or offshore entities to avoid paying income tax and National Insurance.

HMRC has targeted these under the Loan Charge rules, meaning anyone who used such schemes in the past may owe backdated tax.

Artificial Profit-Sharing Arrangements

These schemes claim to split business profits among multiple entities or individuals to reduce overall tax exposure.

HMRC investigates whether these arrangements serve a genuine commercial purpose or are purely for tax avoidance.

Employer Financed Retirement Benefit Schemes (EFRBS)

These schemes offer an alternative to standard pension contributions by making offshore trust payments, avoiding PAYE and National Insurance deductions.

HMRC has heavily scrutinised EFRBS, and businesses using them risk substantial backdated tax bills.

VAT Fraud Schemes

Some businesses artificially inflate VAT reclaims or use missing trader fraud (MTIC) tactics to avoid VAT.

These schemes are illegal, and businesses caught engaging in them can face criminal charges.

HMRC publishes a list of people involved in transactions connected with VAT fraud. The latest list is available on the UK government website: Current list of people involved in transactions connected with VAT fraud.

Dividend Substitution Schemes

These involve reclassifying dividend payments as another type of payment to avoid dividend tax. HMRC will investigate if this is deemed an attempt to circumvent proper tax treatment.

Consequences of Engaging in Tax Avoidance

Using a tax avoidance scheme is not illegal, but if HMRC determines the scheme is not compliant with tax laws, your company will face serious consequences:

• Backdated Tax Bills – You will be required to repay all avoided taxes, often covering multiple years.
• Interest Charges & Penalties – HMRC applies late payment interest and penalties, significantly increasing the final tax bill.
• Legal Action – Some aggressive schemes could lead to civil or criminal prosecution.
• Damaged Business Reputation – Companies involved in tax avoidance may lose credibility with investors, customers and partners.

Reduce Your Limited Company Tax Liability With J. Dauman & Co.

At J. Dauman & Co, we specialise in helping limited companies legally reduce their tax liability, maximise available reliefs and allowances and avoid risky tax avoidance schemes.

By working with our experienced accountants, you can:

• Identify tax-saving opportunities tailored to your business.
• Ensure compliance with the latest HMRC regulations.
• Optimise profit extraction strategies to minimise personal and corporate tax burdens.
• Avoid penalties by structuring your finances correctly.

Don’t leave your tax strategy to chance. Get in touch with J. Dauman & Co today for personalised, expert advice on reducing your corporation tax bill.