Corporation tax can significantly impact your business’s bottom line. Rates can be up to 25% for profits over £250,000.
This guide explains essential strategies to reduce your tax bill legally, provides insights on marginal relief, and prepares you for future tax changes, ensuring your business stays tax-compliant and financially efficient.
What is Corporation Tax?
Corporation tax is the levy businesses pay on their taxable profits, which include income from trading, investments, and selling assets. As of April 2023, the UK’s corporation tax rates are 19% for profits up to £50,000 and 25% for profits above £250,000, with marginal tax rates applying to profits between these thresholds.
Taxable profits are calculated after deducting allowable business expenses, including office costs, pension contributions, and qualifying reliefs. Every business owner, from a sole trader transitioning to a limited company to a large organisation, must understand the importance of strategic tax planning to minimise their tax liabilities.
Marginal Relief Explained
What is Marginal Relief?
Marginal relief is a tax mechanism designed to provide a gradual transition between the lower and higher corporation tax rates for UK businesses. It specifically applies to companies with profits between £50,000 and £250,000, allowing them to benefit from a reduced effective tax rate as their profits increase.
This relief is crucial for medium-sized businesses that might otherwise face a sudden increase in their tax burden as they cross the profit threshold.
How Marginal Relief Works
Marginal relief reduces the effective tax rate incrementally as profits increase from £50,000 to £250,000. The formula for calculating marginal relief is:

To illustrate how marginal relief works, consider a company with profits of £100,000:
1. Identify the Values:
Upper Limit = £250,000
Lower Limit = £50,000
Profits = £100,000
Tax Rate Difference = 6%
2. Plug the Values into the Formula:

3. Calculate:

Substituting these values back into the formula gives:

4. Convert to Percentage:
Multiply by 100 to convert to a percentage:

To determine the effective tax rate for profits of £100,000, follow these steps:
1. Calculate the standard corporation tax:
The first £50,000 is taxed at 19%, resulting in:

The remaining profit of £100,000 − £50,000 = £50,000 is taxed at 25%, resulting in:

2. Total tax before relief:

3. Apply the marginal relief calculated earlier (4.5%):
Total tax after applying marginal relief:

4. Calculate the effective tax rate on profits of £100,000:

For a company with profits of £100,000, the effective tax rate after applying marginal relief would be approximately 21.01%.
Summary Table of Effective Tax Rates
The following table illustrates how the effective tax rate changes for different profit levels between £50,000 and £250,000, including calculations for marginal relief:
Profit Level (£) | Tax on First £50k (£) | Tax on Remaining Profits (£) | Total Tax (£) | Marginal Relief (£) | Final Tax (£) | Effective Tax Rate (%) | 50,000 | 9,500 | 0 | 9,500
| 0
| 9,500
| 19.00
|
---|---|---|---|---|---|---|
75,000
| 9,500
| 6,250
| 15,750
| 1 | 15,749
| 21.00
|
100,000 | 9,500 | 12,500 | 22,000
| 990 | 21,010
| 21.01 |
150,000
| 9,500
| 25,000
| 34,500
| 2 | 34,498 | 22.99
|
200,000 | 9,500 | 37,500 | 47,000 | 3 | 46,997 | 23.50 |
250,000 | 9,500 | 62,500 | 72,000 | N/A | N/A | N/A |
Why Legally Reducing Corporation Tax Matters
Efficient tax planning offers several benefits:
- Lowering the Tax Burden: Minimising your tax liabilities can free up resources to reinvest in your business.
- Reinvestment Opportunities: Savings can fund innovation, employee development, or new projects.
- Competitive Edge: Reduced tax burdens can give you an advantage in pricing, hiring, or expanding operations.
By learning how to reduce company tax and applying legal strategies, businesses can achieve long-term financial resilience.
Strategies to Legally Reduce Corporation Tax
Maximising Allowances and Reliefs
- Annual Investment Allowance (AIA): Deduct up to £1 million in qualifying expenditure on plant and machinery from taxable profits each year. For example, purchasing new office equipment can directly reduce your taxable profits. Plus, businesses investing in energy-efficient equipment may qualify for additional green tax incentives.
- R&D Tax Relief: Businesses investing in innovation can claim up to an additional 130% of qualifying R&D costs as a deduction, potentially turning a loss into a tax credit. Large companies can use the R&D Expenditure Credit scheme for tax-efficient innovation.
- The Patent Box: Companies developing patented products can reduce corporation tax on profits derived from these innovations, paying as little as 10% tax.
By maximising these reliefs, you’ll discover impactful ways to reduce company tax.
Effective Use of Pension Contributions
Employer pension scheme contributions are a powerful way to reduce taxable profits while supporting employees. Don’t forget – these contributions are exempt from National Insurance, lowering overall liabilities.
For example, if a company contributes £50,000 to pensions, this amount is fully deductible, reducing the amount of tax for both the business and employees.
Claiming Business Expenses
Ensuring all allowable expenses are claimed is essential for reducing corporation tax. Some examples include:
- Office costs such as rent and utilities.
- Travel expenses like mileage and train fares.
- Employee training and development courses.
Accurate record-keeping is vital. HMRC requires detailed evidence for claims, so maintaining receipts and documentation is a must.
Salary vs Dividends
For directors of limited companies, choosing between salary and dividends significantly impacts tax efficiency. A salary is deductible as a business expense, reducing taxable profits, but incurs National Insurance. Dividends, however, are taxed at a lower rate and exempt from National Insurance. A combination of both is often the most tax-efficient way to pay yourself.
Leasing vs Buying Assets
Leasing can be more advantageous for lowering corporation tax than purchasing outright, as lease payments are fully deductible. For example, leasing office equipment spreads costs over time and reduces upfront investment. This is a practical option for improving cash flow and could help you to pay less tax over the year.
Timing of Income and Expenditure
Strategic timing helps businesses align income and expenses with the financial year to reduce corporation tax. For instance, accelerating large purchases before year-end increases deductible expenses, while deferring income to the next tax year lowers current-year taxable profits.
If your business operates in Europe, you may be interested in reading A Breakdown of European Corporate Tax Rates in 2024 By Country.
Common Misconceptions about Reducing Corporation Tax
“Tax Planning is Only for Large Businesses”
Many SMEs assume tax planning is irrelevant to them. In reality, small businesses can use strategies like the Annual Investment Allowance and R&D Tax Relief to reduce their tax liabilities effectively.
“All Businesses Can Avoid Paying Corporation Tax Entirely”
This misconception confuses legal tax planning with illegal tax avoidance. While you can significantly reduce your corporation tax, every business must still comply with HMRC regulations. Evasion risks penalties and reputational damage.
“Tax Planning is Too Complex for SMEs”
Professional advice simplifies tax planning for businesses of all sizes. Corporation tax services like those offered by J. Dauman & Co ensure businesses optimise their tax-efficient strategies while staying fully compliant.
Government Guidance and Compliance
Staying compliant with HMRC guidelines is critical for minimising corporation tax and avoiding penalties. Here’s how:
- Review Allowances and Reliefs Regularly: Schemes like R&D Tax Relief and the Patent Box can significantly reduce your corporation tax bill. Stay informed through HMRC’s allowances and reliefs guide.
- Submit Accurate Tax Returns: Errors can trigger audits or fines. Professional assistance ensures accuracy. Read our article on common pitfalls to avoid when submitting your tax return here.
- Maintain Detailed Records: Clear records of expenses, payroll, and income are essential for successful claims.
- Understand Tax Rates: Tax rates depend on profits. For businesses earning over £250,000, the 25% rate applies, while smaller profits may attract lower rates.
- Engage Professional Help: Partnering with a trusted advisor like J. Dauman & Co ensures you benefit from every available relief without risking compliance issues.
Compliance safeguards your business while helping you discover legal ways to reduce corporation tax in the UK.
“Tax planning is about being proactive, not reactive. Businesses should focus on strategies like reinvesting profits into qualifying assets, maximising available reliefs, and maintaining accurate financial records. With potential changes on the horizon in 2025, companies must plan for adaptability to sustain growth.”
Piotr Kubalka, CEO of J. Dauman & Co
Changes to Corporation Tax in 2025
The UK government has signalled potential updates to corporation tax rates and reliefs, which could significantly impact businesses. While some changes remain speculative, here’s what is currently known or anticipated:
1. Adjustments to the Main Corporation Tax Rate
- Speculation about Rate Increases: Analysts suggest the main tax rate, currently at 25%, may rise further to address fiscal challenges. This would increase the tax burden on profits over £250,000.
- Impact: Larger businesses could see a noticeable dent in post-tax profits, potentially limiting their ability to reinvest.
- Impact: Larger businesses could see a noticeable dent in post-tax profits, potentially limiting their ability to reinvest.
- Potential Decreases to Stimulate Growth: Alternatively, there’s speculation that a government seeking to attract investment may reduce the rate to incentivise growth.
- Impact: SMEs with growing profits might benefit, particularly those on the edge of profitability thresholds.
Please note: any such changes would need to be confirmed through official government announcements or budget statements.
2. Changes to Reliefs and Allowances
- Annual Investment Allowance (AIA): The government has extended the £1 million cap on AIA indefinitely. While this benefits businesses with significant capital expenditure, any future changes could involve stricter eligibility criteria or adjustments based on economic conditions.
- Impact: Companies relying on capital investments should prioritise long-term planning to optimise this relief.
- Impact: Companies relying on capital investments should prioritise long-term planning to optimise this relief.
- R&D Tax Relief: Streamlining measures for R&D Tax Relief are underway, with a focus on reducing fraudulent claims. However, these changes may add complexity for SMEs, particularly those claiming under the SME R&D scheme.
- Impact: SMEs may need more administrative resources to comply, increasing costs for smaller businesses. While these changes may increase compliance requirements, they aim to protect legitimate claimants rather than impose undue burdens on SMEs.
3. Budget Announcements
The most recent Budget outlined key measures that could affect your tax planning:
- Investment Incentives: Extended allowances may encourage businesses to bring forward planned expenditures.
- Potential Reductions in Tax Credits: The government could scale back on reliefs, such as the super-deduction or energy-saving incentives.
Strategic planning for investments and tax liabilities under different scenarios is crucial, given the government’s focus on encouraging businesses to invest and grow as part of its economic strategy outlined in the Autumn Budget 2024.
How to Prepare
- Forecast Scenarios: Model your business’s tax liabilities under different corporation tax rates to identify potential vulnerabilities.
- Plan Investments: Consider bringing forward significant expenditures to benefit from current allowances.
- Consult Professionals: Engage a tax advisor to ensure compliance with new R&D relief requirements and maximise eligible claims.
Corporation Tax FAQs
Can I buy property to reduce corporation tax?
Yes, property purchases may qualify for capital allowances, reducing taxable profits. However, the specific benefits depend on the type and use of the property for business purposes.
Does paying a salary reduce corporation tax?
Yes, salaries are deductible as a business expense, directly reducing taxable profits.
How do companies avoid corporate tax?
Companies reduce tax legally by maximising tax-free allowances, claiming reliefs, and optimising income structures.
Is it better to take dividends or salary?
A balanced approach, combining a modest salary with dividends, is typically the most tax-efficient.
What is the best way to pay yourself in a limited company?
Using a mix of salary and dividends often yields the best results. Consult with an expert in limited company accounting for tailored advice.
Reduce Your Company Tax Bill with J. Dauman & Co
Efficient tax planning isn’t just about savings – it’s about reinvesting in your business and staying compliant with UK tax laws. At J. Dauman & Co, we provide tailored advice to show you how to reduce your business taxes and achieve your financial goals.
Contact J. Dauman & Co’s corporate tax experts today for expert guidance on tax planning and compliance.