Nobody wants to pay more tax than they have to, and there are plenty of ways to reduce your company tax bill legally in the UK. Yet plenty of UK companies do, not because they are careless, but because they miss reliefs they are entitled to, buy things at the wrong time, or pay their directors in a way that costs more than it needs to.
The good news? Cutting your tax bill legally is not about loopholes or clever schemes. It is about using the rules exactly as Parliament intended. Be clear on the difference: tax evasion (hiding income or inventing expenses) is a crime, and artificial avoidance schemes are routinely challenged by HMRC. Claiming the allowances and reliefs the law gives you is simply good planning, and HMRC expects you to do it.
Here are seven practical ways to reduce your company tax bill legally in the UK and keep more of your profit in the 2026/27 tax year, with real examples of what each one could be worth to you.
Key numbers at a glance
First, understand the rate you are really paying
First things first: corporation tax is not one flat rate. What you pay depends on how much profit your company makes:
| Taxable profits | Rate |
|---|---|
| Up to £50,000 | 19% (small profits rate) |
| £50,001 to £250,000 | 25%, reduced by marginal relief |
| Over £250,000 | 25% (main rate) |
Here is the bit most owners miss. If your profits fall between £50,000 and £250,000, marginal relief means every extra pound of profit is effectively taxed at 26.5%, more than the 25% main rate. But it works the other way too: every pound of genuine business cost or relief in this band saves you 26.5p in tax.
Conditions to know: these limits are shared between associated companies (broadly, companies under common control). Run two companies and the thresholds are split, so each gets £25,000 and £125,000. The limits are also reduced if your accounting period is shorter than 12 months. If you own more than one business, how they are set up really matters.
1. Claim every allowable business expense
If a cost is incurred “wholly and exclusively” for your business, you can deduct it from your profits. Most companies remember the obvious ones. These two are often forgotten:
- Mileage in your own car: your company can pay you 45p a mile for the first 10,000 business miles in the tax year, and 25p a mile after that. The company gets a tax deduction and you get the money tax-free. Your normal commute to your usual workplace does not count.
- Working from home: your company can pay you a flat £6 a week (£26 a month) tax-free, or reimburse the actual extra household costs, where you have a genuine arrangement to work from home. Since April 2026 employees can no longer claim this relief from HMRC themselves, so the company paying it is now the only route.
Paperwork to keep: receipts and invoices for every expense, a mileage log showing the date, journey, business reason and miles for each trip, and a short written homeworking arrangement. If you cannot evidence an expense, you cannot safely claim it.
2. Use capital allowances, and time your investment
When your company buys equipment, machinery, computers or vans, it can usually deduct the full cost from its profits in the year it buys them, instead of spreading the relief over many years:
| Relief | What it gives you |
|---|---|
| Annual Investment Allowance (AIA) | 100% deduction on up to £1 million a year of qualifying equipment, new or second-hand |
| Full expensing | 100% deduction, with no upper limit, on new and unused main-rate equipment bought by companies |
| Writing-down allowance | Anything not covered above: just 14% a year from April 2026 (down from 18%) |
With the standard allowance now down to 14% a year, claiming the AIA or full expensing is worth more than ever. And timing is everything. Buy equipment on the last day of your accounting year and you get the tax relief in that year. Buy it a day later and you wait a whole extra year.
Conditions to know: relief is given when the cost is “incurred”, which is normally the date you become unconditionally obliged to pay (usually on delivery), not the date you place the order. On hire purchase, the asset must be in use by the year end. If you later sell an asset you claimed 100% on, the sale proceeds are taxed (a “balancing charge”). Cars do not qualify for the AIA or full expensing, with one big exception, covered next.
Paperwork to keep: purchase invoices showing the date and whether each item is new or second-hand, delivery notes, and a fixed asset register.
3. Choose electric company cars
If your company buys a brand-new, zero-emission car, it can deduct 100% of the cost from its profits in the year of purchase. This first-year allowance is available for cars bought up to 31 March 2027.
Here is a simple example. A company has £600,000 of revenue, £300,000 of expenses and pays the 25% main rate. It buys a brand-new £50,000 electric car before its year end:
| Simple tax computation | Without the car | With the electric car |
|---|---|---|
| Revenue | £600,000 | £600,000 |
| Less: business expenses | (£300,000) | (£300,000) |
| Profit before car allowance | £300,000 | £300,000 |
| Less: 100% first-year allowance on the car | – | (£50,000) |
| Taxable profit | £300,000 | £250,000 |
| Corporation tax at 25% | £75,000 | £62,500 |
| Tax saved | – | £12,500 |
The result: the car’s full cost comes off the profit in year one, so the company pays £12,500 less tax (25% of £50,000). A petrol or diesel car would only get 6% a year.
Conditions to know: the car must be new and unused, have zero CO2 emissions, and be bought (not leased) by the company before 1 April 2027. A second-hand electric car only gets 14% a year. VAT on buying a car usually cannot be reclaimed if there is any private use. If the company later sells the car, the sale price is taxed as a balancing charge. See Scenario 2 below for what a £50,000 electric car could save you.
Paperwork to keep: the purchase invoice, and a mileage log of business journeys. If the car is available for private use (including driving between home and work), the company must also report it to HMRC each year on a P11D or through payroll. A car kept purely for business use, with private use banned and the ban enforced, does not need a P11D.
4. Make employer pension contributions
Paying into a pension through your company is one of the most tax-efficient ways to use your profits. Company contributions:
- reduce the company’s taxable profits in the year they are paid
- have no employer’s or employee’s National Insurance on them
- are not taxed on you as income when they go in
Most people can have up to £60,000 a year paid into their pensions, and you can often carry forward unused allowance from the previous three years. Unlike personal contributions, company contributions are not limited by your salary, so even a director on a £12,570 salary can receive large contributions.
Conditions to know: the contribution must be paid, not just promised, so it has to leave the company’s bank account before the year end. It must also be “wholly and exclusively” for the business, which HMRC tests by looking at the person’s whole pay package: salary, bonus and pension together should be reasonable for the work they actually do. This matters most for family members with small roles. High earners (adjusted income over £260,000) get a reduced allowance, as low as £10,000, and anyone who has already started flexibly drawing their pension is limited to £10,000 a year. Remember too that pension money is locked away until at least age 55 (57 from April 2028) and is taxed when you draw it, apart from the tax-free lump sum (usually 25%).
Paperwork to keep: a board minute approving the contribution as part of the director’s remuneration package, the bank payment record, and confirmation from the pension provider.
5. Pay directors in the most efficient way
If you own and run your company, how you take money out affects the total tax you and your company pay together. A salary reduces the company’s corporation tax. Dividends do not, but they come with lower personal tax rates and no National Insurance. Note that dividend tax went up by 2 percentage points in April 2026, to 10.75% for basic-rate taxpayers and 35.75% for higher-rate taxpayers.
For many directors, a salary of around £12,570 topped up with dividends still works best. The right figure depends on whether your company can claim the £10,500 Employment Allowance, and companies where the director is the only employee cannot. Review the mix every year rather than copying last year’s.
Conditions to know: dividends can only be paid out of profits the company has available after tax. A dividend paid without enough profit is unlawful and may have to be repaid.
Paperwork to keep: board minutes and a dividend voucher for every dividend, and payroll (RTI) records for every salary payment.
6. Use tax-free benefits
Some perks reduce the company’s tax and cost the person receiving them nothing:
- Trivial benefits: gifts worth up to £50 each (including VAT), such as flowers or a meal out, that are not cash or a cash voucher and are not a reward for work. Directors of close companies are capped at £300 a year.
- Annual staff events: a Christmas party or summer event costing up to £150 a head per year, as long as it is open to all staff. Go even £1 over and the whole amount becomes taxable.
- A mobile phone: one per employee, with the contract in the company’s name.
Paperwork to keep: receipts, a note of who received each gift and why, and an attendance list and cost per head for staff events.
7. Claim R&D tax relief on genuine innovation
If your company is working to resolve a genuine scientific or technological uncertainty, such as building new software, developing a new product or improving a process in a way a competent professional could not easily work out, part of that cost can come back to you as research and development (R&D) tax relief. It is not just for laboratories: software, engineering, manufacturing and food businesses regularly qualify.
For accounting periods starting on or after 1 April 2024, most companies claim under the merged R&D scheme. It gives a taxable credit of 20% of qualifying spend, worth around 15p for every £1 spent if your company pays the 25% main rate, or around 16.2p at the 19% small profits rate.
Loss-making small companies that spend at least 30% of their total costs on R&D may instead qualify for enhanced R&D intensive support (ERIS), which can turn losses into a cash payment of up to 14.5% of the surrenderable loss.
Costs that can usually be included:
- Staff costs for people working directly on the project: salaries, employer’s National Insurance and pension contributions
- Externally provided workers and subcontractors, which since April 2024 generally must be for work carried out in the UK
- Software, cloud computing and data costs used directly in the R&D
- Consumable materials used up in the R&D process
Conditions to know: the project must aim for an advance in science or technology itself, not just something new to your business. If you are claiming for the first time, or have not claimed in the previous three years, you must notify HMRC within six months of the end of your accounting period, or you lose the relief for that year. Every claim also needs an additional information form sent to HMRC before your tax return. HMRC is checking R&D claims closely, so weak or poorly evidenced claims are often rejected and can lead to penalties.
Paperwork to keep: project records showing the technical uncertainty and how you tried to solve it, timesheets or a reasonable split of staff time, invoices for qualifying costs, and copies of your claim notification and additional information form.
Practical scenarios
Scenario 1: A growing services company with £120,000 of profit
Bright Path Ltd expects to make £120,000 profit in the year to 31 March 2027. Its corporation tax bill would be £28,050.
Before the year end, it buys £20,000 of new equipment it genuinely needs (claiming the AIA) and pays £10,000 into its director’s pension.
The result: taxable profit falls to £90,000 and the tax bill drops to £20,100. That is a saving of £7,950, or 26.5% of the £30,000 spent, because the profits sit in that middle band.
Scenario 2: Choosing an electric company car
A director-owned company paying the 25% main rate buys a brand-new electric car with a list price of £50,000.
For the company: the 100% first-year allowance cuts its tax bill by £12,500 in the year of purchase. It pays £300 of employer’s National Insurance on the benefit.
For the director: the taxable benefit in 2026/27 is just £2,000 (4% of £50,000). That is £400 a year in tax for a basic-rate taxpayer, or £800 for a higher-rate taxpayer. A petrol car with the same list price, taxed at 37%, would create an £18,500 benefit, costing a higher-rate director £7,400 a year.
Scenario 3: A software company developing a new product
CodeWorks Ltd pays the main rate of corporation tax. It spends £100,000 on developer salaries and software to build a new platform that solves a genuine technical challenge.
The result: under the merged R&D scheme it can claim a £20,000 credit. After tax, that is worth around £15,000, money it can put straight back into the product.
Scenario 4: The cost of poor timing
Two identical companies each plan to spend £50,000 on new machinery. Both have a 31 March year end and pay the main rate.
The first takes delivery on 28 March and cuts that year’s tax bill by £12,500. The second takes delivery on 3 April and waits twelve months for exactly the same relief. Same machine, same saving, but one company has £12,500 in the bank a year earlier.
What to avoid
Some arrangements promise big savings but cause much bigger problems:
- Schemes that sound too good to be true, such as paying you through loans or offshore structures. HMRC actively challenges them, and the tax, interest and penalties can far outweigh any saving.
- Putting personal costs through the company. They are not deductible and can be taxed as your income.
- Leaving your director’s loan account overdrawn. If you owe the company money at the year end and do not repay it within nine months, the company pays an extra tax charge of 35.75% on what is still owed (33.75% for loans made before 6 April 2026). The tax is refunded once the loan is repaid, but it ties up cash in the meantime. Repaying and then re-borrowing within 30 days does not count, and loans over £10,000 can also create a taxable benefit for you.
- Leaving it to the last minute. Most planning only works if it is done before your year end, not after.
Year-end checklist to reduce your company tax bill legally in the UK
- Estimate this year’s profit and check which tax band you are in.
- Bring forward any equipment or vehicle purchases you genuinely need, and make sure delivery happens before the year end.
- Agree pension contributions with a board minute, and pay them before the year end.
- Review directors’ salaries, dividends and whether you can claim the Employment Allowance.
- Check whether any of your projects qualify for R&D relief, and notify HMRC in time if needed.
- Gather your paperwork: receipts, mileage logs, purchase invoices, board minutes and dividend vouchers.
- Clear or reduce any overdrawn director’s loan account.
- Revisit your plans after the Autumn Budget on 28 October 2026.
Watch the Autumn Budget
The Chancellor, John Healey, will deliver the Autumn Budget on 28 October 2026. The government’s Corporate Tax Roadmap committed to keeping the main rate of corporation tax at no more than 25% for this Parliament, but allowances, reliefs and the tax on directors’ income can all still change. We will publish our analysis of what the Budget means for your planning as soon as it is announced.
Related reading: Companies House identity verification: what every UK director must do and about Credora Consulting, a tax advisory firm in the UK.
How Credora can help
Every company is different, and the biggest savings usually come from combining several of these steps at the right time. Credora works with business owners to:
- forecast year-end profits and identify the right planning steps
- structure directors’ pay and pension contributions efficiently
- claim capital allowances and R&D relief correctly
- keep your company fully compliant with HMRC
Your year end is closer than you think.
Book a tax planning review with Credora before your year end, and keep more of what your company earns.
This article is for general information and reflects UK tax rules for 2026/27 as at October 2026. Tax treatment depends on individual circumstances and may change, including at the Autumn Budget. Figures in the scenarios are illustrative. Please seek advice before acting.
Sources: HMRC corporation tax rates and marginal relief; Menzies LLP, Autumn Budget 2025: what changed for capital allowances (January 2026); Zmartly, Electric company car tax 2026/27; ByteStart and Clive Owen LLP, director pay and dividend tax 2026/27; HMRC guidance on R&D tax relief, trivial benefits and approved mileage allowance payments; HMRC guidance on homeworking expenses and loans to participators (s455); Grant Thornton, Autumn Budget 2026 predictions (October 2026).