How to Reduce Corporation Tax in the UK in 2026: 15 Legal Ways

15 Legal Ways to Reduce Corporation Tax in the UK (2026)

1. Claim R&D Tax Relief

R&D relief lets companies deduct specific research and development costs from their taxable income. If the business is losing money, it can also get a payable cash credit.

The law gives this protection, which is one of the best, and it covers a lot more work than most directors think. As long as the company is really trying to solve a scientific or technological problem, software development, engineering problem-solving, product testing, and process improvement can all be considered.

The SME and RDEC plans were merged by HMRC into a single R&D scheme in April 2024. The main rate is a 20% above-the-line credit for most businesses. Risky small businesses that do a lot of R&D will pay a higher rate. That’s why one of the first things an expert will do is make sure you understand which rate applies to your business.

HMRC’s review of R&D claims has grown a lot since 2023. Claims need a good technical and financial story, not just a general outline. People who want to make a claim for the first time must now tell HMRC ahead of time.

Who qualifies: UK-registered companies undertaking qualifying R&D. Costs that can be included are staff wages, some subcontractor costs, consumable materials, software, and utilities used in R&D activity.

Action step: Start a project log now if you are not already keeping one, document what problem you are trying to solve, how you are approaching it, and how much staff time is being spent. Then engage an R&D specialist to review the claim before it goes on your CT600. HMRC’s current enquiry rates make clean documentation non-negotiable.

Source: HMRC- R&D tax relief for Corporation Tax

2. Pay a Lower Effective Rate with Patent Box

If your company owns patents and earns profits from products or processes that use them, the Patent Box allows you to apply a 10% corporation tax rate to those qualifying profits instead of the standard 25%.

That is a genuinely significant difference. But it comes with conditions that trip people up if they go in unprepared.

First, the election is not automatic, you have to make a formal claim. Second, the profits eligible for the 10% rate are not simply “all profits from patented products.” They are calculated through a prescribed apportionment that adjusts for how much R&D was done in-house versus acquired. The mechanics are technical enough that most companies need specialist help to do it correctly.

The patents themselves must be granted by the UK IPO, the European Patent Office, or certain EEA offices. A pending patent does not qualify until it is granted, though the relief can be backdated to when the application was filed once the grant comes through.

Both R&D relief and Patent Box require careful recordkeeping and specialist input. Neither is a quick win without proper groundwork.

Who qualifies: Companies that own qualifying granted patents (or hold an exclusive licence), were actively involved in developing the invention, and meet the relevant development conditions for groups.

Action step: Confirm your patent portfolio with your IP solicitor. If you have qualifying patents, commission a specialist Patent Box calculation before making the election. The apportionment model needs to be right from the start.

Source: HMRC- Corporation Tax: the Patent Box

3. Claim Training and Subscription Costs

Training costs that are incurred wholly and exclusively for business purposes are deductible against taxable profits. So are subscriptions to relevant professional bodies and trade associations.

The key word is “wholly and exclusively.” Training that helps an employee do their current job is deductible. Training for personal development unrelated to their role is not, and if the company pays for it, HMRC may treat it as a benefit in kind, creating a P11D obligation. The same applies to subscriptions: they need to relate to the employee’s actual trade, and the organisation must appear on HMRC’s approved list to qualify for tax relief.

In practice, most job-relevant training and professional subscriptions go through without issue. The risk is in undocumented claims or course costs that look personal in nature.

Who qualifies: Any limited company paying for training or subscriptions that relate directly to the business’s trade or the employee’s role.

Action step: Review training invoices and subscription receipts annually. For each one, confirm the business purpose and retain a record. Code them correctly in your accounts, and flag anything ambiguous to your accountant before the year-end.

4. Home Office Expenses, Limited Company Rules

A director working from home can claim a tax-deductible contribution from the company toward household running costs. But the rules are more structured than they first appear, and getting this wrong is more common than people realise.

There are two approaches for limited companies:

Option A, Company reimburses the director The company pays the director a reasonable amount representing the additional household costs attributable to business use, a proportion of heating, lighting, broadband, and so on. This must be calculated from actual costs, not estimated. If the amount is excessive or lacks documentation, HMRC can reclassify it as a benefit in kind, triggering P11D obligations and personal tax.

Option B, Director licenses part of the property to the company This requires a formal written licence agreement. The company deducts the rental payments; the director declares the income personally. It can be more tax-efficient in some circumstances but adds personal tax reporting obligations. It needs to be set up correctly.

Simply registering a company at a home address does not make household bills deductible. HMRC expects a genuine home-working arrangement with documented business use and a proportionate calculation to back it up.

For sole traders, HMRC’s simplified expenses flat rates are a straightforward alternative.

Action step: Formalise the arrangement in writing, calculate the deductible proportion from actual utility bills and floor measurements, keep supporting records, and have your accountant review it before you claim.

Source: HMRC- Use of home as office

5. Transferring a Vehicle to the Company, Benefits and Tax Traps

Directors often transfer personal cars to their limited company expecting straightforward tax savings. The savings can be real, but so can the charges, and the two do not always work out in the company’s favour without careful modelling first.

What can work in your favour:

• The company can claim capital allowances on the car’s acquisition cost (rates depend on CO₂ emissions)
• Running costs, insurance, servicing, business fuel, become deductible company expenses
• The car’s value can be credited to a director’s loan account

Where it gets complicated:

Benefit in kind (BIK): Any personal use of a company car creates a taxable benefit, calculated as a percentage of the car’s list price based on CO₂ emissions. This generates a P11D, personal income tax for the director, and Class 1A NIC for the company. Depending on the car and the level of personal use, the BIK charge can easily exceed whatever tax was saved.

Director’s loan: Crediting the car’s value to a loan account does not produce a tax-free withdrawal. The loan is subject to HMRC’s rules under CTA 2010 ss455–464. Outstanding loans above £10,000 may also generate a further BIK on the notional interest. The idea that a director can simply “withdraw the car’s value tax-free” is a misreading of how the rules actually work.

VAT: Input tax recovery on cars is blocked in most cases unless the vehicle is used exclusively for business with no private use at all. That is a high bar in practice.

Action step: Get a tax review covering BIK, P11D, director’s loan mechanics, and VAT position before transferring any vehicle. The analysis might confirm a saving, or it might show the numbers do not stack up. Either way, go in with the full picture.

Source: HMRC- Company cars

6. Relevant Life Insurance

Relevant life insurance is one of those reliefs that is genuinely straightforward once you understand what it is: an HMRC-approved death-in-service policy where the company pays the premiums, claims full corporation tax relief on them, and the benefit is not treated as a benefit in kind for the employee.

That last point matters. Most company-paid benefits create a P11D obligation and personal tax for the recipient. Relevant life policies, structured correctly, do not.

The policy must be written in a discretionary trust, and it must be a pure term life policy, no investment element, no critical illness rider attached. Cover is typically limited to a multiple of the employee’s total remuneration, usually up to 25 times.

It works for employees and working directors, but not for shareholders who are not also employees.

Action step: Get quotations from specialist relevant life providers and arrange the policy through a qualified financial adviser who can set up the trust correctly. Confirm the deductibility with your accountant.

Source: HMRC- Relevant life policies: overview

7. Private Medical Insurance

Company-paid private medical insurance (PMI) is a deductible business expense, and it has a legitimate role in staff recruitment and retention, particularly given NHS waiting times. But directors sometimes overlook the tax mechanics on the employee side.

Unlike relevant life insurance, PMI premiums paid by the company are a benefit in kind. That means P11D reporting, personal income tax for the employee on the value of the benefit, and Class 1A NIC for the employer. The corporation tax deduction is real, but the NIC cost partially offsets it.

The net position depends on the level of cover, the employee’s income tax rate, and how you weigh the value of the benefit against its cost. It is worth modelling before you commit to a policy.

Action step: Get competitive PMI quotations, work through the P11D and NIC implications with your accountant, and make sure premiums are recorded and reported correctly on the annual P11D return.

Source: HMRC- Expenses and benefits: medical treatment and insurance

8. Annual Investment Allowance (AIA) on Plant and Machinery

The Annual Investment Allowance gives companies 100% first-year tax relief on qualifying plant and machinery expenditure, up to £1,000,000 per year. That limit has been made permanent.

In simple terms: buy qualifying equipment, deduct the full cost from taxable profits in the year of purchase. Accounting depreciation is not tax-deductible, capital allowances are how the tax system deals with asset costs, and AIA is the most generous form available.

Most tangible assets used in the business qualify: machinery, computers, tools, commercial vehicles, office equipment. Cars are the main exception, they have their own rules based on CO₂ emissions and go into either the main rate pool (18% writing-down allowance) or special rate pool (6%). Zero-emission cars currently qualify for 100% first-year allowance.

Since April 2023, the Full Expensing regime also provides 100% first-year relief on qualifying new main-rate plant and machinery for incorporated businesses, sitting alongside the AIA.

Action step: Review capital expenditure plans with your accountant before the year-end. Timing a purchase to fall within the current accounting period rather than the next can make a material difference to this year’s tax bill.

Source: HMRC- Annual Investment Allowance

9. Capital Allowances on Commercial Property

When companies buy or refurbish commercial property, they often claim relief on the building itself but miss the embedded plant and machinery inside it, heating systems, air conditioning, lighting, sprinklers, electrical installations. These qualify separately from the structure and can attract significantly faster relief.

The building’s structure qualifies only for the Structures and Buildings Allowance at 3% a year. But the fixtures and fittings inside it, categorised as integral features, go into the special rate pool at 6%, and some go into the main rate pool at 18%. In certain cases they can be covered by AIA, giving 100% relief upfront.

This is an area where specialist capital allowances surveyors earn their fee. They identify qualifying expenditure that a standard accountant might overlook, and they know how to structure Section 198 elections when property changes hands between connected parties, something that must be agreed at the point of purchase.

Action step: If you are buying or refurbishing commercial property, commission a capital allowances survey. Make sure your solicitors include S198 election clauses in the sale contract. Missing this at purchase is much harder to fix retrospectively.

Source: HMRC- Structures and Buildings Allowance

10. Business Mileage

Directors and employees who use their own vehicles for business travel can be reimbursed tax-free at HMRC’s Approved Mileage Allowance Payment rates. The company gets a full deduction; the individual pays no tax on the reimbursement, provided the rate paid does not exceed the approved limit.

AMAP rates for 2026:

The most common mistake here is poor recordkeeping. HMRC expects a contemporaneous log, date, start and end point, destination, business purpose, and miles. “I drove a lot for work” does not hold up in an enquiry.

Commuting, the journey between home and a permanent workplace, does not qualify. Business journeys do.

If you are paying below the approved rate, employees can claim tax relief on the shortfall through self-assessment.

Action step: Set up a digital mileage log. Most accounting platforms have one built in. Make sure claims are submitted and signed off before the year-end.

11. Invoice Expenses Separately

When a company incurs costs on behalf of a client and recharges them at cost, known as disbursements, those costs pass through the accounts without inflating taxable profit. If the same costs are bundled into a single fee, the full amount looks like revenue and gets taxed accordingly.

There is also a VAT angle. A disbursement (where the company acts as agent for the client) is treated differently from an expense recharge (where the company incurs the cost as principal and passes it on). The distinction affects both VAT recovery and how the amount is accounted for.

This is not a dramatic saving in most cases, but it is worth reviewing if your invoicing practice is to lump all costs together by default.

Action step: Talk through your invoicing structure with your accountant. Make sure client cost recharges are correctly categorised, and that your bookkeeping reflects whether you are acting as agent or principal.

Source: HMRC- Disbursements: VAT treatmen

12. Claim All Allowable Business Expenses

This one sounds obvious, but underclaiming is genuinely common, particularly in smaller companies where the director is also doing the bookkeeping.

HMRC allows a deduction for expenses incurred wholly and exclusively for the purposes of the trade. Commonly missed categories include bank charges, software subscriptions, website and marketing costs, staff recruitment fees, travel and accommodation for business trips, postage and stationery, and bad debt provisions where the debt is demonstrably irrecoverable.

Things that regularly cause confusion:

• Client entertainment is not deductible as a rule. Staff-only events are, up to £150 per head per year (the annual function exemption).
• Depreciation is never deductible, capital allowances replace it.
• Fines and penalties cannot be claimed, regardless of what they relate to.
• Personal costs, any element of private expenditure mixed in with a business claim, must be excluded.

The consequence of claiming non-allowable expenses is not just disallowance; it increases the chance of an HMRC enquiry, which is costly and time-consuming even when it goes your way.

Action step: Run a quarterly review in your accounting software. Reconcile every business card and bank transaction and confirm each is correctly coded. A year-end expenses review meeting with your accountant is worth the time.

Source: HMRC- Allowable expenses for limited companies

13. Directors’ Salaries and Remuneration Structure

For director-shareholders, the combination of salary and dividends is a well-established way to manage the overall tax and NIC burden, but the optimal split changes year to year as thresholds shift.

The basic logic: salary is a deductible corporation tax expense and builds entitlement to the State Pension. But salary above certain thresholds triggers NIC for both the company and the director. Dividends are not subject to NIC, but they are not deductible for corporation tax either, they come out of post-tax profits and carry dividend tax rates of 8.75%, 33.75%, or 39.35% depending on income level.

From April 2025, employer NIC applies from £5,000 (reduced from £9,100), which changed the calculation for a lot of owner-managed companies. The right salary level for 2026/27 needs to be confirmed with your accountant, it is not the same number it was two years ago.

Purely nominal salaries with no commercial basis can occasionally attract challenge, though in practice HMRC’s focus here is mainly on scenarios involving salary sacrifice schemes or artifical arrangements rather than the typical director taking a modest salary topped up by dividends.

Action step: Review your remuneration structure annually, not just when things change. Factor in the current NIC thresholds, your personal income tax position, corporation tax rates, and dividend tax. What worked last year may not be optimal this year.

Source: HMRC- Taking money out of a limited company

14. Pension Contributions

Employer pension contributions are deductible against corporation tax and are not subject to NIC. For a director-shareholder, they are one of the most tax-efficient ways to build personal wealth while also reducing the company’s tax bill.

When the company contributes to a director’s pension, including a SIPP, those contributions reduce taxable profits. No NIC arises. No benefit in kind is created. The money goes into the pension fund with no leakage on the way in.

The limits to keep in mind: the Annual Allowance is £60,000 for 2025/26 (covering employer and employee contributions combined, confirm for 2026/27). Contributions above that level trigger an Annual Allowance Charge on the individual. For owner-directors, HMRC also expects pension contributions to be commercially proportionate to the person’s role, very large contributions that look more like profit extraction than remuneration can attract scrutiny.

Action step: Model the right contribution level with your accountant and IFA before the accounting year-end. Contributions must be paid and received by the pension provider within the accounting period to be deductible in that period.

15. Loss Reliefs

A company that makes a loss in a given period does not have to absorb it quietly. The loss can be used to generate tax relief, either by recovering tax already paid or by reducing future bills.

Larger companies (profits above £5 million) face a restriction on how much of their profits can be sheltered by carried-forward losses in any single year, but this is unlikely to affect most SMEs.

Carry-back claims are subject to a time limit, generally two years from the end of the accounting period. Miss it and the option is gone.

Action step: Review loss positions with your accountant at year-end. A carry-back claim can put cash back in the business quickly. Carry-forward positions should be tracked and factored into your tax forecasting.

How Much Corporation Tax Does a Limited Company Pay in 2026/27?

Companies that make between £250,000 and £500,000 don’t have to pay the full 25% until they make more than £250,000. This is because of marginal relief. One thing that can make things more difficult is that the thresholds are split evenly between associated companies, which are businesses that are tied and are controlled by the same person. This can cause a company to experience the higher rate earlier than planned.

Example: If a business made £120,000 in taxable profit before allowances, its effective tax rate might be between 22 and 23% after marginal relief. You can save around £2,100 to £2,250 by claiming a capital allowance of £10,000. This lowers your taxable profit to £110,000, based on where that profit falls in the marginal band.

Source: HMRC- Corporation Tax rates and reliefs