How to Minimise Corporation Tax Legally

Corporation tax is a significant concern for businesses in the UK, but it doesn’t have to be a financial burden. Although it’s usually one of the biggest cash outflows for profitable companies, with the right tax planning and strategies, businesses can reduce their corporation tax liability while staying compliant with UK tax laws.  

At ASWATAX, we specialise in helping businesses optimise their tax position to ensure they only pay the tax they need to, allowing them to reinvest savings into growth.  

In this blog, we’ll explore some of the most effective strategies for minimising corporation tax legally in the UK, including capital allowances, R&D tax relief, corporate restructuring and more. 

Table of Contents

• Maximise Capital Allowances 

  • Annual Investment Allowance (AIA) 

  • First-Year Allowances (FYA) 

• Claim R&D Tax Relief 

• Optimise Company Structure 

  • Incorporation 

  • Group Relief 

• Patent Box Tax Relief 

  • Eligibility 

• Optimise Tax Relief for Losses 

  • Carry Forward Losses 

  • Carry Back Losses 

• Extract Cash Tax Efficiently 

  • Dividends 

  • Pension Contributions 

• How ASWATAX Can Help 

Maximise Capital Allowances 

One of the most straightforward ways to reduce your corporation tax bill is by claiming capital allowances. These allow businesses to deduct the cost of capital assets like machinery, office equipment, and vehicles from their taxable profits. 

Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) allows businesses to claim 100% of the cost of qualifying assets in the year they are purchased, up to £1 million. This includes assets like machinery, equipment, and vehicles (except cars). By utilising AIA, businesses can significantly reduce their taxable profits in the year of purchase, leading to immediate tax relief. 

First-Year Allowances (FYA) 

For businesses investing in energy-efficient equipment, First-Year Allowances (FYA) provide an extra boost. Assets like electric vehicles and energy-efficient machinery can qualify for 100% tax relief in the first year, further reducing taxable profits and promoting green investment. 

Claim R&D Tax Relief

If your business is involved in innovation or research, you may be eligible for R&D tax relief.

Here’s how R&D Tax Relief and the Patent Box can save you money, a must-read if you’re investing in innovation.

This can provide substantial tax credits for businesses involved in developing new products, processes, or services. 

• Eligibility: Both SMEs and larger companies can claim R&D tax relief, with loss making SMEs spending heavily on innovation eligible for the Enhanced R&D-Intensive Support (ERIS), offering up to 27% tax relief if R&D expenditure makes up at least 30% of total costs. 

• Tax Relief: The new merged scheme provides 14.7%-16.2% tax relief for all businesses (both SMEs and larger companies), replacing the previous SME R&D tax relief and RDEC.  Need help calculating your R&D tax credit? Use our guide on R&D Tax Credit Calculation to make sure you’re not missing out.

• Overseas R&D: The rules have tightened, requiring subcontracted R&D and Externally Provided Workers (EPWs) to be based in the UK, with specific exceptions. 

• Claim Notifications: Don’t miss the Claim Notification deadline, which is six months after your accounting period ends. Failing to notify HMRC on time will disqualify your claim. 

Want to maximise your R&D claim with confidence? Check out our complete guide to R&D Advance Assurance for SMEs, a smart first step for eligible businesses.

Optimise Company Structure

The structure of your business can have a significant impact on your tax liability. Optimising your company structure is essential for minimising tax payments. 

Incorporation

If you are operating as a sole trader or partnership, incorporating your business as a limited company can offer significant tax advantages. Corporation tax rates for limited companies are generally lower than income tax rates for individuals. Incorporation also allows for greater flexibility in distributing profits through dividends, which are taxed at a lower rate than salary income. 

Group Relief

If your business is part of a corporate group, you can use Group Relief to offset the losses of one company against the profits of another within the group. This strategy helps reduce the overall tax burden of the group, allowing for better cash flow and tax efficiency. 

A Linked Investment Company structure can prove to be extremely beneficial when a business has 2 or more unconnected shareholders. The flexibility of the structure allows each shareholder and their family to explore their personal interests, whilst utilising funds from the existing trading business(es). 

Patent Box Tax Relief

Businesses that develop intellectual property (IP) can benefit from Patent Box Tax Relief. This relief applies to profits derived from patented inventions, reducing the corporation tax rate to just 10%. 

Eligibility

To qualify, businesses must own patents and generate income from their exploitation. This can include income from licensing patents, sales of patented products, or income derived from commercialising patents. The Patent Box regime is an attractive tax relief for technology, pharmaceutical, and engineering businesses. 

Optimise Tax Relief for Losses

If your business has incurred losses in a given year, you can use these losses to reduce future tax liabilities through various mechanisms. 

Carry Forward Losses

Losses can be carried forward and offset against future profits, reducing taxable income in profitable years. This allows you to save on taxes when your business recovers from a loss-making period. 

Carry Back Losses

Alternatively, you can carry back losses to the previous year, potentially leading to a tax refund if your business was profitable in the prior year. This can provide immediate financial relief, which can be reinvested into the business. 

Extract Cash Tax Efficiently

Once your business is generating profits, it’s important to extract cash in a tax-efficient manner. There are several ways to do this. 

Dividends

Many business owners opt to take dividends rather than a salary. Dividends are taxed at a lower rate than salary income, which can help reduce your personal tax liability. However, it’s important to ensure your business has sufficient profits to pay dividends. 

Pension Contributions

Another tax-efficient way to extract funds from the business is by making pension contributions. Contributions made by the company are tax-deductible, reducing the business’s taxable profits. This strategy not only reduces the corporation tax bill but also contributes to long-term retirement savings. 

How ASWATAX Can Help

At ASWATAX, we help businesses minimise their corporation tax through expert advice and tailored strategies. Our team of tax professionals can assist your business with: 

• Identifying and claiming capital allowances for qualifying assets. 

• Maximising your eligibility for R&D tax relief and ensuring you claim the maximum amount available. 

• Advising on the most effective company structure to reduce your tax liabilities. 

• Helping you take advantage of Patent Box Tax Relief if your business develops intellectual property. 

• Offering guidance on loss relief, and how to optimise the use of past losses. 

• Providing support with tax-efficient methods of extracting cash from your business, such as dividends and pension contributions. 

At ASWATAX, we don't believe in one-size-fits-all tax advice. Every business is different and so is its tax strategy. That’s why we tailor our support to help you make the most of every available relief and structure your affairs in a way that works for you.

Whether you’re navigating the complexities of R&D tax relief, planning capital investments, or restructuring your business for efficiency, our expert team is here to guide you every step of the way.

Ready to minimise your corporation tax the smart, compliant way?

Get in touch with ASWATAX today for bespoke advice that helps you keep

Meet Omar Omar is a Chartered Tax Advisor (a.k.a an expert on tax issues) and founder of ASWATAX. He regularly shares his knowledge and best advice here in his blog and on other channels such as LinkedIn. Book a call today to learn more about what Omar and ASWATAX can do for you.

*Disclaimer: ASWATAX is a firm of Chartered Tax Advisors, and we strive to provide accurate, up-to-date tax insights. Tax laws may change, so this content is for general guidance only and not a substitute for professional advice. Seek independent tax and legal counsel before making decisions. ASWATAX is not liable for any loss from reliance on this information. Use at your own risk.

What is the most effective way to minimise corporation tax in the UK?

The most effective way to minimise corporation tax in the UK is through proactive tax planning. This includes making full use of capital allowances, claiming R&D tax relief, optimising your business structure, and extracting profits in a tax-efficient way.

Can small businesses legally minimise corporation tax?

Yes, small businesses can legally minimise corporation tax by claiming schemes like the Annual Investment Allowance, R&D Tax Relief, and by carefully managing how profits are withdrawn through dividends and pension contributions.

Is it legal to minimise corporation tax using tax reliefs?

Absolutely. HMRC encourages the use of legitimate tax reliefs to support business investment and growth. As long as you follow the rules, using reliefs to minimise corporation tax is entirely legal and advisable.