There is no legal way to avoid Corporation Tax entirely, but there are many legitimate ways to reduce the amount you owe. The distinction matters: tax avoidance using artificial arrangements that have no commercial purpose beyond tax saving is something HMRC actively challenges. Tax planning using reliefs Parliament has deliberately enacted is not just acceptable, it is expected. This guide covers the most effective options for UK limited companies in 2025/26.
Employer pension contributions
This is almost always the most efficient tax relief available to a director-shareholder. When a company makes a pension contribution directly on behalf of a director or employee, it is fully deductible against Corporation Tax, with no Employer NI, no Employee NI, and no income tax charged on the way in.
| Company with £80,000 profit, 19% CT rate, considering £10,000 extraction | |
| Via salary: gross cost to company (salary + 15% Employer NI) | £11,500 |
| CT saved on salary cost (19%) | −£2,185 |
| Income tax paid by director (basic rate, approx) | −£2,000 |
| Net received in director's hands | £8,000 |
| Via employer pension: gross cost to company | £10,000 |
| CT saved (19%) | −£1,900 |
| Tax on the way in | £0 |
| Net in pension pot (before investment growth) | £10,000 |
The annual allowance for pension contributions is £60,000 for 2025/26 (tapered for those with adjusted income above £260,000). Unused allowance from the three prior tax years can be carried forward, which means a director who has not previously used their pension can make a very large contribution in a single year.
⚠️ Wholly and exclusively test: The pension contribution must be made "wholly and exclusively" for the purposes of the trade. HMRC may challenge disproportionately large contributions for a director who does limited work in the company. Contributions should be commercially justifiable relative to the director's role and remuneration.
Capital allowances: Annual Investment Allowance and full expensing
Buying equipment, machinery, or commercial vehicles reduces Corporation Tax, but only if you claim the right relief. Depreciation charged in the accounts is not an allowable deduction for CT purposes. You must claim capital allowances instead.
The two main reliefs for most limited companies:
- Annual Investment Allowance (AIA): 100% deduction in the year of purchase, up to £1,000,000 per year. Covers most plant and machinery. This means a £50,000 machinery purchase creates a £50,000 CT deduction immediately, saving £9,500 at 19%.
- Full expensing: Introduced from April 2023, this provides a 100% first-year allowance for new (not second-hand) main pool plant and machinery purchased by companies. There is no upper limit.
Timing matters. A purchase made one day before year end creates the deduction in this year's CT computation. A purchase made one day after pushes it to next year. If you are planning significant capital expenditure, the accounting period end date is a key consideration.
✓ Cars are excluded from AIA and full expensing. Cars go into the capital allowances pool at either 18% or 6% per year depending on CO2 emissions, unless they are zero-emission, in which case a 100% first-year allowance applies. Van purchases qualify for AIA; car purchases do not.
R&D tax relief
Research and Development tax relief is among the most valuable reliefs available to UK companies, and one of the most underused, because many directors do not recognise that their activity qualifies. You do not need to be a technology company or have a laboratory. The test is whether your company has attempted to resolve scientific or technological uncertainty in developing a new product, process, or service.
From April 2024, most companies use the merged R&D scheme:
| Scheme | Enhancement rate | Applies to |
|---|---|---|
| Merged scheme (RDEC-style) | 20% above-the-line credit | Most companies from April 2024 |
| Intensive SME scheme | 27% net benefit (approx) | Loss-making SMEs spending 30%+ of total costs on R&D |
Qualifying costs include staff costs, subcontractor costs (capped at 65% for overseas contractors), consumables, cloud computing costs, and software. A company spending £50,000 on qualifying R&D under the merged scheme receives a £10,000 credit against its CT bill.
⚠️ Advance notification requirement: From April 2023, companies claiming R&D relief for the first time (or after a gap of three years) must notify HMRC within six months of the end of the accounting period in which the R&D was carried out. Missing this window means the claim is invalid for that period.
Loss relief
If your company makes a loss in an accounting period, that loss can reduce CT in other periods. The options are:
- Carry forward against future profits: Trading losses can be carried forward indefinitely against future trading profits of the same trade. No restriction for losses up to £5m; losses above that are subject to a 50% cap per year.
- Carry back one year: A trading loss can be set against the profits of the immediately preceding 12-month accounting period, generating a CT repayment.
- Extended carry-back (three years): For accounting periods ending between 1 April 2020 and 31 March 2022, losses could be carried back three years. This relief has now expired, but the standard one-year carry-back remains.
- Terminal loss relief: When a company ceases to trade, it can carry losses back three years against the final trading profits.
Timing income and expenditure
For accruals-basis companies (almost all limited companies), revenue is recognised when earned and costs when incurred, not when cash changes hands. This creates legitimate planning opportunities around the year end:
- Accelerating deductible expenses into the current period (paying bonuses, making charitable donations, renewing subscriptions before year end)
- Deferring invoicing where a project won't genuinely complete until after year end
- Making pension contributions before year end to ensure the deduction falls in the current year's CT computation
These are not artificial arrangements. They are simply choices about when to carry out activities that were already planned. The key test is that the expenditure must be genuinely incurred and the income genuinely deferred, not simply shifted on paper to achieve a tax outcome.
Other reliefs worth checking
Depending on your company's activities, these reliefs may also apply:
- Patent Box: A 10% CT rate on profits attributable to qualifying patented inventions. Companies with patents or exclusive licences should check eligibility.
- Creative industry reliefs: Film, TV, animation, video games, and theatre each have dedicated reliefs with enhanced deductions or above-the-line credits.
- Gift Aid donations: Donations to UK registered charities are deductible against CT profits if made by the company (not by the director personally). The charity also recovers basic rate tax, making the combined benefit significant.
- Enterprise Zone Enhanced Capital Allowances: 100% allowances for certain assets in designated enterprise zones.
💡 Rooby tip: Rooby calculates your CT liability in real time from your Xero data, so you can see the current year's bill as it builds and make planning decisions before the year end creates fixed facts.
What to do before year end
Most CT planning needs to happen before the accounting period ends, not after. Once the period closes, the profit figure is set and the opportunities narrow significantly. The review questions to ask in the final quarter of your accounting year:
- Is there unused pension allowance that could be used this year?
- Are there capital purchases planned that could be brought forward?
- Does any of the company's development work qualify for R&D relief?
- If the company is making a loss, which relief route produces the best outcome?
- Are all allowable expenses being claimed, including home office and mileage?
Reducing your CT bill legally is not about clever structures or obscure loopholes. It is about claiming the reliefs Parliament has put in place and making timing decisions that are commercially sensible as well as tax-efficient.
Rooby connects to Xero and calculates your Corporation Tax in real time, so planning conversations happen before year end - not after.