If you’ve been operating as a sole trader and seen your profits rise, you’ll also have noticed your tax bill climbing in step. While paying income tax on your trading profit is straightforward, it becomes progressively less advantageous as your earnings grow. Incorporating as a limited company can offer a more tax-efficient structure, granting you greater flexibility in how you extract and distribute profits. However, limited companies are liable for corporation tax, so it’s vital to grasp what this entails, how much you might owe and what lawful steps you can take to reduce your bill.
Understanding Corporation Tax
A limited company is legally distinct from its directors and shareholders. Rather than individuals paying income tax on the company’s profit, the business itself settles corporation tax on its taxable gains. This obligation applies across the board to all UK-registered limited companies, regardless of their size or whether they’re actively trading.
Taxable profits include:
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- Trading income (the profit from your core activities)
- Investment returns (for example, bank interest or rental yields)
- Chargeable gains (profits on disposals of assets that have increased in value)
Once corporation tax has been paid, any salary or dividends taken by directors and shareholders are then subject to personal taxation under income tax rules.
The Rates for 2025/26
The rate you pay depends on your company’s taxable profit:
- Profits up to £50,000
Small Profits Rate: 19% - Profits between £50,001 and £250,000
Marginal Relief band: an effective rate that tapers from 19% up to 25% - Profits above £250,000
Main Rate: 25%
Prior to April 2023, all companies paid a flat 19%. The new tiered structure prevents a sudden jump for businesses growing out of the lower band, while ensuring larger, more profitable companies contribute at the higher rate.
Calculating Marginal Relief
If your profits lie within the £50,001–£250,000 bracket, you apply this formula:
(Upper limit – Profit) × (Main rate – Small rate)
—————————————————————————
(Upper limit – Lower limit)
The result is the relief amount you deduct from the tax due at 25%. Alternatively, HMRC’s online calculator will do the sums for you.
Key Deadlines
Staying on top of deadlines is crucial to avoid penalties:
- CT600 Filing
Submit your corporation tax return within 12 months of the end of your accounting period. - Tax Payment
Settle any corporation tax due no later than 9 months and 1 day after your accounting period closes.
Miss either deadline and you risk fines, interest charges or both.
Proven Ways to Reduce Your Corporation Tax Liability
Effective corporation tax planning lets you lawfully lower your chargeable profits. Here are several strategies to consider:
1. Claim Every Allowable Expense
Expenses must be incurred “wholly and exclusively” for the purposes of running your company. Deducting these from your income shrinks your taxable profit. Typical examples include:
- Business insurance premiums
- Capital allowances on machinery and equipment
- Subscriptions, software licences and professional fees
- Staff salaries, pensions and employers’ National Insurance contributions
- Training courses, utilities, rent, phone and internet charges
2. Use Your Annual Investment Allowance (AIA)
The AIA lets you deduct the entire cost of qualifying plant and machinery (cars excluded) against your profits, up to a £1 million annual cap. This immediate write-off encourages investment in growth assets while trimming your tax bill.
3. Offset Losses
If your company made a loss in a previous year, you can carry that loss forward to set against future profits, reducing your taxable income. In some circumstances, you can even carry losses back against profits from the prior 12 months to secure a refund.
4. Maximise Employer Pension Contributions
Contributions you make to employees’ pension schemes are an allowable expense. Boosting pension payments not only supports your team’s future but also cuts your current corporation tax exposure.
5. Claim R&D Tax Credits
Undertaking research and development—whether creating new products, processes or services—can attract generous relief. Under the SME R&D scheme, qualifying costs can generate credits worth up to 33% of your expenditure. Larger companies may use the RDEC scheme, which also delivers significant benefits.
6. Optimise Director Remuneration
Balancing salary and dividends is a key part of tax-efficient extraction of profits. Salary is deductible for corporation tax, whereas dividends are paid from post-tax profits but taxed more favourably at personal level. A tailored mix can minimise combined corporation and income tax liabilities.
Next Steps
Incorporation offers numerous advantages, but navigating corporation tax rules requires careful planning. Our team of chartered accountants can assist you in modelling the impact of different strategies, reviewing your tax position and ensuring you remain fully compliant with HMRC requirements.
If you’d like bespoke advice on reducing your corporation tax burden, or support with company accounts and tax planning, please get in touch with our expert advisers today. We’re here to help you make the most of your limited company’s potential.