Corporation Tax Planning for Small Companies
Reduce your Corporation Tax legitimately using reliefs, allowances and well-timed expenditure.
Corporation Tax is the single largest tax most limited companies pay, charged on their taxable profits for each accounting period. The good news is that, unlike many taxes, it is highly plannable. By understanding the rates, claiming every relief you are entitled to and timing income and expenditure sensibly, a small company can legitimately reduce its bill without crossing any line that would concern HMRC. This guide explains the practical levers available to owner-managed companies.
Planning works best when it happens during the year, not after the books are closed. Once your accounting period ends, most opportunities have gone. Treat Corporation Tax as a year-round consideration alongside your wider limited company finances .
Corporation Tax Rates and the Marginal Rate
Corporation Tax is not a single flat rate. Companies with low profits pay the small profits rate, while those above an upper threshold pay the main rate. In between sits a band where marginal relief applies, producing an effective marginal rate that is higher than the headline figures at either end.
| Profit level | What applies |
|---|---|
| Below the lower limit | Small profits rate |
| Between the limits | Main rate reduced by marginal relief |
| Above the upper limit | Full main rate |
The practical point is that profits falling in the marginal band are taxed at a higher effective rate than profits below it. If your company is sitting just inside the marginal band, moving even a modest amount of profit into a different period through legitimate timing can produce a worthwhile saving. Always check the current limits and the applicable rate before acting, as these can change at fiscal events.
Associated Companies
The profit thresholds that determine your rate are divided between associated companies. If you control more than one company, or share control with connected people, the lower and upper limits are split, which can push each company into a higher rate band than you might expect.
This matters when planning group structures or setting up a second trading company. Before incorporating another entity, consider whether it will be treated as associated and how that affects the rate on all the companies involved. Dormant companies are generally ignored, but active ones count.
Capital Allowances and Full Expensing
When your company buys equipment, you usually cannot deduct the full cost as an ordinary expense. Instead you claim capital allowances. Several mechanisms exist:
- The Annual Investment Allowance, giving a full deduction for qualifying plant and machinery up to an annual limit
- Full expensing, allowing companies to deduct the cost of qualifying new plant and machinery in the year of purchase
- Writing down allowances for expenditure that falls outside the above
Because these allowances reduce taxable profit pound for pound, the timing of a purchase can shift tax between periods. For a detailed treatment of pools, rates and qualifying assets, see our guide to capital allowances explained .
R&D and Other Reliefs
If your company solves genuine technical or scientific uncertainty, Research and Development (R&D) relief can provide an enhanced deduction or a credit. The rules and rates have tightened in recent years and claims must now be properly documented and notified, so keep robust records of the qualifying work and costs.
Other reliefs worth reviewing include:
- Loss relief, carrying trading losses back or forward against profits
- Group relief, where losses in one group company offset profits in another
- Sector-specific reliefs such as those for creative industries
These reliefs reward record keeping. Good bookkeeping guides make the difference between a defensible claim and a missed one.
Timing Income and Expenditure
Because Corporation Tax is charged per accounting period, when a transaction falls can change which period bears the tax. Sensible, commercial timing decisions include:
- Bringing forward planned equipment purchases before the year end to accelerate allowances
- Settling supplier invoices or committing to costs that are genuinely incurred before period end
- Deferring discretionary income where commercially reasonable
The key is that the timing must reflect real commercial substance, not an artificial arrangement. Reviewing your year-to-date profit a couple of months before the year end gives you time to act. Our year-end and annual accounts hub covers the close process in detail.
Pension Contributions
Employer pension contributions paid by the company are normally an allowable deduction in the period they are paid, provided they meet the “wholly and exclusively” test. For owner-directors, company contributions can be a tax-efficient way to extract value while reducing taxable profit, often more efficient than additional salary because they avoid National Insurance.
Contributions must generally be paid before the year end to be deducted in that period; an accrual is not enough. Take advice on annual and lifetime limits before making large one-off payments.
Paying on Time to Avoid Interest
Corporation Tax for most small companies is due nine months and one day after the end of the accounting period, with the return filed within twelve months. Paying late triggers interest, and persistent failures can attract penalties.
Set money aside throughout the year so the bill is never a shock. A simple discipline of moving a percentage of profit into a separate tax account keeps you solvent at payment time. If your profits are large enough, you may fall into the quarterly instalment regime, which brings payment forward considerably.
Provisions and Accruals
Under UK GAAP (including FRS 105 for micro-entities and FRS 102 for small companies), costs are recognised when incurred, not when paid. Accruals for goods and services received but not yet invoiced, and provisions for obligations that are probable and can be estimated, reduce taxable profit in the correct period. The tax charge itself is recognised through the corporation tax expense account in the chart of accounts.
| Item | When recognised |
|---|---|
| Accrual | Cost incurred but invoice not yet received |
| Provision | Probable obligation, reliably estimated |
| Prepayment | Cost paid in advance of the benefit |
Be careful: HMRC will challenge general provisions that are not specific and justifiable. A provision must relate to a real obligation, not simply a wish to reduce profit. Keep clear workings to support each one, and coordinate these adjustments with your wider tax and VAT guides .