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Discover how business asset finance can lower your corporation tax and fuel growth. Learn about tax-deductible payments, capital allowances, and flexible terms that boost cash flow and drive business expansion.
Corporation tax can take a significant bite out of your small business profits, with rates at 19% for profits under £50,000 and 25% for profits above that threshold (as of 2025). Reducing your tax liability can free up capital for growth, investment, or operational expenses. For example, saving just £5,000 in tax could fund a new marketing campaign or equipment upgrade. In this guide, we’ll explore practical strategies to lower your corporation tax in the UK, helping you keep more of your hard-earned profits.
Strategies to Reduce Your Corporation Tax
Here are some effective ways to lower your corporation tax bill while staying compliant with HMRC regulations:
Claim Allowable Expenses:Deduct business expenses like office supplies, travel, and staff training from your taxable profits. For example, if you spend £2,000 on new laptops for your team, this can reduce your taxable income by the same amount.
Utilise Tax Reliefs:Take advantage of reliefs like the Annual Investment Allowance (AIA), which lets you deduct up to £1 million in capital expenditures, such as machinery or vehicles, from your profits.
Make Pension Contributions:Contributions to employee pension schemes are tax-deductible. For instance, contributing £10,000 to your staff’s pensions can reduce your taxable profits by £10,000, saving you up to £2,500 in tax.
Claim R&D Tax Credits:If your business invests in research and development, you can claim R&D tax credits. SMEs can deduct up to 230% of qualifying costs, such as developing a new product or process.
Time Your Profits and Losses:Defer income to the next tax year or accelerate expenses into the current year to lower your taxable profits. For example, delay invoicing a large client until after your tax year ends.
What Can You Claim in Business Finance Terms?
In addition to general business expenses, you can claim specific financial costs related to business finance to reduce your corporation tax. Here’s what you can deduct:
Loan Interest Payments:Interest paid on business loans, such as a term loan or invoice finance, is tax-deductible. For example, if you pay £3,000 in interest on a £50,000 loan, you can deduct this amount from your taxable profits.
Financing Fees:Fees associated with securing finance, such as arrangement fees or broker fees, can be deducted. If you paid a £1,500 arrangement fee for a line of credit, this can reduce your taxable income.
Invoice Finance Costs:Service fees and interest charges for invoice finance are deductible. For instance, if you use invoice finance and incur a 2% fee (£2,000) on a £100,000 invoice, this cost can be deducted.
Equipment Leasing Costs:Payments for leasing equipment through finance agreements, such as a £500 monthly lease for a company vehicle, are deductible as a business expense.
Bad Debt Provisions:If you use invoice finance and a client fails to pay, you can claim a deduction for bad debts, provided you’ve made reasonable efforts to recover the amount. For example, a £5,000 unpaid invoice can be deducted if deemed uncollectible.
Professional Financial Advice Fees:Fees paid to financial advisors or accountants for tax planning or securing finance are deductible. If you paid £2,000 for advice on structuring a loan, this can be claimed.
Always keep detailed records of these expenses and consult with a tax professional to ensure compliance with HMRC rules.
Frequently Asked Questions
You can claim expenses directly related to your business, such as office supplies, travel, staff training, and marketing costs. Keep detailed records and receipts to support your claims with HMRC.
Yes, if your business engages in research and development activities, such as developing new products or processes, you can claim R&D tax credits. SMEs can deduct up to 230% of qualifying costs.
Yes, you can hire family members and deduct their salaries as a business expense, provided the salary is reasonable for the work performed and you comply with HMRC regulations, such as PAYE.
Yes, contributions are subject to annual and lifetime allowances set by HMRC. For 2025, the annual allowance is £60,000, but this may vary based on your income. Consult a tax professional for specifics.
Deadlines vary by relief type. For example, R&D tax credits must be claimed within two years of the end of the accounting period. Check with HMRC or a tax advisor to ensure timely claims.
Need Help Managing Your Finances?
Reducing your corporation tax can significantly boost your business’s financial health, but it’s just one part of effective financial management. At NexGen Business Finance, we offer tailored solutions to help you optimize cash flow, secure funding, and grow your business. Contact us today to explore how we can support your financial goals.
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