Introduction
If you run a limited company, you probably want to pay less tax. Everyone does. The question is how to do it legally and properly.
Corporation Tax is currently 25% for profits over £250,000 and 19% for profits under £50,000. That’s a significant chunk of your profits going to HMRC. Personal tax on dividends and salary adds another layer.
I’m David from Green & Moore Accountancy. I help limited company directors understand their tax position and make smart decisions that keep more money in their business.
This guide covers 10 legitimate ways to reduce your tax bill. Nothing dodgy, nothing aggressive. just standard tax planning that HMRC expects you to use.
1. Get Your Salary and Dividend Split Right
Most company directors pay themselves a combination of salary and dividends. Getting this balance right can save thousands in tax and National Insurance.
How it works:
Salary is tax-deductible for the company but you pay Income Tax and National Insurance on it. Dividends aren’t tax-deductible but they’re taxed at lower rates and don’t attract National Insurance.
The optimal strategy for 2027:
Pay yourself a salary up to the National Insurance threshold (£12,570 for 2026/27). This gives you a qualifying year for State Pension without paying National Insurance. The company gets tax relief on the salary.
Take the rest as dividends. You get a £500 dividend allowance tax-free (reduced from £1,000 in previous years). After that, dividends are taxed at 10.75% (basic rate), 35.75% (higher rate), or 39.35% (additional rate).
Example: Director earning £50,000 total:
- Salary: £12,570
- Dividends: £37,430
- Personal tax saving vs all salary: approximately £6,500
Your optimal split depends on your personal circumstances. This can depend on your company profits and if you have other personal income or a spouse who could take dividends instead, the calculation changes.
2. Contribute to a Director’s Pension
Pension contributions are one of the most tax-efficient ways to extract money from your company.
How it works:
The company makes pension contributions directly to your pension. These are:
- Tax-deductible for the company (reduces Corporation Tax)
- Not taxed as income for you personally
- Not subject to National Insurance
- Grow tax-free inside the pension
The limits for 2026:
You can contribute up to £60,000 per year (annual allowance). If you earn over £200,000, this reduces through the tapered annual allowance.
You can also carry forward unused allowance from the previous three tax years if you didn’t use it.
Example: Company makes a £20,000 pension contribution:
- Company saves £3,800 in Corporation Tax (at 19%)
- You save Income Tax you’d have paid on equivalent dividend (£6,950 at higher rate)
- Total saving: £10,750
The money is locked until you’re 55 (rising to 57 in 2028), so only do this with money you don’t need soon.
3. Claim All Allowable Expenses
Many directors don’t claim all the expenses they’re entitled to. Every legitimate business expense reduces your profit and therefore your Corporation Tax bill.
Commonly missed expenses:
- Home office costs (proportion of mortgage interest, council tax, utilities, internet) or HMRC rates
- Business mileage (45p per mile for first 10,000 miles, 25p thereafter)
- Professional subscriptions and memberships
- Business insurance
- Marketing and advertising costs
- Website hosting and domain names
- Software subscriptions
- Professional development and training
- Business banking fees
- Accountancy fees
- Trivial Benefits to staff and directors (£50 max per time up to 6 times in a tax year)
- Staff entertaining (Staff Christmas parties etc up to £150 per head per tax year)
- Relevant life insurance for Directors and employees
How to do it properly:
Keep records. Save receipts. Use accounting software that tracks expenses automatically.
If you work from home, calculate the business proportion of your home costs. If you use one room for business out of five rooms, that’s up to 20% of eligible costs.
For mileage, keep a log of business journeys. Record date, destination, purpose, and miles.
Don’t claim personal expenses as business expenses. HMRC checks this and penalties are harsh.
4. Use Capital Allowances on Equipment and Vehicles
When you buy equipment, machinery, or vehicles for your business, you can claim tax relief through capital allowances.
Annual Investment Allowance (AIA):
You can claim 100% tax relief on qualifying equipment up to £1 million per year. This is huge for small businesses.
Qualifying items include:
- Computers and laptops
- Office furniture
- Machinery and tools
- Commercial vehicles
- Software
Example: You buy £10,000 of equipment:
- Claim £10,000 capital allowance
- Reduces profit by £10,000
- Saves £1,900 in Corporation Tax (at 19%)
Company cars:
Tax relief on cars depends on CO2 emissions. Electric cars get 100% first-year allowance. Petrol and diesel cars get 6% or 18% writing-down allowance depending on emissions.
If you’re buying a car through your company, electric vehicles are significantly more tax-efficient.
5. Pay Your Spouse or Partner
If your spouse or partner helps in the business, paying them a salary is tax-efficient if they’re a lower-rate taxpayer.
How it works:
Pay must be reasonable for the work they actually do. HMRC challenges this if the salary is obviously excessive for the role.
They get their own personal allowance (£12,570 tax-free) and dividend allowance (£500 tax-free). This creates additional tax-free income for your household.
Example: You’re a higher-rate taxpayer. Your spouse has no other income.
- Pay them £12,570 salary
- They pay no tax (within personal allowance)
- Company gets tax relief (saves £2,388 in Corporation Tax at 19%)
- You avoid paying 40% Income Tax on equivalent dividend (saves £5,028)
- Total household saving: £7,416
Make sure they actually work in the business. Keep records of what they do. Pay them properly through PAYE.
6. Time Your Expenses Strategically
When you incur expenses matters for your tax bill, especially around your year-end.
How it works:
If your company year ends 31 March 2026 and you’re planning major purchases, buying in March 2026 gives you tax relief a year earlier than buying in April 2026.
Strategic timing examples:
- Annual software subscriptions (pay for the year upfront rather than monthly)
- Professional memberships (renew before year-end)
- Equipment purchases (bring forward if planned anyway)
- Marketing campaigns (prepay before year-end)
Warning: Only do this for expenses you were planning anyway and consider your cash balance. Don’t buy things you don’t need just for tax relief. Spending £100 to save £19 in tax still costs you £81.
7. Consider an Electric Vehicle
If you need a company car, electric vehicles have significant tax advantages over petrol or diesel.
Tax benefits:
- 100% first-year capital allowance (full cost deducted from profits immediately)
- Very low Benefit-in-Kind tax (4% in 2026/27)
- No fuel benefit charge if you charge at work
- Potentially exempt from congestion charges and road tax
Example comparison: £40,000 car, 2026/27 tax year
Electric vehicle (Tesla Model 3):
- Capital allowance: £40,000 (saves £7,600 Corporation Tax)
- Benefit-in-Kind tax for director: £1,600 per year (4% of £40,000)
Petrol vehicle (BMW 3 Series):
- Capital allowance: limited (saves roughly £456 per year over several years)
- Benefit-in-Kind tax for director: £6,120 per year (roughly 27% depending on emissions)
The electric vehicle saves approximately £12,000 in tax over three years.
Lease deals for electric vehicles are also often attractive because of high demand and strong residual values.
8. Use Trading Losses Efficiently
If your company makes a loss in a year, you can use that loss to reduce tax bills.
Your options:
Carry forward: Offset the loss against future profits. No time limit. This is the default option.
Carry back: Offset the loss against profits from the previous year. Claim a refund for Corporation Tax already paid. You can carry back 12 months normally, or up to three years for certain losses.
Group relief: If you have multiple companies, losses in one can offset profits in another. Requires proper structure and planning.
Strategic use: If you made a large profit last year and paid significant Corporation Tax, consider whether timing some expenses into this year creates a loss you can carry back for a refund.
This requires forward planning and good advice. Speak to your accountant before doing anything.
9. Employ Family Members in Genuine Roles
Beyond spouses, other family members can be employed tax-efficiently if they do genuine work.
Who can you employ:
- Children (over 16, or younger in some circumstances)
- Parents
- Siblings
- Other relatives
Tax advantages:
Each person gets their own personal allowance (£12,570). If they have no other income, you can pay them up to this amount tax-free.
The company gets tax relief on the salary.
Critical rules:
The work must be real and necessary. The pay must match what you’d pay a non-family member doing the same work. Keep records of hours worked and tasks completed.
HMRC investigates family employment arrangements, especially if the person is young or the pay seems high for the role.
Example: Your 18-year-old helps with social media and admin during university holidays.
- Pay £5,000 for summer work
- They pay no tax (within personal allowance)
- Company saves £950 in Corporation Tax
- Legitimate expense for real work
10. Plan Around Your Company Year-End
Your company’s financial year-end date affects when you pay tax. Choosing the right date can create cash flow advantages.
How it works:
Corporation Tax is due 9 months and 1 day after your year-end. If your year ends 31 March, tax is due 1 January. If your year ends 30 June, tax is due 1 April.
Strategic considerations:
- Match your year-end to your business cycle
- Avoid year-ends during your busiest trading period
- Consider personal tax timing (many choose 31 March to align with personal tax year)
- Plan major expenses around year-end for timing benefits
Changing your year-end:
You can change your accounting reference date once every five years without special permission. This creates a short or long accounting period.
A long period (over 12 months) can defer tax payment but requires careful planning.
Additional Tax-Saving Strategies
Research and Development (R&D) Tax Credits
If your company develops new products, processes, or services, you might qualify for R&D tax relief.
Many small businesses don’t realize they qualify. R&D doesn’t just mean scientists in labs. It includes:
- Developing new software
- Creating new processes
- Improving existing products significantly
- Overcoming technical challenges
R&D claims can be worth 20-30% of qualifying costs. On a £50,000 R&D project, that’s £10,000-£15,000 in tax relief.
The rules changed in April 2024, merging schemes and reducing rates slightly. It’s now called Research and Development Expenditure Credit (RDEC) for most companies.
Worth investigating if you do any development work.
Employment Allowance
If you employ people (including yourself through PAYE), you can claim Employment Allowance of up to £5,000 per year against your Employer’s National Insurance bill.
This reduces your National Insurance bill by up to £5,000 annually at no cost. It’s automatic if you’re eligible.
Eligibility: Your total Employer’s National Insurance liability must have been less than £100,000 in the previous tax year. Most small companies qualify.
Timing Dividend Payments
You can declare dividends at any time during the year. Strategic timing can reduce tax.
Why timing matters:
If you’re near the threshold between basic rate and higher rate (£50,270 for 2025/26), spreading dividends across two tax years keeps more income in the basic rate band.
Example: You want to take £60,000 in dividends.
Option 1: All in one tax year
- £50,270 at 10.75% = £5,404 tax
- £9,730 at 35.75% = £3,478 tax
- Total tax: £8,882
Option 2: Split across two tax years
- £30,000 in year 1 at 10.75% = £3,225 tax
- £30,000 in year 2 at 10.75% = £3,225 tax
- Total tax: £6,450
- Saving: £2,432
This only works if you have flexibility about when you need the money.
What Doesn’t Work (Don’t Try These)
Some strategies sound clever but are either illegal or not worth the risk:
Claiming personal expenses as business expenses: HMRC checks this. Penalties and interest add up. Not worth it.
Disguised remuneration schemes: Schemes that claim to legally avoid tax through complex arrangements usually don’t work. HMRC challenges them aggressively.
Artificial losses: Creating losses that aren’t real business losses. HMRC has anti-avoidance rules.
Paying dividends when company is insolvent: Illegal. Directors can be personally liable.
Excessive salaries to family members who don’t work: HMRC disallows these. You pay the tax anyway plus penalties.
Stick to legitimate tax planning. Aggressive avoidance schemes cause more problems than they solve.
Common Questions
“Is tax avoidance legal?”
Tax avoidance (legally arranging your affairs to minimize tax) is legal. Tax evasion (illegally hiding income or claiming false expenses) is not. Everything in this guide is legal tax avoidance.
“Will HMRC investigate me for using these strategies?”
No. These are standard, accepted tax planning approaches. HMRC expects you to use them. Investigations happen when people do things that aren’t legitimate.
“Can I implement these myself or do I need an accountant?”
Some are straightforward (claiming expenses properly). Others are complex (optimal salary/dividend calculations, pension contributions, timing strategies). An accountant ensures you get it right and don’t miss opportunities.
“What if I’ve been overpaying tax for years?”
You can amend returns going back up to 12 months in some cases. Speak to an accountant about reviewing your previous years to see if anything can be recovered.
“How do I know if my current accountant is doing proper tax planning?”
Ask them. A good accountant proactively suggests these strategies. If you’re taking all dividends, not using pension contributions, and not maximizing expenses, you’re probably overpaying.
How to Implement These Strategies
Don’t try to do everything at once. Pick the strategies most relevant to your situation.
Priority order:
High priority (do now):
- Fix your salary/dividend split
- Claim all legitimate expenses
- Set up Employment Allowance if you pay staff
Medium priority (plan for next year-end): 4. Consider pension contributions 5. Review spouse/family employment options 6. Investigate R&D claims if relevant
Strategic planning (discuss with accountant): 7. Year-end timing strategies 8. Loss utilization if applicable 9. Capital allowance planning for major purchases 10. Company car decisions
Getting Professional Help
Tax planning is complex. What works for one company might not work for another.
A good accountant will:
- Review your specific circumstances
- Calculate optimal salary/dividend splits for you personally
- Identify expenses you’re missing
- Plan around your year-end
- Ensure everything is done correctly and legally
The cost of an accountant is usually less than the tax they save you. We charge fixed fees so you know exactly what you’re paying.
Final Thoughts
Paying less tax legally isn’t about dodgy schemes or aggressive avoidance. It’s about understanding the rules and using the legitimate planning opportunities that exist.
You worked hard for your profits. The tax rules include these strategies specifically to encourage business investment, employment, and growth. Use them.
Start with the basics: get your salary/dividend split right, claim all your expenses, consider pension contributions. These three alone can save thousands.
Then look at the more strategic options: family employment, year-end planning, capital allowances, and the rest.
The key is planning ahead. Most tax-saving opportunities require action before your year-end. Thinking about tax in March when your year-end is April doesn’t give you much room to maneuver.
Review your tax position now. Make a plan. Implement it. Next year you’ll pay less tax and keep more of what you’ve earned.
About the Author:
David Moore is the founder of Green & Moore Accountancy, a carbon-neutral accounting practice supporting purpose-driven limited companies across the UK. Green & Moore specializes in proactive tax planning alongside sustainable business growth.
Want to reduce your company’s tax bill? Book a free consultation to review your current tax position and identify savings opportunities.