Corporation Tax Planning for Limited Companies

Welcome to Corporation Tax Planning for Limited Companies – your practical guide to legally reducing your tax bill in the 2026/27 financial year.

Corporation Tax rates are now tiered at 19% for profits up to £50,000, rising to 25% for profits over £250,000, with marginal relief creating an effective rate of up to 26.5% in between. These frozen thresholds mean proactive planning is more essential than ever to minimise your liability and keep more profits in your business.

This factsheet covers key reliefs like R&D credits, capital allowances, and the Structures and Buildings Allowance; a year-end planning checklist; efficient profit extraction methods via pensions, dividends, and salary; plus real-world examples showing savings for companies with £50,000–£250,000 profits.

Whether you're a startup scaling up or an established firm optimising cash flow, these strategies can help you navigate the rules and boost your bottom line.

Remember, tax rules can be complex, and every company is unique – this is general guidance only. For tailored advice, we strongly recommend consulting a professional accountant.

Section 1: Key Reliefs (R&D, Capital Allowances, Structures & Buildings)

Reducing your Corporation Tax bill starts with claiming the right reliefs on qualifying expenditure. In 2026/27, several key options can provide immediate or accelerated deductions, helping you reinvest in your business.

Below, we outline the main ones: Research and Development (R&D) reliefs, capital allowances for plant and machinery, and the Structures and Buildings Allowance (SBA). These are available to most limited companies, but eligibility depends on your activities and spending – always check with HMRC for your specifics.

Research and Development (R&D) Reliefs

R&D tax reliefs reward innovation by allowing enhanced deductions or credits on qualifying costs, such as staff salaries, materials, and software used in developing new products or processes. For accounting periods starting on or after 1 April 2024 (covering most of 2026/27), the merged R&D scheme offers a 20% above-the-line credit on qualifying expenditure, taxable but providing a net benefit of up to 15% after tax (at 25% Corporation Tax rate). For R&D-intensive SMEs (where 30%+ of total spend is on R&D), enhanced support includes up to a 27% effective rate for loss-making companies through a 14.5% payable credit and 186% enhanced deduction.

Additionally, 100% Research and Development Allowances (RDAs) apply to capital expenditure on assets used for R&D, like lab equipment or facilities. Restrictions apply to overseas R&D and subcontracted work, so plan domestically where possible to maximise claims.

Capital Allowances for Plant and Machinery

Capital allowances let you deduct the cost of assets like machinery, vehicles, or IT equipment from profits before tax. Key options for 2026/27 include:

• Annual Investment Allowance (AIA): 100% relief on up to £1 million of qualifying plant and machinery (excluding cars) in the year of purchase – ideal for smaller investments.

• Full Expensing (for companies only): 100% first-year relief on main pool assets (e.g., general machinery) and 50% on special rate assets (e.g., integral features like electrical systems).

• New 40% First-Year Allowance: Available from 1 January 2026 on qualifying new and unused main rate assets, including those for leasing and unincorporated businesses – a boost for post-New Year investments.

• Writing Down Allowances (WDAs): For expenditure over the AIA, claim 14% annually on main pool assets (reduced from 18% effective from 1 April 2026) or 6% on special rate/long-life assets (reducing balance basis).

• Enhanced Allowances in Zones: In Freeports or Investment Zones, super-deductions or higher rates (e.g., 10% SBA) may apply – check if your location qualifies.
  

For zero-emission cars or electric charging points, 100% first-year allowances remain available, extended until March/April 2027.

Structures and Buildings Allowance (SBA)

For non-residential buildings (e.g., offices, warehouses), SBA provides 3% straight-line relief annually on qualifying construction, renovation, or conversion costs incurred under contracts signed on or after 29 October 2018. This runs over 33 1/3 years from the date the building is first used or expenditure incurred. Enhanced 10% rates apply in Freeports and Investment Zones. Keep an 'Allowance Statement' for claims, detailing costs and start dates.

These reliefs can stack where eligible (e.g., R&D on top of capital allowances), but timing matters to avoid missing out. In Section 2, we'll cover a year-end checklist to implement them effectively.

Section 2: Year-End Tax Planning Checklist

As your company's accounting period ends, a structured year-end review can uncover opportunities to minimise Corporation Tax for 2026/27 while ensuring compliance and optimising cash flow. This checklist focuses on key actions for limited companies, ideally completed before your year-end (typically aligned with your financial close, but often 31 March or 31 December).

Timing is critical – some reliefs must be claimed within the period, and with thresholds frozen until 2028, proactive steps are essential. Consult HMRC or a tax advisor for your specific deadlines, as Corporation Tax payments are due nine months and one day after year-end, with returns filed within 12 months.

1. Review and Update Financial Records

• Ensure all transactions are recorded accurately, including income, expenses, and assets. Reconcile bank statements, ledgers, and invoices to identify any discrepancies or unclaimed items.

• Action: Conduct a full audit of your profit and loss statement and balance sheet to calculate taxable profits precisely, adjusting for non-deductible items like entertaining costs.
  

2. Maximise Deductible Expenses and Allowances

• Accelerate qualifying expenditure: Bring forward purchases of plant, machinery, or R&D-related items to claim full expensing (100% for main pool assets), the £1m Annual Investment Allowance, or the new 40% First-Year Allowance starting 1 January 2026.

• Claim all available reliefs: Review eligibility for R&D credits, Structures and Buildings Allowance, or enhanced allowances in Freeports/Investment Zones. For example, ensure capital allowances are pooled correctly (18% WDA for main pool, 6% for special rate).

• Deduct provisions and accruals: Set aside for bad debts, warranties, or employee bonuses payable post-year-end, provided they're incurred and quantifiable.
  

3. Optimise Profit Levels and Loss Relief

• Manage profits to stay below thresholds: If approaching £50,000 or £250,000, defer income (e.g., delay invoicing) or accelerate expenses to benefit from the 19% small profits rate or minimise marginal relief taper.

• Utilise losses: Carry back trading losses up to three years (extended for certain COVID-19 periods) or offset against other income. For groups, consider group relief to consolidate losses across companies.
  

4. Plan Remuneration and Profit Extraction

• Review director/shareholder pay: Balance salary, dividends, and pensions to reduce overall tax – e.g., pay salaries up to £12,570 to utilise personal allowances while deducting from company profits.

• Accelerate dividends: Extract profits before potential rate increases or allowance changes, ensuring sufficient distributable reserves and proper documentation to avoid reclassification as loans.

• Boost pension contributions: Company contributions are fully deductible (up to £60,000 annual allowance per individual, with carry-forward), providing Corporation Tax relief at your marginal rate.
  

5. Address Compliance and Future Changes

• Check directors' loan accounts: Repay any overdrawn balances within nine months of year-end to avoid 33.75% Section 455 tax.

• Prepare for Making Tax Digital (MTD): If your turnover exceeds £30,000, gear up for quarterly digital submissions starting April 2026 for Income Tax Self-Assessment (ITSA), ensuring compatible software.

• Review VAT and other taxes: Ensure VAT returns are filed (due one month and seven days post-period), and consider flat-rate schemes or partial exemption if beneficial.

• Plan for audits/enquiries: Retain records for at least six years and document all claims to withstand HMRC scrutiny.
  

Implementing this checklist can lead to significant savings – for instance, timing capital spends could yield 100% relief on £1m via AIA. In Section 3, we'll explore profit extraction strategies in more detail.

Section 3: Profit Extraction Strategies (Pensions, Dividends, Salary)

Extracting profits from your limited company in a tax-efficient way is crucial for minimising both Corporation Tax (CT) and personal tax liabilities in 2026/27. The key methods—pensions, dividends, and salary—each offer deductible benefits at the company level while affecting your personal income differently. With CT rates at 19% for profits up to £50,000, tapering to 25% above £250,000, the goal is to reduce taxable profits through deductions while optimising your take-home pay. Below, we break down each strategy, including pros, cons, and integration tips. Always ensure extractions align with available profits and HMRC rules to avoid reclassification or penalties.

Salary

Paying yourself (or other directors) a salary is a straightforward deduction from company profits, reducing CT liability at your marginal rate (e.g., 19-25%). For 2026/27, the optimal salary is often £12,570—the personal allowance threshold—to avoid employee National Insurance (NI) at 8% while qualifying for state pension credits. The company pays employer NI at 15% on amounts above £5,000, but this is also deductible.

• Pros: Fully deductible (saves CT, e.g., £2,388 at 19% on £12,570), builds state pension entitlement, and counts as qualifying earnings for pension relief.

• Cons: Attracts personal Income Tax (20% basic rate above allowance) and NI if over thresholds; less efficient for higher amounts due to combined NI costs.

• Strategy Tip: Limit to £12,570 for most sole directors; increase if needed for mortgage applications or to utilise basic rate band fully. Combine with dividends for balance.

Dividends

Dividends are paid from post-CT profits and aren't deductible, but they're often more tax-efficient personally due to no NI and lower rates: 10.75% basic (up from 8.75% in 2025/26), 35.75% higher, and 39.35% additional, with a £500 allowance at 0%. They must be supported by distributable reserves—paying without profits risks illegality or reclassification as salary/loans.

• Pros: No NI (saving 23% combined on salary equivalents), flexible timing, and lower personal tax rates; ideal for topping up after a low salary.

• Cons: Not deductible (no CT saving), pushes personal tax bands, and the 2026 rate rise reduces efficiency (e.g., £1,065 less take-home on £80,000 extraction vs. 2025/26).

• Strategy Tip: Pair with £12,570 salary to stay in basic rate (up to £37,700 dividends tax-efficiently); document with board minutes and vouchers. Accelerate pre-April 2026 if rates rise further.

Pensions

Company pension contributions are fully deductible, reducing CT without personal tax or NI, making them highly efficient for long-term extraction. For 2026/27, the annual allowance is £60,000 per individual (with carry-forward up to three years), and contributions count towards auto-enrolment if applicable. From April 2027, unused pensions enter IHT estates, so plan accordingly.

• Pros: Deductible at CT rate (e.g., 25% saving on £60,000 = £15,000), no immediate personal tax/NI, and tax relief on growth/withdrawals (25% tax-free lump sum).

• Cons: Locked until age 57 (rising to 58 in 2028), potential IHT from 2027, and tapered allowance for high earners (over £260,000 adjusted income).

• Strategy Tip: Maximise employer contributions over dividends for higher-rate taxpayers; use for family members if eligible. With 2026 dividend tax rises, pensions gain appeal for deferring tax.
  

Integrated Approach: For most, combine £12,570 salary + dividends up to basic rate + max pensions for optimal efficiency (e.g., on £80,000 profits, this could save £1,000+ vs. dividends alone). Review annually, especially with rate changes. In Section 4, see real examples of savings for £50k–£250k profit companies.

Section 4: Real Examples with £ Savings for £50k–£250k Profit Companies

To bring Corporation Tax planning to life, here are three realistic examples for limited companies with profits in the £50,000–£250,000 range during 2026/27.

These illustrate how combining reliefs (from Section 1), year-end actions (Section 2), and extraction strategies (Section 3) can yield substantial savings. Assumptions include a single-company setup with no associated companies (dividing thresholds), and calculations use the tiered rates: 19% on profits up to £50,000, with marginal relief tapering to 25% at £250,000, resulting in an effective marginal rate of up to 26.5% on excess profits. Savings are approximate and depend on specifics; actual figures may vary based on HMRC rules and your circumstances.

Example 1: Tech Startup with £60,000 Profits – Focus on Capital Allowances and R&D Relief

Imagine a software development company in its growth phase, with taxable profits of £60,000 before planning. Without strategies, Corporation Tax would be around £12,325 (19% on first £50,000 = £9,500; effective 26.5% on £10,000 excess = £2,650, minus minor relief adjustments).

Planning Actions:

• Claim £15,000 in R&D relief on qualifying development costs (e.g., staff time and software), providing a 20% credit, reducing taxable profits by an enhanced £27,900 (186% deduction for intensive SMEs).

• Accelerate £10,000 machinery purchase for full expensing (100% first-year allowance), deducting the full amount.
  

Results: Taxable profits drop to £22,100. Tax owed: £4,199 (19% rate, as now under £50,000 threshold). Savings: £8,126 (66% reduction), freeing cash for reinvestment in innovation.

Example 2: Retail Business with £150,000 Profits – Emphasising Pension Contributions and Year-End Expenses

Consider a mid-sized retail firm with £150,000 taxable profits. Base tax without planning: Approximately £33,250 (19% on £50,000 = £9,500; 26.5% effective marginal on £100,000 excess = £26,500, adjusted for relief).

Planning Actions:

• Make £40,000 employer pension contributions (fully deductible, up to annual allowance with carry-forward), reducing profits by £40,000.

• Claim £20,000 on store renovations via Structures and Buildings Allowance (3% annual relief = £600 immediate deduction) and accelerate £15,000 stock/equipment under AIA (100% deduction).
  

Results: Taxable profits fall to £74,400. Tax owed: £16,036 (19% on £50,000 + marginal on excess). Savings: £17,214 (52% reduction), plus long-term pension growth benefits.

Example 3: Consultancy Firm with £240,000 Profits – Leveraging Dividends and Loss Carry-Forward

A professional services company nearing the upper threshold with £240,000 profits. Unplanned tax: About £55,200 (19% on £50,000 + 26.5% effective on £190,000 excess, tapered).

Planning Actions:

• Extract £50,000 as dividends pre-year-end (from post-CT profits, no deduction but avoids higher personal rates post-April 2026).

• Carry forward £30,000 prior-year losses to offset profits, and deduct £25,000 director salary (plus employer NI, total ~£28,750 deduction).

• Invest £20,000 in qualifying R&D for a 20% credit (~£4,000 net benefit after tax).
  

Results: Taxable profits reduce to £166,250. Tax owed: £37,344.

Savings: £17,856 (32% reduction), with additional personal tax efficiency from dividends.

These examples demonstrate how targeted planning can save 30-60% on tax bills, but they're illustrative, tailor to your business for optimal results. In the Conclusion, we'll recap and guide your next steps.

Conclusion

In conclusion, Corporation Tax planning for 2026/27 is all about leveraging key reliefs, such as R&D credits, capital allowances, and SBA, to reduce your liability. This involves following a structured year-end checklist to optimise deductions and manage thresholds, as well as extracting profits efficiently through pensions, dividends, and salary to minimise overall tax.

With rates frozen at 19-25% and marginal relief creating opportunities for savvy timing, these strategies can deliver significant savings—potentially thousands for companies in the £50k-£250k profit range, as shown in our examples—while supporting business growth and compliance.

Ready to slash your Corporation Tax bill and keep more profits in your pocket?

Book your free discovery call with Suzanne Lock Business Services today. We'll review your company's finances, identify untapped reliefs, and craft a personalised 2026/27 plan that's fully tailored to you.

Let's ensure you're not overpaying a penny – we look forward to helping your business thrive.