How to Reduce Corporation Tax
How to Reduce Corporation Tax as a Limited Company Contractor
As a contractor with a limited company, you have a lot to keep on top of. There’s clients to manage, projects to complete and marketing to do, and that’s before the financial side of things is even considered. As a limited company contractor, you’re responsible for managing invoices, expenses and your outgoings, including paying tax. Paying tax is a necessary part of earning money in the UK, but that doesn’t mean you have to pay more than your competitors.
At Go Limited, we know how disheartening it can be to see invoices being paid and your business’ bank account flourishing, only to have to put a significant amount aside for Corporation Tax. This is why we encourage contractors in the UK to look into reducing Corporation Tax, which leaves more money in the business.
Limited Company Tax for Contractors: Understanding Corporation Tax
In the UK, limited companies have to pay Corporation Tax on all of their taxable profits. Profits can come from various sources, such as selling products or services, investments and chargeable gains. All of these profits are added up, and Corporation Tax is calculated based on the total amount. Whereas sole traders have to pay Income Tax on profits, limited companies pay Corporation Tax. This is because as a contractor operating through a limited company, you’re a separate legal entity to your business, and the business itself is also liable for tax.
Currently, as of 2025, the main rate of Corporation Tax in the UK is 25% for businesses with profits over £250,000. But, for companies with profits under £50,000, the rate falls to 19%. Businesses with profits in between are subject to marginal relief, resulting in a gradual increase between the two rates. This means, by reducing your taxable profit, you reduce the amount of Corporation Tax you need to pay.
How is Corporation Tax Calculated and Paid?
Corporation Tax is calculated after all allowable expenses - such as salaries and allowable expenses - have been deducted. It’s then reported annually by submitting a tax return to HMRC, and the bill has to be paid within nine months and one day after the end of the business’ accounting period. For contractors running limited companies, understanding how corporation tax is calculated is key, as it’s a lot easier to keep more of your earnings with tax planning.
Why Do Contractors Want to Reduce Corporation Tax?
As Corporation Tax is charged on the profits that your limited company makes, and with the rate changing depending on how much the business makes, reducing Corporation Tax makes sense. This isn’t a shady or illegal practice, it’s simply a form of tax planning that enables you to avoid paying more than you need to. The goal of reducing Corporation Tax isn’t to evade tax payments, but to reduce how much you need to pay. Using fully compliant tax reliefs and expense rules that are available to limited company contractors, you can ensure that you’re not paying more than is necessary.
By reducing Corporation Tax, you can increase how much of your earnings are kept in the business. This gives you more to invest in your business, as well as giving you more freedom to boost your take-home pay and approach income in a tax-efficient way. There’s no need to pay more Corporation Tax than you need to, not as long as you reduce your bill in a legal, legitimate way.
Limited Company Tax Planning: Reducing Corporation Tax is a Huge Part
When you’re running your own limited company, you need to focus on tax planning. In fact, tax planning is a huge part of your job, especially if you want to operate tax-efficiently. In the same way that managing clients and delivering projects is part of what you do, tax planning needs to have a similar focus. Otherwise, you run the risk of making mistakes, forgetting expenses and paying more than you should. As your personal and business finances are closely linked, how your limited company pays tax directly affects your personal income. If your business is paying more tax, there’s less left for you to take as salary.
When you’re doing limited company tax planning, you need to think about how your income is taken - for a lot of contractors, this means taking income as a combination of salary and profits - and what expenses you can claim. By doing so, you put yourself in a prime position to take advantage of the strategies to reduce Corporation Tax.
Don’t Be a Limited Company Contractor Who Misses Out
Many limited company contractors often miss out on the chance to retain more profits within their businesses, simply because they lack the knowledge or strategies to effectively reduce their Corporation Tax liabilities. A lot of limited company contractors don’t even realise it’s an option.
But, without understanding the various allowable expenses, tax reliefs and efficient financial planning methods available, you run the risk of paying more tax than you need to. This leads to you having less money to invest back into the company, limiting business growth potential and reducing the financial benefits of operating through a limited company.
Strategies to Reduce Limited Company Tax as a Contractor
There are a range of ways to reduce Corporation Tax as a limited company contractor, such as paying yourself in a tax-efficient way, claiming allowable expenses, claiming expenses at the right time and utilising the services of a professional accountant.
Pay Yourself a Tax-Efficient Salary and Dividends
For a lot of limited company contractors, paying yourself in a tax-efficient way is the key strategy for reducing Corporation Tax. This involves minimising your salary, maximising your dividends, and striking the balance between the two. Salaries are deductible for corporation tax, but they are subject to PAYE Income Tax and National Insurance (NICs). However, dividends are not deductible for Corporation Tax, but they are taxed at lower personal tax rates and not subject to NICs. It’s a good idea to pay yourself a low salary, but still enough to qualify for state pension benefits and stay below the NIC threshold, and make the rest up in dividends.
Claim All Allowable Business Expenses
When you’re operating as a limited company, your business is only taxed on profits after expenses. This means that every legitimate business expense you claim reduces your taxable profit, reducing your Corporation Tax. Expenses such as accountancy and legal fees, office equipment, internet and phone bills, home office costs, business travel, business mileage, training and accountancy. As long as costs are “wholly and exclusively” for business use, they are allowable expenses and can be claimed. If they fall into the category of being for business and personal use, the cost must be apportioned.
Accelerate Expenses or Defer Income
As well as being able to claim allowable expenses as a limited company, you have the freedom to claim them in a tax-efficient way. If you’re near a tax threshold or you’re expecting higher profits this year, consider bringing forward your expenses or delay invoicing. This means paying for services or equipment before year-end, or holding back non-urgent invoices until the next accounting year. This can reduce this year’s profits, helping manage your tax liability more efficiently. However, not all expenses can be accelerated and not all invoices can be delayed. This is why it’s important to time things correctly and use professional guidance to your advantage. Deliberately manipulating accounts to avoid tax can breach HMRC rules, so you need to be careful.
Use a Specialist Limited Company Accountant
There’s a lot that goes into running a limited company, and navigating reducing Corporation Tax can often add too much to your plate. With clients and projects to handle, you can’t be blamed for not having time to handle your business’ finances. This is why a lot of contractors enlist the help of a limited company accountant. By working with a good accountant, someone who’s specialised in limited companies, you won’t just help you stay compliant, it’ll ensure that your company structure and finances are set up for tax efficiency.
At Go Limited, we know that being a limited company contractor gives you more control over your earnings, so we understand the appeal. In fact, it’s one of the biggest draws for sole traders making the change. But, it also means that you’re responsible for your tax affairs, including managing Corporation Tax. This is why tax planning is so important. With the right Corporation Tax strategies, you can significantly reduce your corporation tax bill, legally and efficiently.
FAQ
What taxes do contractors need to pay in the UK?
Contractors usually need to pay:
- Income Tax – on your personal income.
- Corporation Tax – if you operate through a limited company (currently 25% for most companies).
- National Insurance – Class 2 and Class 4 if self-employed, or Employee/Employer NI if you’re on a payroll.
- VAT – if your business earns more than £90,000 annually (2024/25 threshold).
- Dividend Tax – if you pay yourself through dividends.
Should I work as a sole trader or set up a limited company?
This depends on your income, risk appetite, and how you want to be taxed. A limited company can be more tax-efficient at higher incomes, but comes with more admin. Sole traders face simpler setup and accounting but pay higher personal tax and NI at certain levels.
What is IR35 and how does it affect my tax?
IR35 is tax legislation that determines whether you're a genuine contractor or a 'disguised employee'. If you’re “inside IR35”, you'll pay more tax (similar to an employee). If “outside IR35”, you can pay yourself via dividends and reduce NI.
How much tax will I pay as a contractor?
This varies:
- Limited company contractors outside IR35: You pay Corporation Tax on profits and Dividend Tax on what you take out.
- Inside IR35 or umbrella company: You pay Income Tax and full NI, like an employee.
- Using a contractor tax calculator or speaking to an accountant can help you estimate it accurately.
Can I claim expenses to reduce my tax bill?
Yes, but only allowable business expenses. These include:
- Travel (not commuting)
- Equipment
- Accountancy fees
- Software
- Certain subsistence costs
- Make sure to keep receipts and records.
Do I need to register for VAT?
You must register if your business turnover goes over £90,000 in a 12-month period. Some contractors register voluntarily to reclaim VAT on expenses, especially in IT and consultancy.
Do contractors get a tax return?
Yes. Whether you’re a sole trader or a director of a limited company, you must usually complete a Self Assessment tax return each year to report your income and pay the correct tax.
How can I make my tax process easier?
- Hire a contractor accountant.
- Use accounting software like FreeAgent or Xero.
- Set aside money each month for tax bills (typically 20–30% of income).
- Keep accurate records of all income and expenses.
Important:
Please note: Any rates and thresholds mentioned in this article are correct at the time of publishing and may be subject to change.
When choosing an accountant, look for one with proven experience and expertise in the contracting sector, particularly around areas like IR35, limited company tax matters and off-payroll working. Formal qualifications are important, but relevant hands-on knowledge matters just as much — especially in a complex and fast-changing landscape like this.
