How UK Directors Legally Reduce Their Corporation Tax Bill

Since 1 April 2023, UK corporation tax has three effective bands instead of one flat rate (see GOV.UK's Corporation Tax rates page). Taxable profits up to £50,000 are taxed at the small profits rate of 19%. Profits above £250,000 are taxed at the main rate of 25%. Profits that fall between those two figures are taxed at 25% minus marginal relief — a taper designed so the transition from 19% to 25% is gradual rather than a cliff-edge, but which pushes the effective marginal rate on profit inside that band to roughly 26.5%, higher than the headline 25% main rate itself.

The £50,000 and £250,000 thresholds aren't fixed per company — they're divided by the number of "associated companies" under common control. This is the detail that catches people out: opening a second company doesn't give you two lots of the 19% band, because HMRC treats commonly-controlled companies as one group for threshold purposes. If you're weighing up a second entity, the rate bands aren't the reason to do it — see the section on group structures below for what actually justifies one.

Marginal relief also isn't automatic. It has to be calculated and claimed correctly on the return itself, and the calculation depends on the number of associated companies and the length of the accounting period. Getting this wrong in either direction — not claiming relief you're entitled to, or claiming more than you're due — is one of the more common corrections we make when taking over a company's affairs from a previous accountant.

Most director-shareholders extract profit through a combination of a modest salary and dividends, rather than salary alone. The salary is a deductible expense for the company (reducing corporation tax) but is subject to income tax and National Insurance. Dividends are paid from profit after corporation tax has already been charged, but are taxed at lower rates than salary and don't attract National Insurance at all — which is usually the bigger factor in the comparison.

What's changed in the last few years: the tax-free dividend allowance has been cut sharply — down to £500, from £2,000 as recently as 2022–23 — and dividend tax rates themselves rose again from 6 April 2026, to 10.75% (basic rate), 35.75% (higher rate) and 39.35% (additional rate). If you've seen 8.75%/33.75% quoted, that's the old 2025/26 figure. Add the jump to a 25% main corporation tax rate on higher profits, which reduces the after-tax pot available to distribute in the first place, and the optimal salary/dividend balance has moved meaningfully from a few years ago — a split that was efficient in 2021 isn't necessarily still efficient now.

What hasn't changed is the underlying logic: a salary set around the level where no employee or employer National Insurance becomes due, topped up with dividends, is still usually more efficient than taking a larger salary — because the National Insurance saved on the dividend portion generally outweighs the lost corporation tax deduction. The exact numbers depend on your specific profit level and personal income from other sources, which is why this is a calculation to run each year, not a rule of thumb to set once and forget.

As covered above, a second company will not get you a second small-profits band — associated company rules close that door. The legitimate reasons for a group structure are about risk and flexibility, not rate arbitrage. Ring-fencing a valuable asset like commercial property away from the trading risk of the operating business is one common one: if the trading company is ever sued or becomes insolvent, an asset held in a separate company is structurally protected from that exposure.

Other genuine reasons: separating a division you might sell in future from one you intend to keep, so a buyer can do clean due diligence on just the part they're acquiring; and holding company structures that let profit accumulate and be reinvested across group companies without being extracted (and taxed) personally, since dividends paid between UK companies are generally not subject to further corporation tax.

The trade-off is real: a second entity means a second set of accounts, a second Companies House filing, and generally more accountancy time each year. It's worth it when the structural benefit is concrete and specific to your situation — not as a default "more structure must be more efficient" assumption, which is a mistake we see fairly often in setups inherited from a previous advisor.

Corporation tax planning is mostly a game of timing. Salary and dividend decisions, employer pension contributions (a deductible expense that extracts value without triggering income tax, National Insurance, or the dividend rules at all), and the timing of capital equipment purchases relative to your accounting period all need to be decided while the accounting period is still open — not after it closes.

Once your year-end passes, the vast majority of what determines that period's tax bill is already locked in. The most common thing we see when a new client comes to us mid-way through a year is a structure that could have been meaningfully more efficient if the decisions had been reviewed two or three months before year-end rather than discovered afterwards during the annual accounts process.

A practical habit: put a corporation tax planning review on the calendar two to three months before your company's year-end, every year, regardless of whether anything seems to have changed. Rates, thresholds, and your own profit level move often enough that "it worked last year" isn't a safe assumption.