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Planning for optimal tax efficiency has become more complex in recent years. Higher rates of Corporation Tax and ongoing changes to reliefs and compliance rules mean that taking time to review your position before the year end is increasingly important.
Corporation Tax and marginal relief
Corporation Tax rates depend on the level of a company’s taxable profits. Profits between £50,000 and £250,000 are subject to marginal relief, creating a gradual increase in the effective tax rate.
Where profits fall within the marginal relief band, the effective rate of Corporation Tax gradually increases from 19% to 25%. As a result, relatively small changes in profit levels can affect the effective tax rate and the overall tax payable. Group structure also matters, as profit thresholds are shared between associated companies.
Action point: where profits fall within the marginal relief band, maximising allowable deductions can be particularly valuable.
Capital allowances and investment decisions
Ensuring that capital allowances claims are fully optimised remains one of the most effective ways to reduce Corporation Tax liabilities.
The Annual Investment Allowance (AIA) stands at £1 million, providing immediate relief for many businesses. In addition, companies investing in qualifying new plant and machinery may benefit from enhanced first‑year allowances, including full expensing.
However, the rules are becoming more nuanced. Recent announcements include:
- a reduction in the main pool writing down allowance from April 2026, and
- the introduction of a new 40% first year allowance from January 2026, with a wider scope than some existing reliefs.
The interaction between the AIA, first year allowances and future disposal charges means that timing and structuring investment is increasingly important.
Using losses effectively
Loss relief can play a valuable role in managing cash flow and reducing overall tax liabilities. Trading and property losses can often be set against other profits, carried back to earlier periods or carried forward, subject to conditions.
Decisions on how and when to use losses can affect both the amount and timing of tax relief. Claims are also subject to strict time limits, so opportunities can be lost if action is delayed.
Research and Development (R&D) relief: opportunity with caution
For companies undertaking genuine qualifying R&D activity, tax relief can be significant. However, the regime has undergone substantial change and HMRC scrutiny has increased.
New compliance requirements apply, including advance notification for some claimants and additional information submissions. The introduction of a merged R&D expenditure credit scheme, alongside enhanced support for R&D‑intensive SMEs, has also changed how relief is calculated and accessed.
Care is needed to ensure claims are robust, well evidenced and genuinely within scope.
Profit extraction: reviewing the balance
Ongoing changes mean that profit extraction for director‑shareholders remains a complex area.
Dividend tax rates are due to increase from April 2026, while the Dividend Allowance remains low. This may prompt some business owners to consider the timing of dividend payments, particularly where profits are already available.
At the same time, salary, bonuses and pension contributions each have different tax and National Insurance consequences for both the company and the individual. Increases in employer National Insurance costs, and changes to allowances and thresholds, mean that long‑standing strategies may now need revisiting.
Pulling it all together
Corporation Tax rates, capital allowances, loss relief, R&D claims and profit extraction strategies are all closely connected. Reviewing them in isolation can mean missing opportunities or creating unintended costs.
These highlights form part of a broader range of planning points covered in detail in our Year End Tax Planning Guide. Download the guide for practical planning points for companies and business owners, as well as guidance for families, couples and individuals, to help ensure finances are structured as efficiently as possible before the tax year end on 5 April 2026.
If you would like to discuss any of these areas, please get in touch. We’d be happy to help.
