Tax Planning for High-Earning Company Directors
Every £1 your company spends on a genuine business cost can save between 19p and 26.5p in Corporation Tax. That is the good news. The less welcome news is that a pound spent on something the business didn't need still costs you somewhere between 73.5p and 81p. Tax relief reduces the cost of spending. It never makes spending free.
I say this at the start of almost every year-end conversation with company directors across Tunbridge Wells, Tonbridge and Sevenoaks, because it frames everything that follows. The aim isn't to hunt for clever tricks. It is to make sure that your company claims every relief it's entitled to, makes its spending decisions with the tax effect in view, and avoids the mistakes that turn a sensible plan into an unwelcome letter from HMRC.
Let's work through the main legitimate routes: tax planning, allowable expenses, capital allowances, pension contributions and R&D relief. Then we'll look at the mistakes I see most often, and finish with a worked example that pulls it all together.
Here is the single most important point in this guide. Most of the useful decisions have to be made before your accounting period ends. You can't buy equipment, make a pension contribution or pay a bonus after the year-end and have it count for the year just finished (with a few narrow exceptions). Once the date has passed, the profit is fixed.
A client in Tonbridge came to see me in the second week of April one year, slightly pleased with his company's results. His year-end had been 31 March. He had made £88,000 of profit, and wanted to know whether he could "put some of it into a pension for last year". I had to tell him, as kindly as I could, that the opportunity had closed a fortnight earlier. A call in February would have saved him close to £4,000.
That's why I like to speak to clients two or three months before their year-end, when the picture is still clear and the options are still open.
For 2026–27, the Corporation Tax rate is 19% on profits up to £50,000, 25% on profits above £250,000, and a sliding scale in between. Across that middle band, each extra pound of profit effectively costs 26.5%. That means the value of a deduction depends on where your profit sits.
For a company with £40,000 of profit, an extra £1,000 of deductible spending saves £190. For a company with £120,000, the same spending saves £265. This isn't a reason to spend recklessly. It is a reason to know where you stand before you decide.
Your own salary is a deductible cost. Dividends are not. The balance between them affects the company's tax and your personal tax, and it's covered in our separate guide on salary versus dividends. For most single-director companies, a salary at the personal allowance level of £12,570 is a sensible starting point, but the right answer depends on your circumstances and changes with the rules.
If you control more than one company, the £50,000 and £250,000 thresholds are shared between them. A director who sets up a second company hoping for a second £50,000 band at 19% will be disappointed. The limits are divided by the number of associated companies. It's worth checking before you set up a new company in the hope of saving tax.
HMRC has a General Anti-Abuse Rule that can counteract arrangements whose main purpose is to obtain a tax advantage and which are abusive. You won't fall foul of that by buying a van you need, funding a pension you value or claiming R&D relief on work you really did. The question to ask is always: would I have done this if there were no tax saving? If the answer is yes, you're probably on safe ground. If the honest answer is no, speak to us first.
Every year, directors are approached by people selling schemes that promise to cut tax dramatically, often involving loans, offshore arrangements or unusual employment structures. Some of them are marketed hard to company directors in Kent. The rule I give clients is simple. If it sounds too good to be true, if the promoter offers a guarantee or is vague about how it works, walk away. HMRC takes action against these schemes, and the person left with the bill is the company, and sometimes the director.
The most reliable way to reduce your Corporation Tax is also the simplest. Make sure that every genuine business cost is recorded, and claimed. For an expense to be deductible, it must be incurred wholly and exclusively for the purposes of the business. I've covered the detail in our guides on company expenses and director expenses, so here I'll focus on the points that save the most.
When I review a new client's accounts, I look for the same gaps again and again.
Wages, employer's National Insurance and employer pension contributions for staff are deductible. If a family member does real work for the company, such as bookkeeping, administration or marketing, they can be paid a fair wage for it, and the company deducts the cost. Keep a record of what they do and pay them at least the National Minimum Wage.
If you employ at least one person other than yourself, you may also qualify for the Employment Allowance, which reduces your employer's National Insurance bill by up to £10,500 a year.
A debt that you've genuinely written off as irrecoverable can usually be deducted. Interest on loans taken out for business purposes is generally allowable too. These are small points, but in a difficult year they matter.
Client entertainment, fines, ordinary clothing, commuting, private costs and dividends are not deductible. The most reliable way to cut your tax bill is to claim what's allowable, and not to claim what isn't. The second half of that sentence matters as much as the first.
When a company buys equipment, machinery or vans, the cost isn't deducted as an ordinary expense. Instead, the company claims capital allowances. The most generous is the Annual Investment Allowance, which lets a company deduct up to £1 million of qualifying spending in the year of purchase. For almost every small business, that means a 100% deduction.
It applies to tools, machinery, office equipment, computers, furniture and vans. It does not apply to cars.
Companies can also claim full expensing, which gives a 100% deduction for new, unused main-rate plant and machinery, without the £1 million cap. A smaller first-year allowance of 50% applies to some special-rate assets, such as certain fixtures in buildings.
The Autumn Budget 2025 also introduced a new 40% first-year allowance for new main-rate assets from 1 January 2026, which includes leased assets and is open to unincorporated businesses as well as companies. Alongside it, the writing-down allowance on the main pool of assets was cut from 18% to 14% for companies from 1 April 2026. If you buy assets and don't claim a full deduction, the remainder is written off more slowly than before.
Because the allowance is given in the period you buy the asset, timing matters. A builder from Maidstone bought a £30,000 van a few days before his year-end and received the full deduction in that year. If he had bought it a week later, the relief would have moved to the following year. That's not a reason to buy something you don't need. But if you're going to buy it anyway, check the year-end first.
Cars sit outside the Annual Investment Allowance, and have their own rules. Allowances on new electric cars have been time-limited and have changed more than once, so please check the current position before you buy. For company cars, the director is also taxed on private use. If you're thinking of a car through the company, speak to us first.
Construction costs of new commercial buildings, and some renovation costs, may qualify for the Structures and Buildings Allowance, a flat 3% a year. It's slow, but over time it adds up for companies that own their premises.
You'll need invoices showing what was bought, when and for how much, and a note of what the asset is used for. Mixed-use assets may need a private use adjustment. I'd recommend keeping a simple fixed asset register: a spreadsheet listing each item, the date, the cost and the supplier.
An employer pension contribution is, for many directors, the most effective way to reduce Corporation Tax. The company pays money into your pension, deducts the full amount from its profits, and pays no employer's National Insurance on it. There is no income tax on the contribution when it's made. The money is invested for your retirement, tax-free within the pension.
Compare that to taking the same amount as a dividend. The company pays Corporation Tax first, and then you pay dividend tax on top. A pension contribution avoids both layers on the way in.
The standard annual allowance is £60,000, including contributions by you and your employer. Unused allowance from the three previous tax years can be carried forward, provided you were a member of a pension scheme in those years. Higher earners may face a reduced allowance. Contributions must also be reasonable in relation to the work you do, and your overall pay, to qualify as a business expense.
A contribution is deductible for the accounting period in which it's paid, not when it's agreed. If your year-end is 31 March, the money must leave the company's account by that date.
Here's a point that is easy to overlook. If your company's profit is between £50,000 and £250,000, each extra pound of profit costs 26.5%, so each pound moved into a pension saves 26.5p of Corporation Tax. Take a company with £60,000 of profit. Corporation Tax on that is £12,150. If the company pays £10,000 into a pension, taxable profit drops to £50,000, and the tax falls to £9,500. That's a saving of £2,650. The £10,000 contribution costs the company a net £7,350.
It's also worth remembering that a pension isn't a free-for-all. The money is locked in until at least your minimum pension age, which is rising to 57 in 2028. You are exchanging access for tax efficiency. For a director who doesn't need every pound now, it's an excellent trade.
An architect from Tunbridge Wells told me that his pension was "the one decision I never regretted". He started paying employer contributions in his early forties, and by fifty the pot had grown into something he could properly plan around.
When people hear "research and development", they imagine white coats. In reality, R&D relief is available to companies of every size that try to resolve scientific or technological uncertainty, whether that's building new software, developing a better manufacturing process or improving a product. Kent has a strong mix of technology, engineering and manufacturing businesses, and many qualify without realising.
The test is not whether the idea is new to your business. It's whether you are seeking an advance in science or technology that a competent professional couldn't readily work out, and whether the work involves real uncertainty. Routine development and ordinary customisation usually don't count.
Since April 2024, most claims fall under a single merged scheme. It gives a taxable credit of 20% of qualifying R&D spending. Because the credit is taxable, the net benefit is about 16.2p for each £1 of qualifying spend for a company paying 19%, and 15p for a company paying 25%.
Take a software company in Sevenoaks that spends £50,000 on qualifying staff costs and software on a new product. The credit is £10,000. After tax at 19%, it's worth about £8,100. That is a meaningful reduction in a year when the company is investing.
Companies that are loss-making and spend at least 30% of their total expenditure on qualifying R&D can claim an enhanced payable credit, the Enhanced R&D Intensive Support scheme. It can be worth around 27p for each £1 of qualifying spend. It's aimed at young companies whose main activity is innovation.
Qualifying costs usually include staff costs for people directly working on the project, including the employer's National Insurance and pension contributions, externally provided workers, consumable materials, software and certain cloud computing and data costs. A share of your own time as a director counts if you work directly on the project.
R&D claims have more procedure than most reliefs. A company making its first claim, or one that hasn't claimed in the previous three periods, must submit an advance notification within six months of the end of the accounting period. Every claim needs an additional information form, which describes the projects and the uncertainty involved, submitted before the Company Tax Return. Claims must be made within two years of the end of the accounting period.
HMRC is looking closely at R&D claims, and a poorly prepared one invites an enquiry. I've covered the process step by step in our guide to submitting an R&D claim, and the errors to avoid in our guide to the seven most common R&D mistakes. If you're thinking of claiming, read both.
Some firms promote R&D claims on a success-fee basis, with very little attention to whether the work genuinely qualifies. Inaccurate claims have led to penalties for companies. Choose an adviser who asks hard questions about your projects.
It's the most common mistake, and the most expensive. A company that spends £10,000 on equipment it doesn't need to save £2,650 of tax has still lost £7,350. Only spend where the business benefits.
Most reliefs need action before the year-end. If you discuss planning after the date has passed, the choices have gone. Put a reminder in your diary three months before your year-end.
Private items paid through the company can create tax charges, loan account problems and, in the worst cases, penalties. Keep business and personal spending apart. Our guide on separate bank accounts explains how.
Directors who set up several companies frequently overlook that they share the thresholds. It changes the tax rate, and sometimes the payment dates.
A relief without evidence is a relief at risk. Keep invoices, mileage logs, minutes, asset registers and R&D project records for at least six years.
Anything promising to eliminate your tax bill with no real change to your business should be treated with suspicion. HMRC publishes lists of schemes it challenges, and it pursues them for years.
If your company made a loss in a previous year, it may be able to carry it forward, or in some cases back, to reduce tax. The claim has to be made. Losses that aren't claimed are easy to forget.
Even the best plan fails if the return is late. Corporation Tax is due nine months and one day after the end of the accounting period, and the return is due twelve months after it.
A trading company has taxable profit of £90,000 before any planning, with a year-end of 31 March 2027. Corporation Tax on £90,000, allowing for marginal relief, is £20,100.
In February, the director speaks to us. The company needs new equipment costing £20,000 for a project in the following year, and the director would like to put £15,000 into a pension. Both are done before 31 March.
Taxable profit falls to £55,000. Corporation Tax on that is £10,825. The saving is £9,275.
Of course, the company has spent £35,000 to save £9,275. But it now owns equipment it needed, and the director's pension has grown by £15,000 that would otherwise have attracted both Corporation Tax and dividend tax on its way out. That is what good planning looks like: the spending was planned for the business, and the tax saving was a welcome result.
Quick answer: By claiming everything it's entitled to and planning before the year-end: allowable expenses, capital allowances on equipment, employer pension contributions and, where it qualifies, R&D relief. Each saves between 19p and 26.5p for every £1 of deductible spending, depending on the company's profit level.
What this means for a company director: You control more of your tax bill than you might think. The decisions on timing, pay, equipment and pensions are yours. A conversation a few months before the year-end gives you the chance to act. But tax relief isn't a reason to spend. It reduces the cost of spending you'd have done anyway.
Example: A company with £90,000 of taxable profit would pay £20,100 of Corporation Tax. After buying £20,000 of qualifying equipment and paying £15,000 into the director's pension before the year-end, taxable profit falls to £55,000 and the tax to £10,825, a saving of £9,275.
Common mistakes: Spending purely to save tax; leaving planning until after the year-end; claiming private costs; ignoring associated companies; keeping poor records; falling for promoted schemes; and missing R&D formalities.
When should you speak to an accountant? Two to three months before your year-end. Before any large purchase, pension contribution or R&D claim. When your profit is approaching £50,000 or £250,000. And whenever someone offers you a scheme that sounds too good to be true.
Reducing your Corporation Tax bill is not about finding loopholes. It's about knowing the rules, planning early and making sure that nothing you're entitled to is left unclaimed. At Peter Hodgson & Co, we work with company directors across Tunbridge Wells, Tonbridge, Sevenoaks and the wider Kent and South East area, and we speak to our clients before the year-end, while there is still time to act.
If you'd like a review of your Corporation Tax position, or you're approaching a year-end and want to make sure you've done everything you can, we'd be glad to hear from you. You can complete the "Contact Us" form on our website, call us on 01892 515 733, or send us an email at info@peterhodgson.co.uk.
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
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