How Limited Company Directors Can Reduce Tax the Right Way

If you run a limited company, reducing tax is not about loopholes or risky shortcuts.

Real tax efficiency comes from planning properly before your year end. The biggest savings are made months in advance, not after the accounts are finished and the bill has landed.

Here are seven legal and effective ways limited company directors can reduce their tax bill, as long as they act early enough.

1. Pay Yourself the Right Way

One of the most common mistakes directors make is not reviewing how they pay themselves.

A well planned mix of salary and dividends can reduce both Income Tax and National Insurance. But this only works when profits are tracked properly and dividends are paid correctly from available profit.

Getting this balance wrong can mean overpaying tax or creating problems with HMRC later on.

2. Make Pension Contributions

Company pension contributions are one of the most tax efficient options available to directors.

They are treated as a deductible business expense and are not subject to Income Tax or National Insurance. In many cases, up to £60,000 per year can be contributed, subject to the rules and your personal circumstances.

This allows you to reduce corporation tax while investing in your long term future at the same time.

3. Claim Every Allowable Expense

Many businesses overpay tax simply because they miss legitimate expenses.

Commonly overlooked costs include:

• Software and subscriptions

• Business use of home

• Phone and internet

• Training and courses

• Professional fees

If an expense is incurred wholly and exclusively for business purposes, it should usually be claimed. Missing these adds up over time.

4. Use Capital Allowances

Purchasing equipment, technology, or machinery before your year end can reduce your taxable profits.

Capital allowances allow you to claim tax relief on qualifying assets, but timing is key. Buy too late and the relief may be delayed into the next year.

Planning purchases ahead of time helps maximise the benefit.

5. Review Your VAT Scheme

Being on the wrong VAT scheme can quietly drain cash flow.

Depending on your margins and how your business operates, schemes like Flat Rate, Cash Accounting, or Standard VAT can produce very different outcomes.

A regular review ensures your VAT setup still suits your business as it grows and changes.

6. Reinvest Profits Instead of Extracting Them

You do not need to take everything out of the business personally.

Leaving profits in the company can reduce personal tax and strengthen your business by funding growth, building reserves, or investing in new opportunities.

This approach gives you more flexibility and supports long term planning.

7. Plan Early, Not After Year End

This is the most important point of all.

Most large tax bills happen because planning started too late. Once the year end has passed, your options are limited.

The real savings come from forecasting profits, reviewing structure, and making decisions well before the year closes.

The Bottom Line

Tax efficiency is not about being clever.

It is about being prepared.

With the right planning, accurate numbers, and timely decisions, you can reduce tax legally and keep more money working for you and your business.

If you want help forecasting profits, planning ahead, and reducing tax the right way, we are here to help.

Meet Lewis

Lewis is a professional accountant and founder of Rhombus Accounting. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn.

Book a call today to learn more about what Lewis and Rhombus Accounting can do for you.