Running a profitable business is the best problem to have, until you realise a big chunk of those business profits will be swept away in tax. The good news is that smart reinvestment is win-win: you build value in the business and legitimately reduce the tax you pay now.
Below we walk through the most useful and realistic routes to reinvest business profits.
One of the most direct ways to reinvest business profits and cut your taxable profit is to buy qualifying plant and machinery and claim capital allowances.
What’s changed recently? From 1 January 2026 the government introduced a new first-year allowance for some qualifying plant and machinery, intended to encourage investment and allow companies to obtain bigger tax reliefs in the year of purchase.
This sits alongside the existing Annual Investment Allowance (AIA) and other capital allowance rules, so it’s worth checking which allowance gives the best tax relief for your purchase.
How it saves tax
If your company spends on qualifying assets (machinery, some plant, fixtures, specialist equipment), you can usually deduct that cost from taxable profits immediately (up to the AIA limit) or via first-year allowances – reducing the business profits that corporation tax is charged on.
Practical steps
Trap to avoid: Buying things you don’t actually need just for tax relief rarely pays. Focus on assets that genuinely support profitability or capacity.
R&D and innovation spending: get relief while you build better products/processes
If your company carries out technical or scientific work that seeks to resolve uncertainty, you might qualify for R&D relief. The rules and rates have changed post-2023, but the principle is simple: HMRC allows enhanced deductions or payable credits for qualifying R&D spend, effectively lowering your tax bill or generating cash for loss-making companies.
How it saves tax
R&D schemes allow you to enhance qualifying expenditure (effectively increasing your allowable deduction) and, for loss-making companies, potentially convert losses into payable tax credits.
Practical steps
Trap to avoid: Overclaiming vague “innovation” that is really normal business improvement. Be factual and document activity.
Paying employer pension contributions is a classic, tax-efficient way to deploy profits. Employer contributions are generally deductible for Corporation Tax provided they’re “wholly and exclusively” for the purposes of the trade. They also boost employee retention and can be structured to benefit directors.
How it saves tax
Employer pension contributions reduce company profits and therefore reduce Corporation Tax liability. For directors, employer contributions also avoid immediate Income Tax and (usually) National Insurance in the way a salary might attract.
Practical steps
Trap to avoid: Don’t exceed annual or lifetime allowances without checking the tax impact for the individual (or falling foul of proposed future policy changes). Always document commercial rationale.
Spending profits on staff training, apprenticeships or productivity tools is often allowable as deductible revenue expenditure and it directly builds the business’s capability.
How it saves tax
If the expenditure is revenue in nature (training course fees, salaries for staff while training, training materials), it’s generally deductible against trading profits, lowering taxable profits. Some training costs also attract government grants or apprenticeship levy credits.
Practical steps
A properly designed share-option scheme can help you reinvest profits into growth (by keeping and rewarding the team) while offering tax advantages.
Why EMI is useful now
The government has recently expanded and adjusted eligibility for EMI schemes, making them more accessible to a wider set of growing companies – and these options remain one of the most tax-efficient ways to reward employees because gains on exercise can be taxed as Capital Gains rather than Income, often with more favourable rates.
How it saves tax
Putting value into equity rather than cash wages reduces immediate payroll costs for the employer and may reduce Income Tax/NICs on employees. On exit, gains may be subject to more favourable Capital Gains Tax treatment (including potential Business Asset Disposal Relief if conditions are met).
Practical steps
Trap to avoid: Share schemes have strict rules. If incorrectly implemented they can become taxable as employment income.
Sometimes the simplest option is to leave business profits in the company to fund growth or to time shareholder distributions to a tax-efficient moment. Corporation Tax is payable on profits, but timing dividends, reinvesting for expansion, or drawing as salary/pension all influence total tax take across company and owner.
Practical steps
Don’t leave large sums idle without a plan! cash attracts both tax debates and temptation to spend inefficiently.
If your company is investing spare business profits into other UK start-ups or if you’re thinking more broadly about corporate investments, consider government-backed schemes that give tax relief to investors (EIS/SEIS) and VCTs. These are most relevant when your company acts as an investor rather than reinvesting in its own operations.
How it saves tax
Investments under SEIS, EIS and VCTs can generate income tax reliefs, deferral reliefs or exemption on capital gains. This route is more niche for trading companies but can be part of a strategic treasury or group investment policy.
Practical steps
If growth via acquisition makes strategic sense, using retained business profits to buy a complementary business, technology or client list can be tax-efficient compared with paying large salaries or capex that doesn’t deliver scale.
Tax points: How you structure the purchase (asset vs share) affects immediate tax treatment and the ability to claim capital allowances, so planning with a solicitor and accountant is essential.
Practical steps
Trap to avoid: Overpaying for deals without clear integration plans; poor due diligence is the common killer.
All of the routes above require careful record keeping and planning. The difference between a legitimate tax saving and an HMRC dispute is evidence, rationale and timing.
Checklist for every reinvestment decision
“Reinvest business profits” isn’t a one-size-fits-all instruction. The best use of profit is the one that grows the business and matches your strategic timeline — while being tax-aware.
Short checklist to act now:
Don’t forget governance: document purpose, expected outcomes, and who’s accountable.