What Is Corporation Tax?
Corporation tax is the tax a UK limited company pays on its profits. If you run a company, this is the main tax the business itself is liable for, separate from any Income Tax you personally pay on the salary or dividends you take out of it.
It applies to limited companies, but also to some other bodies you might not expect: members' clubs, societies, associations and certain unincorporated organisations that make a profit. Sole traders and ordinary partnerships do not pay it at all. They pay Income Tax through Self Assessment instead, which is one of the practical differences between operating as a sole trader or a limited company.
The important thing to grasp early is that corporation tax is charged on profit, not on turnover. A company with a million pounds of sales and a million pounds of costs has made no profit and owes no corporation tax. The tax follows what is left after the costs of running the business, not the money coming through the door.
What Corporation Tax Is Charged On
A company pays corporation tax on its "taxable profits", which come from three main sources:
- Trading profits, the money the business makes from its normal activities after allowable costs.
- Investment income, such as interest earned on company money held in the bank.
- Chargeable gains, the profit made when the company sells an asset like property, shares or equipment for more than it paid.
For most small companies it is the trading profit that matters, and that is broadly your net profit adjusted for tax rules. The accounts figure and the taxable figure are rarely identical, because HMRC does not accept every accounting entry as a deduction. That adjustment is where a lot of the real work sits, and we come back to it below.
Corporation Tax Rates in the UK
Since 1 April 2023 there has been more than one rate, so the days of a single flat rate for everyone are gone. There are now effectively three positions depending on how much profit a company makes:
- 19 percent, the small profits rate, for companies with profits up to £50,000.
- 25 percent, the main rate, for companies with profits above £250,000.
- A tapered rate in between, for profits between £50,000 and £250,000, worked out using marginal relief.
These rates apply for the financial year to 31 March 2027 and the government has said it intends to keep the 25 percent main rate capped for the rest of this Parliament, which gives companies some welcome stability to plan around.
The two thresholds, £50,000 and £250,000, are not fixed per company. They are divided by the number of associated companies you have, so a group of two companies would see each threshold halved. This is a point that catches directors who run several companies, because splitting a business across entities does not multiply the low rate band. It shares it.
Marginal Relief and the 26.5 Percent Trap
Between £50,000 and £250,000 of profit, the tax is not simply 19 percent or 25 percent. It is calculated so that the rate eases gradually from one to the other, which sounds fair until you look at what happens to each extra pound.
Because the relief tapers away as profits rise through the band, every pound of profit earned between £50,000 and £250,000 is effectively taxed at 26.5 percent, higher than the headline 25 percent main rate. That surprises people. A company making £250,000 pays an average rate of 25 percent across all its profit, but the slice sitting inside the marginal band carries that steeper 26.5 percent marginal cost.
The practical takeaway is that profits in this middle band are the most expensive profits a company earns. It is why timing income and expenditure around the year end, or pension contributions that reduce profit out of the marginal band, can be worth real money. This is planning territory, and it is one of the first things we look at for company clients whose profits land in this range.
A Simple Worked Example
Numbers make it clearer. Suppose your company makes a taxable profit of £40,000 in the year. That is below £50,000, so the whole lot is taxed at the small profits rate of 19 percent. The bill is £7,600.
Now suppose profits grow to £300,000. That is above the upper threshold, so the entire profit is taxed at the main rate of 25 percent, giving a bill of £75,000. No marginal relief applies once you are over £250,000.
The tricky case is the one in the middle. A company on £100,000 of profit sits inside the marginal band. It does not pay a flat 19 or 25 percent. HMRC's marginal relief calculation reduces the headline 25 percent charge, and the effective rate on that profit works out lower than 25 but higher than 19. Our corporation tax calculator does this maths for you in seconds, including the marginal relief, so you can see the real figure rather than guessing.
Allowable Expenses: What You Can Deduct
Because corporation tax is charged on profit, the expenses you can legitimately deduct directly reduce the bill. The general rule is that a cost must be incurred "wholly and exclusively" for the purposes of the trade. Typical allowable costs include:
- Staff wages, salaries and employer's National Insurance
- Directors' remuneration paid through payroll
- Rent, utilities, insurance and other business overheads
- Accountancy and professional fees
- Stock, raw materials and the direct costs of what you sell
Two areas trip companies up. First, entertaining clients is not allowable, even though it is a genuine business cost, so it has to be added back when working out taxable profit. Second, depreciation is not allowable either. The depreciation figure in your accounts is replaced for tax purposes with capital allowances, HMRC's own system of tax relief on equipment, vehicles and machinery. The Annual Investment Allowance lets most companies write off qualifying equipment purchases in full, up to a generous limit, in the year of purchase.
This gap between the accounts and the tax computation is exactly why the profit in your accounts is rarely the profit you pay tax on. Getting those adjustments right, claiming everything you are entitled to and adding back what you are not, is where a good accountant earns their fee several times over.
Deadlines: When to Pay and When to File
Corporation tax has a quirk that catches almost everyone at first, because it works the opposite way round to most taxes. You have to pay the tax before you file the return.
For a typical small company with profits under £1.5 million, the deadlines run from the end of your accounting period, usually your financial year end:
- Pay your corporation tax within 9 months and 1 day of the end of the accounting period.
- File your company tax return, the CT600, within 12 months of the end of the accounting period.
So a company with a 31 March year end must pay by 1 January and file by the following 31 March. Miss the filing deadline and HMRC issues automatic penalties that escalate the longer the return is late. Pay late and interest runs on the overdue amount from the day after it was due.
Very large companies, broadly those with profits over £1.5 million, do not get the 9 month and 1 day rule. They pay in quarterly instalments, some of them during the accounting period itself, before the year has even finished. That is a different regime from the payments on account that catch out the self employed under Self Assessment, though the underlying idea, paying tax in advance, is similar.
How to Register and Pay
A new company must register for corporation tax with HMRC, which usually happens shortly after you form the company and start trading. You then file a CT600 for each accounting period and pay what is due. The whole cycle repeats every year for as long as the company trades.
One point worth flagging: even a company that has made no profit, or made a loss, generally still has to file a return telling HMRC so. Silence is not an option. A dormant company that is genuinely not trading can be treated differently, but that status has to be confirmed with HMRC rather than assumed.
Keeping the Bill Down, Legally
There is a world of difference between tax evasion, which is illegal, and tax planning, which is simply arranging your affairs sensibly within the rules. Legitimate ways companies reduce their corporation tax include:
- Paying a director's salary and employer pension contributions, both allowable deductions, rather than taking everything as dividends which are paid from after tax profit.
- Making company pension contributions, which are usually deductible and can pull profit out of the expensive marginal band.
- Claiming capital allowances in full on qualifying equipment.
- Claiming research and development relief if the company does genuine innovation, which can be valuable but is now more tightly policed than it once was.
- Timing large purchases before the year end so the relief lands a year sooner.
None of this is aggressive or artificial. It is the ordinary business of not paying more than the law asks. Watch the director's loan account too, because money drawn from the company that is not salary or dividend can trigger a separate tax charge that has nothing to do with corporation tax but often gets tangled up with it.
Our View
Corporation tax is one of those taxes that feels simple from a distance and gets complicated up close. The headline is easy enough: profit times the rate. The difficulty is in everything that sits between the profit in your accounts and the profit HMRC taxes, from the expenses you cannot deduct to the capital allowances you should be claiming to the marginal relief band that quietly taxes middle profits at 26.5 percent.
Our honest view is that most small companies overpay not through any single big mistake but through small ones adding up: a relief not claimed, an add back handled clumsily, a bill met late because nobody worked out the figure in advance. The companies that do well are the ones that treat corporation tax as something to plan for across the year, not a nasty surprise nine months after the year end.
Get the year end right, know the number early, put the cash aside as you go, and corporation tax becomes what it should be: a predictable cost of running a profitable business, not a source of stress.
How IAK Can Help
We look after limited companies across North London, and corporation tax runs through everything we do. Our accounting team prepares your statutory accounts and CT600, working through every adjustment so your taxable profit is right and every allowance you are due is claimed. Our tax planning service looks at the bigger picture, the salary and dividend mix, pension contributions, the timing of capital spend and the marginal relief band, so the whole bill is as low as it legally can be.
If you have just formed a company and are not sure what corporation tax means for you, or you want a second opinion on a bill that looks higher than it should, contact us for a free consultation. You can also try our corporation tax calculator for a quick estimate of what your company owes.
Sources
- Corporation Tax, GOV.UK, on who pays corporation tax, what it is charged on, registration and filing.
- Corporation Tax rates and reliefs, GOV.UK, on the 19 percent small profits rate, the 25 percent main rate, the £50,000 and £250,000 thresholds and marginal relief.
- Corporation Tax: marginal relief, GOV.UK, on how marginal relief is calculated for profits between the thresholds and the effect of associated companies.
- Pay your Corporation Tax bill, GOV.UK, on the 9 months and 1 day payment deadline and quarterly instalments for large companies.
- Capital allowances, GOV.UK, on the Annual Investment Allowance and the treatment of equipment in place of depreciation.