Corporation Tax is a tax on the profits of UK limited companies. Understanding how it works is essential for effective business planning. This guide covers everything from current rates and calculations to deadlines, allowable deductions, and legitimate tax-saving strategies.
What Is Corporation Tax?
Corporation Tax is a tax on the taxable profits of:
- UK limited companies
- Foreign companies with a UK branch or office
- Clubs, co-operatives, and other unincorporated associations
What Counts as Taxable Profits?
- Trading profits - income from business activities
- Investment income - interest, dividends from non-UK companies
- Capital gains - profit from selling assets
Important Distinction
Corporation Tax is paid by the company, not by individual shareholders or directors. Shareholders pay additional tax (Income Tax) when they receive dividends from the company.
Registration
You must register for Corporation Tax within 3 months of starting to trade. HMRC will send you a Unique Taxpayer Reference (UTR) which you'll need for all tax filings.
Current Corporation Tax Rates (2025/26)
The UK Corporation Tax rate depends on your company's taxable profits:
| Profit Level | Rate | Tax on Max Profit |
|---|---|---|
| Up to £50,000 | 19% (Small Profits Rate) | £9,500 |
| £50,001 - £250,000 | Marginal Relief applies | Varies |
| Over £250,000 | 25% (Main Rate) | 25% of profits |
Understanding Marginal Relief
For profits between £50,000 and £250,000, Marginal Relief gradually increases the effective rate from 19% to 25%.
The formula:
Marginal Relief = (Upper Limit - Profits) × (Profits - Lower Limit) / Profits × 3/200
In practice, this means the effective rate for profits in this band is approximately 26.5%.
Example Calculations
- £30,000 profit: £30,000 × 19% = £5,700 tax
- £100,000 profit: ~£22,750 tax (effective rate ~22.75%)
- £300,000 profit: £300,000 × 25% = £75,000 tax
Associated Companies
If you control multiple companies, the thresholds are divided by the number of associated companies. For example, if you have 2 associated companies:
- Small Profits threshold: £50,000 ÷ 2 = £25,000 each
- Main Rate threshold: £250,000 ÷ 2 = £125,000 each
How to Calculate Corporation Tax
Step-by-Step Process
-
Calculate Total Income
Add up all revenue from trading, investments, and other sources.
-
Deduct Allowable Expenses
Subtract business expenses that are "wholly and exclusively" for business purposes.
-
Add Back Disallowable Items
Add back any expenses that aren't tax-deductible (e.g., entertainment, some fines).
-
Apply Capital Allowances
Deduct allowances for equipment, vehicles, and other capital expenditure.
-
Deduct Losses (if applicable)
Apply any brought-forward losses from previous years.
-
Calculate Tax Due
Apply the appropriate rate to your taxable profits.
Simple Example
| Sales Revenue | £200,000 |
| Less: Cost of Sales | (£80,000) |
| Gross Profit | £120,000 |
| Less: Operating Expenses | (£50,000) |
| Add: Disallowable Entertainment | £2,000 |
| Less: Capital Allowances | (£12,000) |
| Taxable Profit | £60,000 |
| Corporation Tax (with Marginal Relief) | ~£12,850 |
Allowable Expenses
You can deduct expenses that are "wholly and exclusively" for business purposes:
Deductible Expenses
- Staff costs: Salaries, wages, employer NI, pension contributions
- Office costs: Rent, utilities, insurance, business rates
- Travel: Business travel, vehicle running costs, accommodation
- Professional fees: Accountant, solicitor, consultants
- Marketing: Advertising, website costs, promotional materials
- Bank charges: Interest on business loans, bank fees
- Software: Subscriptions, licenses (usually deductible immediately)
- Training: Staff training related to current role
- Bad debts: Write-offs of uncollectable debts
Non-Deductible Expenses
- Entertainment: Client entertainment, hospitality
- Fines and penalties: Parking fines, HMRC penalties
- Donations: Political donations (charitable donations may qualify)
- Personal expenses: Anything not for business purposes
- Dividends: Paid from post-tax profits
- Capital expenditure: Claimed via Capital Allowances instead
Mixed Use Assets
For assets used for both business and personal purposes (e.g., a home office or car), you can only claim the business proportion. Keep records to support your claims.
Key Deadlines
Corporation Tax deadlines are based on your accounting period end date:
Filing Deadline
12 months after the end of your accounting period.
Example: Accounting period ends 31 March 2026 → File by 31 March 2027
Payment Deadline
9 months and 1 day after the end of your accounting period.
Example: Accounting period ends 31 March 2026 → Pay by 1 January 2027
Large Companies
Companies with profits over £1.5 million must pay in quarterly instalments:
- Months 7, 10, 13, and 16 after the start of the accounting period
- Based on estimated profits
Penalties for Late Filing/Payment
- 1 day late filing: £100 penalty
- 3 months late: Another £100
- 6 months late: 10% of unpaid tax (min £100)
- 12 months late: Another 10% of unpaid tax
- Late payment: Interest charged from due date
How to Pay Corporation Tax
Payment Methods
- Bank transfer (Faster Payments/CHAPS): Same or next day
- Direct Debit: Set up via HMRC online account
- Debit card online: Same or next day
- Corporate credit card: Fee applies
- Bank Giro: 3 working days
Payment Reference
Always use the correct payment reference:
- Your 10-digit Unique Taxpayer Reference (UTR)
- Followed by the accounting period end date
- Example: 1234567890A00123 (UTR + period indicator)
HMRC Bank Details
Find the correct bank details for Corporation Tax on GOV.UK. They differ from other HMRC payments.
Filing Your CT600
The CT600 is the Corporation Tax Return that all UK companies must file.
What's Included
- Company details (name, UTR, accounting period)
- Trading profits calculation
- Capital allowances claimed
- Losses carried forward or back
- Tax computation
- Full accounts (or abbreviated if eligible)
- Tax computations
How to File
- HMRC Online: Free, requires registration
- Commercial Software: Many accounting packages support CT600 filing
- Accountant: Most companies use accountants for CT600
iXBRL Accounts
Company accounts must be filed in iXBRL (inline eXtensible Business Reporting Language) format. Most accounting software can generate this, or your accountant will handle it.
Tax Reliefs & Allowances
Annual Investment Allowance (AIA)
- 100% deduction on qualifying plant and machinery
- Current limit: £1,000,000 per year
- Covers equipment, vehicles, machinery, fixtures
Research & Development (R&D) Relief
- SME Scheme: Enhanced deduction of 86% of R&D costs (from April 2024)
- Large Company Scheme: 13% credit (RDEC)
- Loss-making companies can claim a tax credit
Patent Box
- 10% tax rate on profits from patented inventions
- Must own or exclusively license qualifying patents
Creative Industry Reliefs
- Film, TV, video games, animation, theatre, orchestra
- Enhanced deductions or tax credits available
Trading Losses
- Carry forward indefinitely against future profits
- Carry back 1 year (extended to 3 years for some COVID losses)
- Set against other income in the same period
Full Expensing
From April 2023, companies can claim 100% first-year allowance on qualifying main rate plant and machinery. This "full expensing" is now permanent.
Tax-Efficient Strategies
Legitimate ways to reduce your Corporation Tax bill:
1. Maximize Allowable Expenses
- Claim all legitimate business expenses
- Keep detailed records and receipts
- Don't miss commonly overlooked expenses
2. Pension Contributions
- Employer pension contributions are fully deductible
- No employer National Insurance on pension contributions
- Tax-efficient way to extract value from company
3. Timing of Income and Expenses
- Accelerate expenses before year-end if profitable
- Consider timing of invoicing around year-end
- Plan major purchases around accounting period
4. Capital Allowances
- Use Annual Investment Allowance fully
- Consider full expensing for qualifying assets
- Don't forget to claim on existing assets
5. Director Salary Optimization
- Salary up to NI threshold (no employer NI)
- Remaining profits as dividends (lower tax)
- Salary is deductible, dividends are not
6. R&D Claims
- Many companies miss eligible R&D activities
- Software development often qualifies
- Enhanced relief can significantly reduce tax
Stay Within the Rules
Tax efficiency is legal; tax evasion is not. Always ensure strategies comply with HMRC rules. Aggressive tax avoidance schemes can result in penalties and reputational damage.
Non-Resident Companies
If you're running a UK company from overseas, understanding Corporation Tax is especially important.
UK-Registered, Non-Resident Managed
- Company pays UK Corporation Tax on worldwide profits
- Tax residency usually based on where central management occurs
- Double taxation treaties may apply
Tax Residency Rules
A company is UK tax resident if:
- It's incorporated in the UK, or
- Its central management and control is in the UK
Non-Resident with UK Trade
- Only UK-sourced profits taxed
- May need to register for Corporation Tax
- Complex rules - seek professional advice
Double Taxation Relief
The UK has tax treaties with many countries. If you pay tax on the same income in two countries, you may be able to claim relief. Check the specific treaty for your country of residence.
Summary
- Corporation Tax rate is 19% for profits up to £50,000, 25% over £250,000
- File CT600 within 12 months of accounting period end
- Pay tax within 9 months and 1 day of accounting period end
- Maximize allowable expenses and capital allowances
- Consider R&D relief if applicable to your business
- Pension contributions are highly tax-efficient
- Keep detailed records to support all claims
- Consider using an accountant for complex tax planning
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