What Is Corporation Tax?
Corporation Tax is a tax paid by companies and certain organisations on their taxable profits. Unlike Income Tax, which is paid by individuals, Corporation Tax applies mainly to limited companies operating in the United Kingdom. Companies calculate their taxable profits for each accounting period and submit a Corporation Tax Return to HM Revenue & Customs (HMRC).
Corporation Tax is one of the UK's major business taxes and helps fund public services including healthcare, education, infrastructure and national security. Every company director should understand how Corporation Tax works to ensure compliance and to manage business finances effectively.
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Who Pays Corporation Tax?
Most UK limited companies are required to pay Corporation Tax on their taxable profits. Some clubs, societies, associations and other incorporated organisations may also be liable.
Sole traders and ordinary partnerships do not pay Corporation Tax. Instead, their business profits are generally taxed through Income Tax.
- Private limited companies (Ltd)
- Public limited companies (PLC)
- Foreign companies with UK taxable profits
- Certain clubs and associations
What Are Taxable Profits?
Corporation Tax is charged on taxable profits rather than total business income. Taxable profits may include trading profits, investment income and chargeable gains after allowable deductions and reliefs have been applied.
Common deductible business expenses include:
- Employee salaries and wages
- Office rent and utilities
- Business insurance
- Professional fees
- Marketing and advertising costs
- Business travel expenses
- Certain capital allowances
Corporation Tax Rates
The amount of Corporation Tax a company pays depends primarily on its taxable profits during the accounting period.
| Annual Taxable Profits | Corporation Tax Rate |
|---|---|
| Up to £50,000 | 19% |
| £50,001 – £250,000 | Marginal Relief Applies |
| Over £250,000 | 25% |
What Is Marginal Relief?
Marginal Relief reduces the amount of Corporation Tax paid by companies whose taxable profits fall between the lower and upper profit limits. Rather than immediately paying the full main rate, eligible companies receive a gradual increase in their effective Corporation Tax rate as profits grow.
This system helps smaller businesses transition smoothly from the small profits rate to the main Corporation Tax rate.
Accounting Period
Every company prepares accounts for a defined accounting period, which is normally 12 months. Corporation Tax is calculated separately for each accounting period.
If the accounting period is shorter or longer than twelve months, special rules may apply when calculating taxable profits and filing deadlines.
Corporation Tax Return
Companies must submit a Corporation Tax Return to HMRC after the end of each accounting period. The return normally includes the company's financial statements, tax computations and supporting schedules.
Accurate bookkeeping throughout the year makes preparing the Corporation Tax Return significantly easier and reduces the risk of errors or penalties.
Corporation Tax Payment Deadlines
Corporation Tax is generally payable before the Corporation Tax Return filing deadline. Companies should monitor HMRC deadlines carefully because late payment may result in interest charges and penalties.
- Maintain accurate accounting records.
- Prepare annual accounts promptly.
- Submit Corporation Tax Returns on time.
- Pay Corporation Tax before the payment deadline.
Corporation Tax Examples
Example 1 – Small Company
ABC Ltd reports taxable profits of £40,000 for its accounting period. As its profits are within the small profits threshold, the company generally pays Corporation Tax at the small profits rate.
Example 2 – Medium-Sized Company
XYZ Ltd reports taxable profits of £120,000. Because its profits fall between the lower and upper thresholds, the company may be entitled to Marginal Relief, reducing its effective Corporation Tax rate.
Example 3 – Large Company
Global Manufacturing Ltd earns taxable profits of £800,000. Its profits exceed the upper threshold, so Corporation Tax is generally charged at the main rate.
Ways to Reduce Corporation Tax Legally
- Claim all allowable business expenses.
- Take advantage of available capital allowances.
- Invest in qualifying research and development where applicable.
- Maintain accurate bookkeeping throughout the year.
- Plan the timing of business expenditure.
- Seek professional tax advice for complex transactions.
Good tax planning can reduce Corporation Tax while ensuring full compliance with UK tax legislation.
Estimate Your Corporation Tax
Use our free UK Corporation Tax Calculator to estimate your company's Corporation Tax based on current UK tax rules and profit levels.
Open Corporation Tax Calculator