What is Corporation Tax?
Corporation Tax is the tax UK limited companies pay on their taxable profits, at 19% for profits up to £50,000 and 25% for profits of £250,000 or more.
What Corporation Tax means
Limited companies, and some clubs and associations, pay Corporation Tax on their profits instead of income tax. There is no personal allowance: tax starts from the first pound of taxable profit.
- 19% small profits rate, for taxable profits up to £50,000
- 25% main rate, for profits of £250,000 or more
- between the two, the main rate applies less marginal relief, so the effective rate climbs gradually from 19% to 25%
The limits are divided between associated companies and reduced for accounting periods shorter than 12 months.
Example
A company has taxable profit of £100,000 for a 12-month period and no associated companies.
- Tax at the main rate: £100,000 × 25% = £25,000
- Marginal relief: (£250,000 − £100,000) × 3/200 = £2,250
- Corporation Tax due: £25,000 − £2,250 = £22,750, an effective rate of 22.75%
Each extra pound of profit in the marginal band is taxed at 26.5%, which is why timing pension contributions or equipment purchases can save more than you might expect.
Why it matters for your business
Taxable profit is not the same as accounting profit. Depreciation is added back and replaced by capital allowances; client entertaining and fines are disallowed; and reliefs such as research and development can reduce the bill.
The deadlines are separate:
- pay the tax 9 months and 1 day after the end of the accounting period
- file the Company Tax Return (CT600) within 12 months of the end of the period
Because payment comes before filing, many companies leave the return late and pay late interest. Setting money aside every month, roughly a fifth to a quarter of profit, avoids a shock.
Corporation Tax vs income tax
Company profits are taxed once at Corporation Tax rates. When the director takes those profits as dividends, they pay dividend tax personally. The combined rate is what matters when comparing a company with being a sole trader.
Legal ways to reduce the bill
Claim every allowable cost, including the use of home as office and mileage. Make employer pension contributions before the year end, which are deductible and carry no National Insurance. Buy equipment you need before the year end to bring forward capital allowances. Check whether development work qualifies for research and development relief.
Common questions
Nine months and one day after your accounting period ends, for most small companies. A December year end means paying by 1 October. The return itself is due 12 months after the period end. Very large companies pay in quarterly instalments.
No. With no taxable profit there is no tax to pay, but you must still file a Company Tax Return. Trading losses can be carried back one year or carried forward to reduce future profits.