1. What Is Corporation Tax?
Corporation tax is a tax that UK limited companies pay on their profits. This includes:
- Trading profits
- Investment income
- Capital gains
It’s a mandatory business tax for all registered companies, and accurate computation ensures compliance with HMRC rules.
2. Corporation Tax Rate in the UK
As of 2025, the standard UK corporation tax rate is:
- 25% for companies with profits over £250,000
- 19% for small profit companies with profits below £50,000
- Marginal Relief applies to profits between £50,001 and £250,000
These thresholds are adjusted for associated companies.
3. Key Steps in Corporation Tax Computation
To compute corporation tax:
- Calculate accounting profit from your company’s financial statements.
- Adjust for tax purposes, adding back disallowable expenses and subtracting non-taxable income.
- Apply capital allowances for qualifying equipment and assets.
- Include chargeable gains if assets were sold.
- Apply reliefs and deductions, such as R&D credits or loss relief.
- Calculate taxable profits and apply the correct tax rate.
4. Adjustments to Accounting Profit
Typical disallowable expenses include:
- Client entertainment costs
- Depreciation (replaced with capital allowances)
- Fines and penalties
- Personal expenses not wholly for business use
These are added back to profits for tax purposes.
5. Capital Allowances
Instead of claiming depreciation, use capital allowances on assets like:
- Machinery
- Equipment
- Vehicles
- Fixtures and fittings
You can claim:
- Annual Investment Allowance (AIA) up to £1 million
- Writing Down Allowance (WDA) for unclaimed items
6. Deductible Expenses
Allowable business expenses reduce your taxable profits. These include:
- Salaries and wages
- Rent and utilities
- Advertising and marketing
- Professional fees
- Office supplies
These must be wholly and exclusively for business purposes.
7. R&D and Other Reliefs
You can reduce your tax bill through:
- R&D tax credits (for qualifying innovation-related costs)
- Loss relief (carry forward or back losses to reduce profits in other periods)
- Patent Box relief (reduced tax rate on profits from patented inventions)
8. Example Corporation Tax Computation
Suppose:
- Net accounting profit: £120,000
- Add disallowable expenses: £5,000
- Less non-taxable income: £3,000
- Capital allowances: £15,000
Taxable profit = £120,000 + £5,000 – £3,000 – £15,000 = £107,000
If marginal relief applies, calculate using HMRC’s formula or online calculator.
9. Corporation Tax Deadlines
- Filing deadline: 12 months after accounting period ends
- Payment deadline: 9 months and 1 day after period ends
Late payments attract interest and penalties.
10. Submitting Your Corporation Tax Return
Use HMRC’s CT600 form. Submit through:
- Commercial tax software
- An accountant
- HMRC’s online services (for small businesses)
You’ll need:
- Company UTR number
- Annual accounts
- Adjusted profit calculations
- Supporting schedules for allowances and reliefs
11. Keeping Records for Corporation Tax
Keep detailed records of:
- Receipts and invoices
- Asset purchases and sales
- Payroll records
- Bank statements
- Tax return copies
HMRC requires businesses to retain these for 6 years.
12. Common Corporation Tax Mistakes
- Forgetting to add back disallowed expenses
- Missing capital allowances
- Filing or paying late
- Overclaiming R&D relief
- Incorrectly treating dividends
Use a professional accountant or software to avoid errors.
13. Corporation Tax for Small and Dormant Companies
- Dormant companies file a “nil” return if no activity
- Small companies may qualify for the 19% small profits rate
You still need to notify HMRC even if you owe nothing.
14. Using Software for Computation
Tax software can:
- Automate capital allowance calculations
- Generate CT600 forms
- Check for errors
- Submit directly to HMRC
Popular tools include Taxfiler, Sage, Xero, and QuickBooks.
15. When to Hire a Tax Professional
Consider professional help if:
- Your business claims reliefs or grants
- You have foreign income
- You’ve sold company assets
- You want to avoid errors and penalties
Accountants ensure compliance and often save more than their fees.
16. Corporation Tax Planning Tips
- Time expenses to reduce high-profit years
- Consider director’s salary vs dividends
- Use loss relief efficiently
- Invest in qualifying assets for capital allowances
Smart planning reduces liability and improves cash flow.
17. HMRC Support and Resources
HMRC provides:
- Online guides
- Corporation tax calculators
- Helplines for businesses
- Webinars on compliance and updates
Use these resources to stay informed and avoid mistakes.
Frequently Asked Questions
1. What is the formula for corporation tax computation?
Taxable profit = Adjusted profit + disallowed expenses – capital allowances – reliefs. Then apply the tax rate.
2. Do I need to file corporation tax if I made a loss?
Yes, you must still file a CT600 return and can carry the loss forward or back for relief.
3. How do I know if marginal relief applies?
If your profits fall between £50,001 and £250,000, you may qualify. HMRC provides a calculator to assist.
4. Can I claim home office expenses?
Yes, if the costs are exclusively for business use. Keep detailed records and apply a fair apportionment.
5. What happens if I miss the filing deadline?
Penalties start at £100 and increase based on lateness and repeat offenses. Interest is also charged on late payments.
6. Can a sole trader pay corporation tax?
No. Only limited companies pay corporation tax. Sole traders pay income tax via self-assessment.
Conclusion
Corporation tax computation is a crucial task for any UK company. With proper understanding of deductions, allowances, and compliance steps, you can file accurately and avoid penalties. Whether you use software or a professional, staying organised and proactive is the key to stress-free tax reporting.