1. Introduction to Corporation Tax
Running a company means dealing with taxes, and one of the most important is corporation tax. This is a levy on company profits, and understanding how it works helps businesses stay compliant while managing costs effectively. In this guide, you’ll find corporation tax explained in clear, simple steps.
2. What Is Corporation Tax?
Corporation tax is a business tax paid on profits by:
- UK-registered limited companies.
- Foreign companies with UK branches or offices.
- Certain clubs, societies, and co-operatives.
It applies to both trading profits and gains from selling assets.
3. Who Pays Corporation Tax?
Corporation tax is mandatory for:
- Limited companies.
- Some non-profit organisations (if they make taxable profits).
- Businesses based outside the UK with taxable UK income.
Sole traders and partnerships do not pay corporation tax; instead, they pay income tax on profits.
4. What Counts as Taxable Profits?
Corporation tax is charged on:
- Profits from trading activities.
- Rental or investment income.
- Capital gains (e.g., sale of property, shares, or other assets).
5. UK Corporation Tax Rates (2025)
- 19% for companies with profits up to £50,000.
- 25% for companies with profits over £250,000.
- Marginal Relief applies between £50,001 and £250,000, gradually increasing the tax rate.
6. How Corporation Tax Is Calculated
Corporation Tax = (Taxable Profits × Applicable Rate) – Allowances and Reliefs
Steps:
- Work out total income.
- Deduct allowable expenses.
- Apply reliefs and allowances.
- Calculate tax at the correct rate.
7. Allowable Business Expenses
To reduce taxable profit, companies can claim expenses such as:
- Staff wages and salaries.
- Office rent, bills, and utilities.
- Raw materials and stock.
- Marketing and advertising costs.
- Professional fees (accountants, legal).
- Business travel.
8. Capital Allowances
Instead of deducting the cost of equipment at once, companies claim capital allowances on:
- Machinery and equipment.
- Vehicles used for business.
- Office furniture.
The Annual Investment Allowance (AIA) often allows 100% deduction in the first year.
9. Corporation Tax Reliefs
Businesses may reduce their tax bill using:
- R&D Tax Relief – for companies investing in innovation.
- Patent Box – lower tax rate on profits from patented inventions.
- Loss Relief – offset trading losses against current or future profits.
10. Example of Corporation Tax Calculation
- Profit: £120,000
- Allowable expenses: £20,000
- Taxable profit = £100,000
- Corporation tax (marginal rate ~23%) = about £23,000
11. Filing and Payment Deadlines
- File Company Tax Return (CT600) within 12 months of year-end.
- Pay Corporation Tax within 9 months and 1 day after year-end.
12. Penalties for Late Filing or Payment
- Late filing penalty: £100 minimum.
- Additional fines if more than 3 months late.
- Daily interest on late tax payments.
13. Corporation Tax for Small vs Large Companies
- Small companies benefit from the lower 19% rate.
- Larger companies pay 25%.
- Medium companies fall into the marginal relief band.
14. Tips to Reduce Corporation Tax Legally
- Claim all allowable expenses.
- Invest in equipment to use capital allowances.
- Claim R&D relief if eligible.
- Make pension contributions.
- Carry forward business losses.
15. Do You Need an Accountant?
While businesses can file their own corporation tax returns, most use accountants to:
- Ensure compliance.
- Maximise reliefs.
- Avoid costly errors.
Frequently Asked Questions
Q1: What is corporation tax in simple terms?
It’s the tax companies pay on their profits.
Q2: How much is corporation tax in the UK?
Between 19% and 25%, depending on profit levels.
Q3: Do self-employed people pay corporation tax?
No, they pay income tax, not corporation tax.
Q4: Can I reduce my corporation tax bill?
Yes, by claiming expenses, allowances, and tax reliefs.
Q5: When do I pay corporation tax?
Within 9 months and 1 day after your company’s financial year ends.
Q6: Do all companies have to file a tax return?
Yes, even if they make no profit or are dormant.
Conclusion
With corporation tax explained, businesses can see it’s a straightforward tax on profits, but one that requires careful planning. By understanding rates, expenses, and reliefs, companies can reduce liabilities and avoid penalties. Proper record-keeping and timely filing ensure compliance and financial efficiency.