1. What Is Corporation Tax?
Corporation tax is a tax charged on the profits of limited companies and certain organisations in the UK. Unlike income tax for individuals, it applies to company earnings, including trading profits, investment income, and chargeable gains.
2. Who Pays Corporation Tax?
Corporation tax applies to:
- UK limited companies
- Foreign companies with UK offices or branches
- Certain non-profit organisations (if they carry out taxable activities)
Sole traders and partnerships do not pay corporation tax. Instead, they pay income tax through self-assessment.
3. Corporation Tax Rates in the UK
As of April 2023, the UK has a main rate of 25%, with a small profits rate of 19%. The system works as follows:
- Profits up to £50,000: Taxed at 19%
- Profits above £250,000: Taxed at 25%
- Profits between £50,001 and £250,000: Subject to a marginal relief system, meaning the effective rate is between 19% and 25%
These thresholds are proportionally reduced if a company has associated businesses.
4. Steps in Calculating Corporation Tax
Step 1: Work Out Taxable Profits
Start with total business income and deduct allowable business expenses. Include:
- Trading profits (sales minus costs)
- Investment income (e.g., interest, rental income)
- Chargeable gains (profits from selling assets like property or shares)
Step 2: Adjust for Disallowed Expenses
Not all expenses are deductible. Excluded items include:
- Entertaining clients
- Fines and penalties
- Certain capital expenses (covered under capital allowances instead)
Step 3: Apply Capital Allowances
Capital allowances let businesses deduct the cost of assets like machinery, vehicles, or equipment over time (or immediately under the Annual Investment Allowance).
Step 4: Calculate Taxable Profit
Taxable profit = Business income – Allowable expenses – Capital allowances + Disallowed expenses
Step 5: Apply the Corporation Tax Rate
Depending on profit levels, apply the correct rate (19%, 25%, or marginal relief).
Step 6: Deduct Reliefs and Credits
Businesses may reduce their tax bill with schemes such as:
- Research and Development (R&D) relief
- Creative industry tax reliefs
- Loss relief (offsetting previous or future losses against profits)
Step 7: Final Tax Liability
After adjustments, you’ll have the final corporation tax owed.
5. Example of Corporation Tax Calculation
A company earns £120,000 profit before tax.
- Allowable expenses: £20,000
- Disallowed expenses: £2,000
- Capital allowances: £10,000
Taxable profit = £120,000 – £20,000 – £10,000 + £2,000 = £92,000
Since £92,000 falls between £50,001 and £250,000, marginal relief applies. The effective tax rate will be slightly higher than 19% but lower than 25%.
6. Filing and Paying Corporation Tax
- Companies must file a Company Tax Return (CT600) with HMRC.
- Corporation tax must be paid 9 months and 1 day after the end of the company’s accounting period.
- Filing deadlines for returns are 12 months after the end of the accounting period.
Late filing or payment can result in penalties and interest charges.
Frequently Asked Questions
1. Do small businesses pay corporation tax?
Yes, all limited companies pay corporation tax, regardless of size.
2. Can losses reduce corporation tax?
Yes, companies can offset trading losses against past or future profits to reduce tax liability.
3. Is corporation tax calculated before or after dividends?
It is calculated before dividends. Dividends are paid from post-tax profits.
4. Do self-employed individuals pay corporation tax?
No, self-employed workers pay income tax through self-assessment.
5. What happens if I don’t pay corporation tax on time?
HMRC charges penalties and daily interest on late payments.
6. Can corporation tax be reduced legally?
Yes, through reliefs, allowances, and strategic tax planning.
Conclusion
Understanding how corporation tax is calculated helps UK companies manage finances, claim allowances, and remain compliant. By accurately calculating profits, applying reliefs, and meeting deadlines, businesses can minimise tax burdens and avoid penalties.