1. Introduction to Corporation Tax
Every limited company in the UK must pay corporation tax on its profits. Understanding how do you calculate corporation tax is essential for staying compliant and avoiding penalties. Unlike individuals who pay income tax, companies pay corporation tax on trading profits, investments, and capital gains.
2. Current Corporation Tax Rates (UK, 2025)
- 19% – for profits up to £50,000
- 25% – for profits over £250,000
- Marginal relief – applies to profits between £50,001 and £250,000, reducing the effective rate gradually
3. What Counts as Taxable Profits?
Corporation tax is charged on:
- Trading profits (income from business activities)
- Investment income (interest, rental income, etc.)
- Chargeable gains (profit from selling assets, e.g., property or equipment)
4. Step-by-Step: How to Calculate Corporation Tax
Step 1: Work Out Total Income
- Add all business income (sales, services, investments).
Step 2: Deduct Allowable Expenses
- Staff wages and salaries
- Office rent and utilities
- Raw materials and stock
- Business travel costs
- Marketing and advertising
- Professional fees (accountants, solicitors)
Step 3: Deduct Capital Allowances
- Equipment, machinery, and vehicles may qualify for tax relief through capital allowances.
Step 4: Adjust for Other Reliefs
- R&D tax credits (for innovation and research businesses)
- Marginal relief (for profits between £50k and £250k)
- Loss relief (if carrying forward past losses)
Step 5: Apply the Correct Tax Rate
- Calculate profits after deductions.
- Apply 19% or 25%, or use marginal relief if applicable.
5. Example of Corporation Tax Calculation
Imagine your company earns £120,000 profit in the year:
- Income: £200,000
- Expenses: £80,000
- Taxable profit = £120,000
- Tax band = between £50,001 and £250,000 → marginal relief applies
Instead of paying the full 25%, marginal relief reduces your effective rate to around 22%, meaning your bill would be approximately £26,400.
6. Deadlines and Payment
- Must register for corporation tax with HMRC within 3 months of trading.
- Corporation tax must be paid 9 months and 1 day after the end of your accounting period.
- Tax return (CT600 form) must be filed within 12 months of the accounting period.
7. Common Mistakes to Avoid
- Forgetting to claim allowable expenses
- Missing deadlines (leading to penalties)
- Mixing personal and business expenses
- Not claiming reliefs such as R&D credits
8. Tips for Reducing Corporation Tax
- Claim all allowable expenses
- Use capital allowances efficiently
- Take advantage of R&D tax credits
- Offset trading losses against future profits
- Contribute to employee pension schemes
Frequently Asked Questions
Q1: How do I calculate corporation tax on small profits?
Apply 19% if profits are £50,000 or less.
Q2: What is marginal relief in corporation tax?
It reduces the effective tax rate for profits between £50,001 and £250,000.
Q3: Do I need an accountant to calculate corporation tax?
Not legally, but many businesses use one to avoid errors and claim all reliefs.
Q4: What happens if I don’t pay corporation tax?
HMRC can impose fines, interest, and legal action.
Q5: Do dividends affect corporation tax?
No. Dividends are paid from post-tax profits, so they don’t reduce your corporation tax bill.
Q6: Can I reduce corporation tax by reinvesting profits?
Yes, investing in allowable expenses or R&D can lower taxable profits.
Conclusion
To answer how do you calculate corporation tax, you first work out taxable profits by deducting expenses, allowances, and reliefs from income, then apply the correct tax rate. While the process can seem complex, keeping clear records and using professional advice ensures compliance and helps reduce your bill.