1. Introduction to Corporation Tax
Corporation Tax is a tax paid by limited companies and some organisations on their profits. If you run a company in the UK, understanding how is corporation tax calculated is essential to stay compliant with HMRC and manage your finances effectively.
2. Who Pays Corporation Tax?
- UK-registered limited companies.
- Foreign companies with a UK branch or office.
- Clubs, co-operatives, and some non-profit organisations (if they make taxable profits).
3. What Counts as Taxable Profits?
Corporation Tax applies to:
- Trading profits (from regular business activities).
- Investment income.
- Chargeable gains (profits from selling assets like property or shares).
4. Current Corporation Tax Rates (UK 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, creating a gradual increase.
5. Basic Formula for Corporation Tax
Corporation Tax = (Taxable Profits × Applicable Rate) – Reliefs and Allowances
Where:
- Taxable Profits = Total income – allowable expenses – reliefs.
- Applicable Rate = Depends on profit level.
6. Allowable Expenses That Reduce Taxable Profits
Companies can deduct business costs such as:
- Staff wages and salaries.
- Office rent and utilities.
- Raw materials and supplies.
- Marketing and advertising.
- Professional services (legal, accounting).
- Business travel costs.
7. Capital Allowances
Instead of deducting asset costs immediately, businesses claim capital allowances for items such as:
- Equipment and machinery.
- Business vehicles.
- Fixtures and fittings.
The Annual Investment Allowance (AIA) allows full deduction of qualifying assets up to a set limit.
8. Reliefs That Reduce Corporation Tax
- R&D Tax Credits – For companies investing in innovation.
- Patent Box Relief – Lower tax rate on profits from patented inventions.
- Loss Relief – Offset trading losses against current, previous, or future profits.
9. Example of Corporation Tax Calculation
- Company profits: £100,000.
- Allowable expenses: £20,000.
- Taxable profit = £100,000 – £20,000 = £80,000.
- Corporation Tax rate (marginal band): approx. 23%.
- Corporation Tax due = £18,400 (approx.).
10. Filing and Payment Deadlines
- File Company Tax Return (CT600) within 12 months of year-end.
- Pay Corporation Tax within 9 months and 1 day of year-end.
11. Common Mistakes When Calculating Corporation Tax
- Forgetting to claim allowable expenses.
- Missing capital allowances.
- Not applying loss relief.
- Late filing and payment penalties.
12. Penalties for Non-Compliance
- Late filing penalty: £100 minimum.
- Late payment interest: applied daily until paid.
- Potential fines or investigations for serious errors.
13. Corporation Tax for Small vs Large Companies
- Small companies benefit from the lower 19% rate.
- Larger companies pay 25% or use marginal relief if in between thresholds.
14. Tips to Reduce Corporation Tax Legally
- Claim all allowable expenses.
- Make pension contributions.
- Use R&D relief if eligible.
- Time capital investments strategically.
- Carry forward losses efficiently.
15. Do You Need an Accountant?
While you can calculate and file yourself, most companies use accountants to ensure accuracy, maximise reliefs, and avoid penalties.
Frequently Asked Questions
Q1: How is corporation tax calculated in the UK?
By applying the correct tax rate (19–25%) to taxable profits after deducting expenses and reliefs.
Q2: What is marginal relief?
It’s a gradual tax increase for companies with profits between £50,001 and £250,000.
Q3: Can I reduce corporation tax by reinvesting profits?
Not directly, but investing in assets or R&D can reduce taxable profits through allowances.
Q4: Do small companies pay less corporation tax?
Yes, profits up to £50,000 are taxed at 19%.
Q5: When do I pay corporation tax?
Within 9 months and 1 day after your company’s financial year ends.
Q6: Is corporation tax the same as income tax?
No, corporation tax applies to company profits, while income tax applies to individuals.
Conclusion
To answer how is corporation tax calculated, you take your company’s taxable profits, subtract allowable expenses and reliefs, then apply the appropriate tax rate. Staying organised with records, claiming all available allowances, and filing on time helps businesses stay compliant while reducing tax liability.