1. What Is Corporation Tax?
Corporation tax is the tax UK limited companies pay on their taxable profits. This includes profits from trading, investments, and chargeable gains (like selling assets). Sole traders and partnerships do not pay corporation tax—only registered companies do.
2. Who Pays Corporation Tax?
- Private limited companies (Ltd)
- UK branches of foreign companies
- Some clubs and cooperatives
You must register for corporation tax within 3 months of starting to trade with HMRC.
3. Corporation Tax Rate in 2024–25
- The main rate is 25% on profits over £250,000.
- A small profits rate of 19% applies to profits of £50,000 or less.
- Marginal relief applies to profits between £50,001 and £250,000.
4. Key Terms to Understand
- Profit before tax: Total income minus all allowable business expenses
- Taxable profit: Profit adjusted for tax purposes (includes disallowed expenses)
- Allowable expenses: Costs wholly and exclusively for business use (e.g. salaries, rent, materials)
- Capital allowances: Tax relief on equipment or machinery
5. How to Work Out Corporation Tax Step-by-Step
- Calculate total income: Include sales, interest, and investment income
- Subtract allowable business expenses: Salaries, marketing, software, rent
- Adjust for disallowed expenses: Entertaining clients, certain fines or depreciation
- Add capital gains: Profit from selling company assets
- Apply capital allowances: Deduct eligible spending on equipment
- Determine taxable profit
- Apply tax rate:
- Profits ≤ £50,000 → 19%
- Profits ≥ £250,000 → 25%
- Profits in between → calculate marginal relief
6. Marginal Relief Explained
Marginal relief smooths the transition between the 19% and 25% tax rates. HMRC offers a calculator to determine the exact amount for profits between £50,001 and £250,000.
7. Example Calculation
Profit before tax: £100,000
Allowable expenses: £40,000
Adjusted profit: £60,000
Apply marginal relief as this falls between £50,001 and £250,000. The effective tax rate will be between 19% and 25%, resulting in a bill slightly under £15,000.
8. When and How to Pay
- Deadline: 9 months and 1 day after the end of your accounting period
- File Company Tax Return (CT600): Within 12 months of the accounting period end
- Payment: Via HMRC portal using bank transfer, direct debit, or debit card
9. Tips for Managing Corporation Tax
- Keep clear records of all income and expenses
- Plan your spending to optimise allowable deductions
- Invest in accounting software or hire an accountant
- Set aside funds throughout the year to avoid cash flow issues
- File early to avoid last-minute errors or penalties
Frequently Asked Questions
Do all companies pay the same rate?
No. Small profits are taxed at 19%, while larger profits pay 25%. Marginal relief applies in between.
Are director salaries tax-deductible?
Yes, salaries paid to directors are an allowable business expense.
Can I claim entertainment costs?
Client entertainment is generally not allowable for corporation tax.
What happens if I miss a deadline?
You may face fines or interest. HMRC can charge penalties for late filing or payment.
Is depreciation an allowable expense?
No. Use capital allowances instead to deduct equipment costs.
Can I offset losses?
Yes, you may carry trading losses forward or back to reduce taxable profit in other years.
Conclusion
Understanding how to work out corporation tax is vital for managing your UK company’s finances. By staying organised, using the right tools, and applying correct tax rules, you can ensure compliance and avoid unexpected tax bills while maximising available deductions.