1. Profits from Trading Activities
Corporation tax is primarily paid on profits from trading—the core business operations of a company. This includes revenue from selling products or services, minus allowable business expenses such as salaries, rent, utilities, and raw materials.
Example:
If your company sells software, income from software subscriptions minus your operating costs is taxable.
2. Investment Income
Corporation tax also applies to income earned from investments, such as:
- Interest earned from bank deposits
- Dividends received from shares in other companies
- Gains from selling shares or securities
Note: Some dividend income may be tax-free if received from UK or qualifying foreign companies.
3. Capital Gains (Chargeable Gains)
When a company sells or disposes of a business asset for more than it paid, the profit (capital gain) is subject to corporation tax. This includes:
- Property
- Equipment
- Shares not listed on a recognised exchange
- Business goodwill
You can deduct allowable costs like legal fees or asset improvements.
4. Income from Rental Properties
If your company owns and rents out property, the rental income minus related expenses (mortgage interest, repairs, maintenance) is taxable under corporation tax rules.
Companies involved in buy-to-let or commercial property lettings are fully subject to this rule.
5. Overseas Income
UK-resident companies are liable to corporation tax on their worldwide income. This means income from foreign branches, investments, or overseas trading activities must be included in the tax calculation.
Foreign tax paid may be offset via double taxation relief.
6. Chargeable Profits Before Reliefs and Deductions
Corporation tax is calculated based on total taxable profits—the combined amount from trading, investments, capital gains, and other income streams, before applying reliefs like:
- R&D Tax Relief
- Loss carry-forwards
- Patent Box regime
- Capital allowances
These can reduce the final corporation tax liability.
7. Non-Qualifying Expenses Are Not Deductible
Only allowable business expenses can be deducted before calculating taxable profits. Non-deductible costs include:
- Client entertaining
- Fines and penalties
- Gifts not used for promotional purposes
- Depreciation (replaced by capital allowances)
Accurate bookkeeping is essential to avoid overstating deductions and underpaying tax.
Frequently Asked Questions
What is corporation tax paid on exactly?
It’s paid on the profits of a UK-limited company, including trading profits, investment income, capital gains, and rental income.
What is the corporation tax rate in 2025?
As of 2025, the main rate is 25% for companies with profits over £250,000. A lower rate of 19% applies to profits under £50,000, with tapering in between.
Do sole traders pay corporation tax?
No. Sole traders pay income tax, not corporation tax. Only incorporated businesses (limited companies) pay corporation tax.
Can you reduce corporation tax legally?
Yes—by claiming allowable expenses, using R&D tax credits, and carrying forward losses.
Are dividends taxed as corporation income?
No. Dividends your company pays to shareholders are not taxed within the company, but shareholders pay personal tax on them.
How often is corporation tax paid?
Usually annually, 9 months and 1 day after the end of your company’s accounting period.
Conclusion
Understanding what is corporation tax paid on is vital for UK company owners. It’s not just about trading profits—it includes investment returns, rental income, and capital gains. Knowing what’s taxable and what expenses are allowed helps ensure compliance and smarter tax planning.