What is Corporation Tax?

Corporation Tax is a tax that companies and certain organisations pay to HMRC on their profits.

You calculate it for each accounting period, which usually matches your financial year. However, your first year can include more than one accounting period.

Unlike many other taxes, such as Income Tax, HMRC does not send you a bill. Instead, you must calculate the amount due, file a Company Tax Return (CT600) and pay the tax on time.

Who Needs to Pay Corporation Tax?

You will usually need to pay Corporation Tax if you operate as a:

• Limited company registered in the UK
• Foreign company with a UK branch or office
• Club, co-operative or other unincorporated association (such as a community group)

However, sole traders and most partnerships do not pay Corporation Tax. Instead, they pay Income Tax through Self Assessment.

Moreover, some charities and Community Amateur Sports Clubs can claim exemptions on certain types of income. However, they may sill pay tax on non-charitable trading activities.

What Profits Does Corporation Tax Apply To?

Corporation Tax applies to your company’s taxable profits.

These profits can come from several sources, including:

• Trading profits from selling goods or services
• Investment income (such as bank interest)
• Chargeable gains (which arise when you sell an asset for more than it cost)

Chargeable gains often arise from selling property, shares or valuable equipment.

If your company is classed as UK-resident for tax purposes, you must pay Corporation Tax on profits earned both in the UK and overseas.

If your company is not UK-resident but operates through a UK branch, you normally pay Corporation Tax only on profits linked to UK-based activities.

Current Corporation Tax Rates

The rate of Corporation Tax depends on the level of taxable profits in your accounting period.

HMRC currently applies the following rates:

• 19% on profits of £50,000 or less (Small Profits Rate)
• 25% on profits of £250,000 or more (main rate)
• Marginal Relief for profits between £50,000 and £250,000

Marginal Relief gradually increases the effective tax rate between 19% and 25%. As a result, companies avoid a sudden jump in tax when profits rise above £50,000.

Your Accounting Period

An accounting period is the period you use to calculate taxable profits for Corporation Tax.

In most cases, it lasts 12 months. However, your first set of accounts may create two accounting periods for tax purposes.

For instance, you might:

• Start trading part way through a financial year
• Extend or shorten your year end
• Change your accounting reference date

Therefore, you should always confirm your accounting period dates. You can check them in your Statutory Accounts and your HMRC online account.

Associated Companies and Thresholds

If your company has associated companies, HMRC reduces the profit thresholds. This adjustment can move a company into a higher rate band.

For example: If two companies are associated, they share the limits. Each company then uses lower thresholds.

Registering for Corporation Tax

You must register your company with Companies House before trading. During incorporation, you can often set up Corporation Tax at the same time. If you do not, you can add Corporation Tax through your HMRC business tax account later.

You can register for Corporation Tax online via GOV.UK and you will need:

• Your Company’s Registration Number
• The date your business started trading
• The date your first accounts are made up to
• Your company’s Unique Taxpayer Reference (UTR)

You must register within three months of starting business activity, which can include:

• Buying stock or materials
• Advertising services
• Employing staff
• Renting business premises

If your company remains inactive, HMRC may treat it as dormant for Corporation Tax. Even so, you should confirm this position formally.

Record-Keeping Requirements

You should retain clear evidence of:

• Sales invoices and receipts
• Purchase invoices and expense receipts
• Bank and loan statements
• Payroll records and pension information
• Asset purchase and disposal details
• Contracts and legal agreements

Most companies must keep these records for at least six years.

How to Calculate Corporation Tax

1. Calculate Taxable Profit

Start with total income and deduct allowable business expenses.

This works out as: Turnover – Allowable Expenses = Taxable Profit

You must then adjust for:

• Disallowable expenses (such as client entertainment)
• Capital Allowances on qualifying assets
• Losses brought forward
• Any relevant tax reliefs

2. Apply the Correct Rate

Next, apply the appropriate Corporation Tax rate for the accounting period. You should calculate Marginal Relief if profits fall between £50,000 and £250,000.

3. Submit Your Company Tax Return

You must file your Company Tax Return online. Moreover, you must submit a return even if the company makes a loss or there is no Corporation Tax due.

Example Calculation

Suppose a company reports:

• Turnover of £120,000
• Allowable expenses of £70,000

Taxable profit equals £50,000. At this level, the Small Profits Rate may apply.

Now assume the company purchases equipment that qualifies for capital allowances worth £5,000.

Taxable profits reduces to £45,000. As a result, the overall tax bill falls.

Allowance Expenses and Capital Allowances

Allowable expenses reduce taxable profits and therefore reduce Corporation Tax. HMRC requires that costs must be “Wholly and Exclusively” for business purposes.

Common allowable expenses include:

• Staff salaries and wages
• Employers’ National Insurance Contributions
• Employers’ pension contributions
• Business insurance
• Office rent and utilities
• Business travel and accommodation
• Training costs
• Professional fees (such as accountancy fees)
• Software and subscriptions used for work

Capital purchases, such as machinery or vehicles, usually fall outside normal expenses. However, you can often claim Capital Allowances on qualifying items.

Some expenses require more careful treatment:

• Client entertainment rarely qualifies for tax relief
• Personal use restricts claims
• Mixed-use costs require fair apportionment

Corporation Tax Reliefs

Several reliefs can reduce your final Corporation Tax bill.

This includes:

• Research and Development (R&D) Tax Relief
• Loss Relief (which offsets losses against profits)
• Patent Box (which offers a reduce rate on qualifying patent profits)
• Creative Industry Tax Reliefs for eligible productions

Each relief carries a specific eligibility criteria.

Payment and Filing Deadlines

Corporation Tax involves two main deadlines. Notably, the payment deadline arrives first.

Payment Deadline

Most companies must pay Corporation Tax nine months and one day after the end of the accounting period. Large companies may need to pay in instalments.

Filing Deadline

You must file the Company Tax Return within 12 months of the accounting period end.

For example: If your year end falls on 31 March 2025, payment is due by 1 January 2026 and the tax return is due by 31 March 2026.

How to Pay Corporation Tax

HMRC accepts several payments methods, including:

• Online or telephone banking
• Faster Payments or CHAPS
• Debit or corporate credit card
• Direct Debit

You must quote your 17-character Corporation Tax payment reference for relevant accounting period. Because some payment methods take longer to clear, you should allow enough time before the deadline. Bank holidays can also delay processing.

HMRC does not accept payment by post.

Penalties and Interest

Late filing leads to automatic penalties, even if no tax is due.

HMRC generally charges:

• £100 if the return is one day late
• An additional £100 after three months
• A percentage penalty after six months
• A further percentage penalty after 12 months

HMRC also charges interest on late payment. The interest rate can also change over time. Repeated late submissions can increase penalties and attract additional scrutiny.

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This article is for general informational purposes only and does not constitute legal or financial advice. While we aim to keep our content up to date and accurate, UK tax laws and regulations are subject to change. Please speak to an accountant or tax professional for advice tailored to your individual circumstances. Pi Accountancy accepts no responsibility for any issues arising from reliance on the information provided.