Corporation Tax is the tax a UK limited company pays on its taxable profits. Unlike Income Tax, which is charged on individuals, Corporation Tax is levied on the company itself. The current rate structure — introduced in April 2023 — means that small companies pay 19% while larger companies pay 25%, with a tapered rate in between. Understanding how Corporation Tax works, what reduces your bill, and when it must be paid is essential for every company director.
What Is Corporation Tax?
Corporation Tax (CT) is charged on the profits of UK limited companies (and some other organisations, including clubs and co-operatives). It applies to:
- Trading profits — income from your main business activities, less allowable expenses
- Investment income — dividends received, bank interest, and similar
- Capital gains — profit from selling business assets
If your company makes a loss, there is no Corporation Tax to pay. Losses can be carried forward to offset future profits or, in certain circumstances, carried back against the previous year's profit.
Corporation Tax Rates for 2025/26
The current rate structure has three tiers based on your company's augmented profits (profits plus any dividends received from non-group companies):
| Augmented Profits | Rate |
|---|---|
| Up to £50,000 (small profits rate) | 19% |
| £50,001 to £250,000 (marginal relief) | 19%–25% (tapered) |
| Over £250,000 (main rate) | 25% |
Marginal Relief
Companies with profits between £50,000 and £250,000 pay a blended rate through marginal relief. The formula is designed so that the effective rate rises gradually from 19% at £50,000 to 25% at £250,000. For example, a company with profits of £150,000 pays an effective rate of approximately 22.5%.
Important: if your company has associated companies (companies under common control), the £50,000 and £250,000 thresholds are divided by the number of associated companies plus one. A director with two associated companies would have thresholds of £25,000 and £125,000 respectively.
Calculating Taxable Profit
Your taxable profit starts with your accounting profit (as shown in your company's profit and loss account) and then makes certain adjustments required by tax law.
Allowable Deductions
Most genuine business expenses are deductible for Corporation Tax purposes — the principle is broadly similar to Income Tax for sole traders. Common deductible items include:
- Staff salaries, wages, and employer's National Insurance contributions
- Employer pension contributions
- Office rent, rates, and utilities
- Professional fees (accountancy, legal)
- Business insurance
- Marketing and advertising costs
- Bank charges and interest on business loans
- Software subscriptions
- Travel costs (business purpose)
Items Not Deductible
Some items are specifically excluded from CT deductions even though they appear as expenses in your accounts:
- Business entertainment (client lunches, hospitality)
- Depreciation of assets (replaced by capital allowances)
- Fines and penalties
- Dividends paid to shareholders (these are distributions of profit, not expenses)
- Certain legal costs (capital in nature)
Capital Allowances
When your company buys assets — equipment, machinery, vehicles, computers — these aren't deducted as expenses. Instead, they go through the capital allowances system. The main allowances available are:
Annual Investment Allowance (AIA)
The AIA allows you to deduct 100% of qualifying capital expenditure in the year of purchase, up to £1,000,000 per year. For most small companies, this means virtually all equipment purchases can be written off immediately rather than over several years.
Writing Down Allowances (WDA)
For expenditure that doesn't qualify for AIA (or exceeds it), assets go into "pools" and attract an annual deduction of either 18% (main pool) or 6% (special rate pool, which includes integral building features and long-life assets). Cars are specifically excluded from AIA and must go through WDA.
Full Expensing
Introduced in April 2023 and made permanent in 2024, full expensing allows companies to deduct 100% of the cost of new and unused plant and machinery (main pool assets) in the year of purchase, with no upper limit. This is in addition to AIA and effectively extends unlimited immediate relief to a wider range of assets.
Research and Development (R&D) Tax Relief
If your company undertakes qualifying R&D activities — developing new products, processes, or software, or making significant improvements to existing ones — you may be eligible for R&D tax relief. For SMEs, this allows companies to deduct an additional 86% of qualifying R&D costs on top of the 100% normal deduction (so 186% total), and companies making losses can surrender that loss for a cash credit of up to 10% (reduced rate for accounting periods from April 2023).
R&D relief has been subject to significant changes in recent years following concerns about widespread fraud. HMRC scrutiny has intensified, and you should only claim if your activities genuinely qualify under the technical definition. Always use a qualified adviser for R&D claims.
When Does Corporation Tax Have to Be Paid?
This is one of the most common traps for new company directors: the payment deadline is not the same as the filing deadline.
| Obligation | Deadline |
|---|---|
| Payment of Corporation Tax | 9 months and 1 day after the company's accounting period end |
| Filing the CT600 return | 12 months after the accounting period end |
For example, if your company's accounting year ends on 31 March 2025, your Corporation Tax is due by 1 January 2026, and your CT600 return must be filed by 31 March 2026.
Large companies (profits over £1.5 million) must pay in quarterly instalments during the accounting period itself — well before year-end. For most small companies, the 9-month + 1 day deadline applies.
How to File the CT600
The CT600 is the Corporation Tax return. It must be filed online through HMRC's Corporation Tax Online service or via approved third-party software. The CT600 cannot be filed on paper (except in very limited circumstances). It must be accompanied by:
- The company's statutory accounts (profit and loss account and balance sheet)
- Detailed tax computations showing how the taxable profit was derived
- Any supplementary pages for specific items (capital allowances, R&D, losses)
Accounts submitted alongside the CT600 must be in iXBRL format — a structured data format. Most accounting software can produce iXBRL accounts automatically. HMRC's free CATO (Corporation Tax for Agents and Taxpayers Online) filing service can be used for simpler cases.
Penalties for Late Filing and Payment
HMRC charges automatic penalties for late CT600 filing: £100 immediately, another £100 if still outstanding after three months, then 10% of the unpaid tax at 18 months. Interest accrues on late payments from the day after the due date.
Getting Your Corporation Tax Right
For new directors in particular, Corporation Tax can feel daunting — the interaction between accounting profit, capital allowances, deductible versus non-deductible expenses, and associated company rules adds layers of complexity that aren't always obvious. Getting it wrong means either overpaying (common) or underpaying (worse — with penalties to follow).
At SMD Accountancy, we prepare company accounts and CT600 returns for limited companies of all sizes. We identify every allowable deduction, make sure capital allowances are fully claimed, and file everything on time. If you'd like to discuss your company's tax position, book a free 20-minute call with us.