What is corporation tax? It is the tax a UK limited company pays on its taxable profits, and it is one of the first bills new directors run into once the business starts making money. The rules are not hard, but the details around rates, deadlines and reliefs catch plenty of people out. This guide walks through everything in plain English so you can plan ahead instead of scrambling when HMRC comes calling.
Quick note before we start: tax rules change, so treat this as general information rather than personal advice. For anything complicated, speak to a qualified accountant.
What Is Corporation Tax and Who Has to Pay It?
Put simply, corporation tax is to a company what income tax is to an individual. It is charged on the profit your business makes in an accounting period, not on the money coming through the till. A company with £2 million in sales and £1.9 million in costs is taxed on the £100,000 difference.
You need to pay it if you run a UK limited company. Foreign companies with a UK branch or office are in scope too, as are clubs, co-operatives and some unincorporated associations such as community groups or sports clubs. GOV.UK lists these groups clearly on its Corporation Tax pages.
Sole traders and ordinary partnerships are different. They do not pay it at all. Instead, they report their profits through a Self Assessment return and pay income tax. That is one of the main reasons people compare the two structures before deciding whether to incorporate.
What Counts as Taxable Profit?
Your taxable profit is not always the same figure you see in your annual accounts. HMRC starts from your accounting profit and then makes adjustments. In practice, taxable profit usually includes:
- Income from trading, such as sales and fees for services
- Investment income, for example interest received
- Profits from selling assets, known as chargeable gains
Some costs are not allowed, even though you paid them. Entertaining clients is the classic example. You add it back to your profit when preparing the return, which pushes your taxable figure up. Other expenses, like staff wages, rent, software and professional fees, are generally deductible if they were incurred wholly and exclusively for the business.
Corporation Tax Rates for 2026/27
Now that you know what is corporation tax and who pays it, here are the current rates. The structure has been stable since April 2023. Two headline rates apply, with a sliding scale in between:
| Annual taxable profit | Rate |
|---|---|
| £50,000 or less | 19% (small profits rate) |
| £50,001 to £250,000 | Between 19% and 25% (marginal relief) |
| Over £250,000 | 25% (main rate) |
One detail many directors miss: those £50,000 and £250,000 limits shrink if your accounting period is shorter than 12 months, and they are divided by the number of associated companies you have. If you control several businesses, your small profits band may be much smaller than you expect.
How marginal relief works
Marginal relief is not a separate tax band. HMRC calculates your tax at the full 25% and then deducts a relief. The formula is the gap between £250,000 and your profit, multiplied by 3/200 (that is 1.5%).
Take a company with £100,000 of profit. Tax at 25% is £25,000. The relief is £150,000 × 3/200 = £2,250. So the bill is £22,750, an effective rate of 22.75%. At £200,000 of profit, the relief drops to £750, giving a bill of £49,250 and an effective rate of 24.625%. Notice how quickly the benefit fades as profits climb.
A few quick examples
- £35,000 profit × 19% = £6,650 corporation tax
- £100,000 profit = £22,750 after marginal relief
- £400,000 profit × 25% = £100,000 corporation tax
How Corporation Tax Is Worked Out
Knowing what is corporation tax in theory is one thing; working out the actual figure is another. Getting to the final number follows a fairly logical path. First, take your accounting profit. Second, add back disallowed costs and subtract any allowances or reliefs you are entitled to. Third, apply the relevant rate, or rates if your accounting period straddles a change. Finally, deduct any tax you have already paid to leave the amount due, or an overpayment you can reclaim.
Most small companies leave this to an accountant, and for good reason. The profit shown in your books and the profit shown for tax purposes rarely match, and it is easy to miss an adjustment. If you prefer to file yourself, use accounting software that supports the Company Tax Return and check your figures against HMRC’s marginal relief calculator.
Corporation Tax Deadlines You Cannot Afford to Miss
Understanding what is corporation tax is only half the job, because there are two separate deadlines, and this is where most mistakes happen. Paying the tax and filing the return are different duties with different dates.
- Payment: 9 months and 1 day after the end of your accounting period
- Filing the Company Tax Return (CT600): 12 months after the end of the accounting period
For a company with a 31 March year end, that means paying by 1 January and filing by the following 31 March. Because payment comes first, you usually have to estimate the bill before the return is even finished.
Larger companies work differently. If taxable profits go above £1.5 million, tax is paid in instalments rather than in one lump sum. Check the GOV.UK payment guidance for the exact dates that apply to your profit level.
What happens if you are late?
HMRC charges interest on unpaid tax from the day after the deadline. Filing late brings fixed penalties that start the day after the deadline and rise the longer you wait, with extra tax-based penalties once a return is more than six months overdue. Importantly, you must still file a return if you made a loss or owe nothing. A nil return is a legal requirement, and a missed one still earns a penalty. If cash is tight, contact HMRC early to discuss a Time to Pay arrangement rather than hoping the problem goes away.
Legal Ways to Reduce Your Corporation Tax Bill
Paying less tax is not about clever tricks. It is about claiming everything you are entitled to. The most common routes are:
- Capital allowances: Relief on equipment, machinery and business vehicles you buy to use in the company. Check the current limits for the Annual Investment Allowance and full expensing before a big purchase.
- Research and Development relief: Available if you work on genuine scientific or technological advances, and more companies qualify than you might think.
- Patent Box: A lower rate on profits that come from patented inventions.
- Loss relief: Trading losses can often be set against other profits or carried forward.
- Employer pension contributions: Payments into staff and director pensions are generally deductible for the company.
- Charitable donations: Qualifying gifts to registered charities can reduce taxable profit.
Timing matters as well. Spending on genuine business needs before your year end may bring the deduction into the current period. Just make sure the spend makes commercial sense, because buying things purely to cut tax usually costs more than it saves.
Common Mistakes to Avoid
People who search for what is corporation tax are usually trying to avoid a nasty surprise. After watching small firms deal with HMRC, the same errors come up again and again:
- Assuming no profit means no filing duty
- Mixing up the payment deadline with the filing deadline
- Forgetting that associated companies shrink the marginal relief limits
- Treating personal spending as a company expense
- Leaving receipts and records until the last minute
A simple fix is to set aside a slice of profit every month in a separate savings account. Many directors put away 20% to 25% of profit so the bill never comes as a shock.
Frequently Asked Questions
When does a new company start paying corporation tax?
The company must tell HMRC when it starts trading or has other taxable income. Your first accounting period usually begins on that date, and the payment deadline follows 9 months and 1 day after the period ends.
Do sole traders pay corporation tax?
No. Sole traders and partnerships pay income tax through Self Assessment. Corporation tax applies only to companies and certain organisations.
Can I pay corporation tax with personal money?
Yes, you can, although it is best to record it properly in your books, usually as a director’s loan, and speak to your accountant about the treatment.
What is corporation tax used for?
The money goes to the Treasury and helps fund public services. For a business owner, the practical point is that it is a cost of making a profit, so it should be budgeted for like any other bill.
What is corporation tax if my company makes a loss?
There is nothing to pay on a loss, but you still need to file the return. The loss can often be carried forward or set against other profits, so it may reduce a future bill.
Is corporation tax charged on turnover?
No. It is charged on profit after allowable costs, which is why keeping good records can lower your bill.
Final Thoughts
So, what is corporation tax in a nutshell? It is a yearly tax on company profits, charged at 19%, 25% or somewhere in between, and it comes with firm payment and filing deadlines. Once you grasp what is corporation tax and how it is calculated, you are in control: you can budget for it, claim every legitimate relief and avoid penalties. Review your position well before each year end, keep tidy records, and ask an accountant to check anything that feels uncertain. Acting early is what really saves money.
