Corporation Tax is one of the most significant financial responsibilities for UK limited companies. With recent changes introduced in April 2023, understanding how Corporation Tax is calculated, which rate applies to your business, and how to legally reduce your tax bill has become even more crucial.
Whether you’re running a small start-up or managing a growing portfolio of businesses, getting clarity on your tax obligations can save you time, money, and potential penalties.
In this guide, we’ll break down exactly how Corporation Tax works for limited companies in the UK, including the new tiered rates, marginal relief, how associated companies impact thresholds, and what your company needs to do to stay compliant.
What Is Corporation Tax and Who Needs to Pay It?
Corporation Tax is a tax on the profits made by companies operating in the United Kingdom. If you operate a limited company, a UK branch of a foreign business, or an unincorporated organisation like a club or charity, you’re likely subject to Corporation Tax.
The tax is applied to:
- Profits from trading (e.g. sales of goods or services)
- Investment income
- Chargeable gains from selling company assets like property or shares
Unlike VAT or PAYE, you won’t receive a bill from HMRC. Instead, it’s your company’s responsibility to calculate how much tax is owed, report it, and pay it on time.
Registration with HMRC must be completed within three months of starting to trade. Failing to register or file your returns can lead to penalties, even if you’ve made no profit.
What Changed in Corporation Tax Rules from 1 April 2023?
The Corporation Tax structure underwent a significant overhaul starting from 1 April 2023. For nearly a decade prior, all companies paid a flat rate of 19%, regardless of profit levels. However, to better reflect the size and profitability of businesses, the government reintroduced a tiered system based on profit bands.
Dual Rates Introduced
From 1 April 2023, two main Corporation Tax rates apply:
- 19%: Small profits rate (for companies with profits at or below £50,000)
- 25%: Main rate (for companies with profits over £250,000)
For companies with profits between £50,000 and £250,000, a gradual increase in tax applies, known as marginal relief.
Accounting Periods That Straddle 1 April 2023
If your accounting period covers time before and after 1 April 2023, it must be split into two notional periods:
- Profits earned before 1 April are taxed at 19%
- Profits earned after 1 April are taxed under the new tiered system
Example: A company with a financial year from 1 January to 31 December 2023 will split profits for tax purposes as:
| Period | Days | Tax Rate | Example Taxable Profit | Apportioned Tax |
|---|---|---|---|---|
| 1 Jan 2023 – 31 Mar 2023 | 90 | 19% | £75,000 | £14,250 |
| 1 Apr 2023 – 31 Dec 2023 | 275 | Tiered | £225,000 | Based on new rules |
These split calculations can get complex, especially when marginal relief or associated companies apply. Accurate accounting is essential.
How Much is Corporation Tax for a Limited Company in 2024/25?
From the financial years 2024/25 and 2025/26, Corporation Tax rates continue to follow the structure introduced in 2023:
| Profit Band | Tax Rate |
|---|---|
| Up to £50,000 | 19% (Small Profits Rate) |
| £50,001 – £250,000 | 25%, reduced by marginal relief |
| Above £250,000 | 25% (Main Rate) |
It’s important to understand that these thresholds may be adjusted if:
- The accounting period is shorter than 12 months
- The company has associated companies
In these cases, the lower and upper thresholds are divided accordingly. For example, a company with two associated businesses will see its thresholds halved, meaning marginal relief could apply at a much lower profit level.
Augmented Profits Explained
To determine which rate applies, you must calculate augmented profits, which are:
- Your company’s total taxable profits, plus
- Certain exempt distributions, such as non-group dividends
This adjusted profit figure helps HMRC assess whether marginal relief or the main rate applies.
How Does Marginal Relief Work and Who Qualifies for It?
The presence of associated companies can significantly affect how Corporation Tax thresholds are applied. An associated company is one that:
- Is under the control of the same person or group
- Exercises control over another company
- Shares management or ownership links
Threshold Reduction for Associated Companies
If your company has three associated companies, your thresholds are divided by four (including your own company):
| Standard Limit | Adjusted Threshold (4 Companies) |
|---|---|
| £50,000 | £12,500 |
| £250,000 | £62,500 |
This means your company could be taxed at 25% on profits above just £62,500, not £250,000. Properly identifying and reporting associated companies is critical to apply the correct rate.
How Do You Calculate Corporation Tax for Your Limited Company?
Calculating Corporation Tax correctly is essential to ensure compliance with HMRC regulations and avoid under- or overpaying your liabilities. The process involves determining your total income, deducting eligible expenses, making necessary adjustments for disallowed costs, and applying the appropriate Corporation Tax rate based on your profits.
Step 1: Calculate Taxable Profits
Begin by calculating your total income, which includes sales revenue and any investment income. From this amount, you can deduct allowable business expenses that are essential for running your company.
These may include:
- Employee salaries and pensions
- Rent and utility bills
- Office equipment and supplies
- Business-related software subscriptions
- Travel and accommodation for business purposes
- Professional services such as accounting or legal fees
Expenses such as client entertainment and depreciation must be added back, as they are not considered deductible for Corporation Tax purposes.
Step 2: Adjust for Capital Allowances
While depreciation is not tax-deductible, companies can claim Capital Allowances for qualifying capital purchases such as machinery, computers, and vehicles.
Most businesses use the Annual Investment Allowance (AIA), which allows them to deduct up to £1 million of capital expenditure each tax year. This reduces the taxable profit and subsequently lowers the Corporation Tax liability.
Step 3: Apply the Correct Tax Rate
After adjustments, apply the relevant Corporation Tax rate. Companies with profits below £50,000 use the 19% small profits rate.
For profits above £250,000, the 25% main rate applies. If profits fall between these two thresholds, calculate tax using the marginal relief formula.
Example Calculation:
| Description | Amount |
|---|---|
| Total Income | £300,000 |
| Allowable Expenses | £39,465 |
| Capital Allowances | £1,800 |
| Addbacks (Depreciation + Entertainment) | £1,600 |
| Taxable Profit | £260,435 |
| Tax Payable @ 25% | £65,108.75 |
By carefully following these steps and ensuring accurate calculations, your limited company can meet its Corporation Tax obligations confidently and avoid costly errors or penalties.
When and How Do You Pay Corporation Tax in the UK?
Corporation Tax must be paid nine months and one day after the end of your accounting period. For instance, if your year-end is 31 December, your tax payment is due by 1 October the following year.
Payment Methods:
- Online banking (Faster Payments, CHAPS, BACS)
- Debit or corporate credit card
- Direct debit (new or existing)
- At your bank or building society
Payments cannot be made by post. Plan payments in advance to avoid delays during weekends or holidays.
What Allowances and Reliefs Can Reduce Your Corporation Tax Bill?
The UK tax system offers a range of allowances and reliefs to legally reduce your Corporation Tax liability.
Allowable Business Expenses
You can deduct business expenses that are “wholly and exclusively” for business use. These include:
- Equipment
- Office rent and utilities
- Professional fees
- Travel and accommodation
- Business insurance
Reliefs Available
Certain businesses can claim:
- Research & Development (R&D) Tax Relief
- Patent Box (for income from patented products)
- Creative Sector Reliefs (e.g. for film, TV, gaming)
- Loss Relief (carry forward or back to reduce profits in other periods)
These reliefs can significantly reduce your tax bill, and in some cases, result in a cash credit from HMRC.
What Are the Penalties for Late Filing or Incorrect Corporation Tax Returns?
If your company fails to file its Corporation Tax return on time or pays late, HMRC will apply penalties and charge interest. The initial penalty for a late filing is £100, and this increases the longer the return remains outstanding. Repeated late filings within a 12-month period attract higher penalties.
Interest is charged daily on unpaid Corporation Tax from the day after the payment deadline. HMRC may also investigate incorrect returns, particularly if errors are considered careless or deliberate. These could result in additional financial penalties and compliance checks.
To avoid these issues, maintain clear financial records, meet all deadlines, and consider using accounting software or working with a qualified accountant.
Conclusion
Navigating Corporation Tax as a limited company in the UK requires attention to detail, especially since the introduction of multiple rates and marginal relief. Understanding how your profits, associated companies, and accounting period impact your tax liability is essential.
By properly calculating your taxable profits, making use of available reliefs and allowances, and filing on time, you can remain compliant and potentially reduce your Corporation Tax burden.
If you’re unsure about your company’s situation or need help with calculations, always consult a qualified accountant or tax adviser. Accurate planning today can save your business significantly tomorrow.
Frequently Asked Questions
Do you pay Corporation Tax if your limited company made no profit?
Yes, you still need to file a Corporation Tax Return, even if there’s no tax to pay. If your company is dormant or made a loss, HMRC still expects a submission.
How do you register your company for Corporation Tax with HMRC?
Usually, registration is completed during your Companies House incorporation. If not, you can register separately via the HMRC website using your Government Gateway account.
Can you carry trading losses forward to reduce future Corporation Tax?
Yes. You can carry forward trading losses to offset future profits, reducing Corporation Tax in subsequent years.
How does Corporation Tax differ from Income Tax for sole traders?
Corporation Tax applies to limited companies, while Income Tax applies to sole traders and partnerships. The rates, allowances, and reliefs differ between the two.
What happens if your company changes its accounting period mid-year?
You must notify HMRC and may need to prepare two Corporation Tax Returns for the respective periods.
Are dividends subject to Corporation Tax in the UK?
No. Dividends are not deductible expenses for Corporation Tax but are subject to personal tax when distributed to shareholders.
Can you amend a submitted Corporation Tax return if you discover an error?
Yes. You can amend a CT600 within 12 months of the filing deadline for that accounting period.
