What is Corporation Tax?
Corporation Tax is the tax UK limited companies pay on their profits. It's like income tax, but for businesses instead of people.
Current Rate (2025/26)
25% (main rate), 19% for profits under £50,000, marginal relief between £50,000-£250,000
Example
If your Ltd company makes £100,000 profit, you'll pay £25,000 in Corporation Tax (at the main rate).
Key Dates
Due 9 months and 1 day after your accounting period ends
How Corporation Tax Works in Practice
Corporation Tax is the primary tax your limited company pays on its taxable profits. Unlike personal income tax which applies to individuals, Corporation Tax applies to the company as a separate legal entity. Every UK limited company, including dormant companies with taxable income, must register for Corporation Tax with HMRC within three months of starting to trade.
Since April 2023, the Corporation Tax rate depends on the level of your company's profits. The small profits rate of 19% applies to companies with profits up to £50,000. The main rate of 25% applies to profits above £250,000. If your profits fall between £50,000 and £250,000, you qualify for marginal relief, which creates an effective rate that gradually increases from 19% to 25%. For many micro-businesses, this means you are actually paying somewhere around 20-23% rather than the headline 25% rate.
One critical point that catches many directors out: Corporation Tax is calculated on taxable profits, not on the cash in your bank account. Taxable profit can differ significantly from your bank balance due to timing differences, capital allowances, and other adjustments. Money sitting in your account earmarked for VAT or PAYE is not profit.
The payment and filing deadlines are separate and directors frequently confuse them. You must pay your Corporation Tax bill within 9 months and 1 day after the end of your accounting period. However, the actual CT600 return does not need to be filed until 12 months after the period ends. Missing the payment deadline triggers automatic interest charges, and late filing incurs penalties starting at £100.
Step by Step
Your company calculates its taxable profit by taking total income and deducting allowable business expenses, capital allowances, and any other qualifying reliefs. This calculation happens for each accounting period, which is usually 12 months. You or your accountant then apply the correct rate based on the profit level and any associated company rules.
To actually pay, you register for Corporation Tax online with HMRC, file the CT600 return through HMRC's online service or compatible software, and pay the amount due. Payment can be made by bank transfer, direct debit, or corporate debit card. HMRC assigns your company a Unique Taxpayer Reference (UTR) which you need for all filings.
If your company is part of a group or has associated companies, the profit thresholds are divided by the number of associated companies. So if you have two associated companies, the small profits rate threshold drops from £50,000 to £25,000 each. This is a commonly overlooked rule that can significantly affect your effective tax rate.
Practical Tips
- Set aside approximately 20-25% of your monthly profits into a separate bank account so you always have funds ready when the Corporation Tax bill arrives
- Review your profit forecast before your year end to identify any legitimate expenses or capital purchases that could reduce your taxable profit
- Check whether you have any associated companies, as this affects which rate thresholds apply to your business
- File your CT600 return and pay on time every year, even if you make a loss, to avoid penalties and maintain a clean compliance record with HMRC
Common Mistakes to Avoid
- Confusing the payment deadline (9 months and 1 day) with the filing deadline (12 months) and missing the earlier payment date, triggering interest charges
- Not accounting for associated companies when calculating rate thresholds, leading to underpayment and unexpected bills
- Treating the full 25% rate as unavoidable when marginal relief could save thousands for profits between £50,000 and £250,000
- Failing to register for Corporation Tax within 3 months of starting to trade, which can result in HMRC penalties even if no tax is owed
Frequently Asked Questions
When do I need to pay Corporation Tax?
Corporation Tax is due 9 months and 1 day after the end of your accounting period. For example, if your year end is 31 March 2026, payment is due by 1 January 2027. The CT600 return has a separate, later deadline of 12 months after the period end.
What is the Corporation Tax rate for small companies in 2025/26?
Companies with profits under £50,000 pay 19% (the small profits rate). Between £50,000 and £250,000, marginal relief applies, creating an effective rate between 19% and 25%. Above £250,000, the full 25% main rate applies.
Do I pay Corporation Tax on turnover or profit?
You pay Corporation Tax on profit, not turnover. Profit is calculated after deducting all allowable business expenses, capital allowances, and other reliefs from your total income. Your turnover is your total revenue before any deductions.
What happens if I pay Corporation Tax late?
HMRC charges interest from the day after the payment deadline until the date you pay. The interest rate is currently the Bank of England base rate plus 2.5%. There are no separate late payment penalties for Corporation Tax, but late filing of the CT600 return incurs penalties starting at £100.
Can I reduce my Corporation Tax bill?
Yes. Common ways include claiming capital allowances on equipment, the Annual Investment Allowance, R&D tax credits if you do qualifying work, employer pension contributions, and ensuring you claim all allowable business expenses. Proper tax planning with your accountant before your year end is key.
Source: HMRC CTM01000 - Corporation Tax Manual: Introduction
Related Terms
Profit is what's left after deducting all business expenses from your turnover. Corporation Tax is calculated on profit, not turnover.
Your accounting period is the 12-month timeframe your company uses for financial reporting and tax calculations.
CT600 is the Corporation Tax return form companies submit to HMRC, declaring profits and calculating tax owed.
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