What is Profit?
Profit is what's left after deducting all business expenses from your turnover. Corporation Tax is calculated on profit, not turnover.
Example
Turnover £150,000 - Expenses £100,000 = Profit £50,000. You pay Corporation Tax on the £50,000.
Key Dates
Calculated at year end
How Profit Works in Practice
Profit is the financial gain your company makes after deducting all allowable expenses from its total income. It is the single most important number in your accounts because Corporation Tax is levied on profit, not on turnover. Understanding what constitutes profit -- and how to legitimately reduce it through allowable deductions -- is central to managing your company's tax position.
There are several layers of profit in a company's accounts. Gross profit is turnover minus the direct cost of sales. Operating profit (also called EBIT) is gross profit minus overhead expenses like rent, salaries, insurance, and professional fees. Pre-tax profit is operating profit adjusted for interest and any exceptional items. Net profit is what remains after Corporation Tax has been deducted. Each level tells you something different about the financial health of the business.
For Corporation Tax purposes, the profit figure is further adjusted in the tax computation. Certain accounting expenses are not allowable for tax (like depreciation, client entertaining, and certain provisions), so these are added back. Capital allowances are then deducted instead of depreciation. The resulting "taxable profit" is what HMRC charges Corporation Tax on. For 2025/26, the main rate is 25%, with a small profits rate of 19% for companies with taxable profits under £50,000, and marginal relief for profits between £50,000 and £250,000.
Profit also determines how much you can extract from the company as dividends. You can only declare dividends from accumulated retained profits. Taking dividends in excess of available profits is unlawful and could make you personally liable.
Step by Step
At the end of your accounting period, your accounts are prepared by totalling all income and deducting all allowable business expenses. The result is your accounting profit before tax. Your accountant (or software) then prepares a Corporation Tax computation which adjusts this figure for items that are treated differently for tax purposes.
Common adjustments include adding back depreciation (replaced by capital allowances for tax), adding back entertainment costs (not allowable for tax), and deducting any capital allowances claimed on business assets. If you have losses brought forward from previous years, these can also be offset against current year profits to reduce the tax bill.
Once the taxable profit is calculated, Corporation Tax is applied at the appropriate rate. You pay this tax 9 months and 1 day after your accounting period ends, and report it on your CT600 which is due at 12 months.
Practical Tips
- Review your expenses monthly to ensure you are capturing everything allowable -- missed claims directly increase your tax bill
- If profits are near the £50,000 small profits rate threshold, consider timing expenses or pension contributions to stay below it and benefit from the 19% rate
- Maintain a clear separation between accounting profit and cash flow -- profitable businesses can still fail if they run out of cash
- Keep a record of any tax losses to carry forward, as these can offset future years' profits and save significant Corporation Tax
Common Mistakes to Avoid
- Thinking profit and cash are the same thing -- you can be profitable but cash-poor if customers owe you money
- Paying dividends that exceed retained profits, which is unlawful and creates a personal liability for directors
- Not claiming all allowable expenses, which inflates your taxable profit unnecessarily
- Confusing accounting profit with taxable profit -- they are different because of adjustments like depreciation and capital allowances
Frequently Asked Questions
What is the difference between accounting profit and taxable profit?
Accounting profit is calculated under accounting standards and appears in your annual accounts. Taxable profit is adjusted for items HMRC treats differently -- for example, depreciation is replaced by capital allowances, and client entertaining is added back. Corporation Tax is calculated on taxable profit, not accounting profit.
Can I reduce my taxable profit legally?
Yes. Ensure you claim all allowable business expenses, maximise capital allowances (especially the Annual Investment Allowance), make pension contributions from the company, and carry forward any losses. These are all legitimate ways to reduce taxable profit and pay less Corporation Tax.
What Corporation Tax rate applies to my profit?
For 2025/26, the small profits rate is 19% for taxable profits under £50,000. The main rate is 25% for profits over £250,000. Marginal relief applies between £50,000 and £250,000, creating an effective rate between 19% and 25%.
Is profit the same as retained profit?
No. Profit is the current year figure before dividends. Retained profit is the accumulated total of all past profits minus all dividends ever paid and any losses. Retained profit appears on the balance sheet and determines how much you can legally distribute as dividends.
What happens if my company makes a loss?
If your company makes a loss, no Corporation Tax is due for that period. The loss can be carried forward indefinitely and offset against future profits. You can also carry losses back one year to reclaim tax already paid, which can generate a useful cash refund.
Source: HMRC Company Taxation Manual: https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual
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