UK Corporation Tax:
the complete guide.

What is corporation tax?

Corporation tax is a direct tax charged on the taxable profits of UK limited companies, branches of foreign companies operating in the UK, and certain unincorporated bodies (clubs, co-operatives, and associations). It is administered by HM Revenue & Customs and self-assessed: companies calculate the liability themselves, file a CT600 return, and pay HMRC the resulting amount.

The taxable profit is not the same as the accounting profit shown in your statutory accounts. Several adjustments are required — adding back disallowable expenditure (such as client entertainment and fines), removing accounting depreciation (replaced with capital allowances), and accounting for any tax-specific reliefs. The result is a tax computation that sits alongside the accounts.

Corporation tax applies to a company's accounting period, which is usually 12 months long and aligned with the financial year shown in its statutory accounts. If you change your year-end, multiple short accounting periods can result.

Who has to pay it

Every active UK limited company is within the scope of corporation tax — including newly incorporated companies in their first accounting period. You must register for corporation tax with HMRC within three months of starting to trade. In most cases registration happens automatically when the company is set up at Companies House, but the obligation to confirm trading status sits with the directors.

Sole traders and partnerships do not pay corporation tax — they pay income tax via Self Assessment, and (for partnerships) Class 4 National Insurance. Only entities with a separate legal personality from their owners, principally limited companies and LLPs treated as opaque, are within the corporation tax regime.

Dormant companies — those carrying on no trade and receiving no income beyond statutory filings — are outside the scope of corporation tax for periods of dormancy. They still need to file dormant accounts with Companies House, but no CT600 is required while dormancy is maintained and HMRC has been notified.

Rates and bands (2025/26)

The graduated corporation tax structure introduced in April 2023 continues for the 2025/26 financial year. Three bands apply, calculated by reference to taxable profits for the accounting period:

These thresholds are the annual limits and are pro-rated for accounting periods of less than 12 months. A 9-month accounting period, for example, gets a small profits limit of £37,500 and an upper limit of £187,500.

Marginal relief and associated companies

Marginal relief reduces the corporation tax liability for companies with profits between £50,000 and £250,000. It is computed at the main rate (25%) and then reduced by the marginal relief amount:

For most companies without overseas dividend income, augmented profits equal taxable profits and the formula simplifies to (£250,000 − profits) × 3/200. The marginal effective rate on each pound of profit between £50,000 and £250,000 is therefore 26.5% — higher than the headline 25% — which makes proactive planning in this band particularly valuable.

The thresholds are divided between associated companies. Two companies are associated if one controls the other, or both are under common control. If you have two associated companies, each gets a £25,000 small profits limit and a £125,000 upper limit, not £50,000 and £250,000. This is a frequent trap for owners of multiple businesses, including holding-company structures and family-owned groups.

The associated company test looks at the position throughout the accounting period — not just at year-end — so a mid-year incorporation of a sister company can affect both companies' bands.

Calculating taxable profits

The corporation tax computation starts with the accounting profit and makes the following adjustments to arrive at taxable profits:

The result is the taxable total profits figure on which corporation tax is calculated. Even small computational errors — a miscoded entertainment expense, an unclaimed allowance — can compound into a meaningful tax difference over a multi-year period.

Reliefs and allowances

The UK corporation tax system contains a wide range of reliefs designed to encourage investment, innovation, and capital formation. Most owner-managed businesses are entitled to at least one of the following:

• Capital allowances. Tax relief on qualifying plant, machinery, vehicles, fixtures, and integral features.
• Research & Development credits. Tax relief or repayable credits for qualifying R&D activity, even in routine sectors.
• Patent Box. A reduced 10% effective rate on profits attributable to qualifying patents.
• Creative industry reliefs. Reliefs for film, television, video games, animation, theatrical, and museum production.
• Group relief. Surrendering trading losses between members of a 75% group.
• Land remediation relief. 150% deduction for cleaning up contaminated or derelict land.

Capital allowances and full expensing

Capital allowances replace accounting depreciation in the tax computation. The two main routes for plant and machinery are the Annual Investment Allowance and full expensing.

The Annual Investment Allowance (AIA) gives a 100% first-year deduction on up to £1 million of qualifying expenditure each year. It is available to both incorporated and unincorporated businesses and covers most plant, machinery, integral features, and commercial vehicles.

Full expensing, made permanent in 2023, allows companies (only) to claim a 100% first-year allowance on qualifying main-rate plant and machinery, with no upper cap. A 50% first-year allowance applies to special-rate assets such as integral features. Full expensing typically benefits larger companies that exceed the £1m AIA cap, but companies under the cap usually find AIA simpler.

Vehicles need particular care: cars are excluded from full expensing and AIA, and instead receive writing-down allowances at 18%, 6%, or 100% depending on CO₂ emissions. Choosing electric or zero-emission vehicles preserves access to the 100% first-year allowance.

R&D tax credits

Research and Development tax relief is one of the most generous reliefs in the UK system. From April 2024, the previous separate SME and RDEC schemes were merged into a single R&D Expenditure Credit scheme for accounting periods beginning on or after 1 April 2024, with an enhanced rate for loss-making R&D-intensive SMEs.

To qualify, your project must seek an advance in science or technology and address scientific or technological uncertainty that a competent professional cannot readily resolve. The bar is lower than many directors assume — qualifying activity exists in software development, manufacturing process improvement, engineering, and product development across nearly every sector.

The relief is calculated on qualifying expenditure including staff costs, sub-contractor costs (subject to restrictions), software, consumables, and certain externally provided workers. Claims now require an advance notification (for new claimants) and a detailed Additional Information Form filed alongside the CT600. We assess R&D eligibility for every limited company client where qualifying activity is plausible.

Trading losses

Trading losses can be valuable. The main routes for relief are:

1. Current-year offset — set against other profits of the same period, including chargeable gains and investment income.
2. 12-month carry-back — set against total profits of the previous 12 months, generating a corporation tax repayment.
3. Indefinite carry-forward — set against trading profits, or (since April 2017) against total profits, of future periods. A £5 million annual deductions allowance applies, above which only 50% of profits can be relieved.
4. Group relief — surrender to a 75% group company that can use the loss against its own profits.

The optimal use of losses depends on cash-flow priorities, current and projected tax rates, and group structure. A straightforward carry-back can convert a current-year loss into immediate cash via repayment, while a carry-forward may give a higher absolute saving if profits rise into the main rate band.

Director pay: salary vs dividends

For owner-directors, the optimal mix of salary, employer pension contributions, and dividends is reviewed annually because the answer changes as personal allowance, NIC thresholds, and dividend allowance shift. The key principles:

• Salary is corporation tax-deductible. A salary reduces taxable profit, but creates employer's NIC and PAYE/employee NIC obligations.
• Dividends are not deductible. Dividends are paid from post-tax profits, so the company pays corporation tax first; the shareholder then pays dividend tax personally.
• Pension is the most tax-efficient. Employer pension contributions are deductible for corporation tax, are not subject to NIC, and are tax-free in the recipient's hands until drawdown.
• Personal allowance and dividend allowance. Most directors take a small salary up to the secondary NIC threshold to use the personal allowance and accrue state pension qualifying years, then top up with dividends.

Filing and payment deadlines

Corporation tax has two distinct deadlines, which catch out many first-time directors:

Tax is due before the return — the corporation tax liability must be paid three months earlier than the CT600 is filed. Most owner-managed companies will have agreed accounts and a tax computation well before the payment deadline so the figure is known.

Penalties and HMRC enquiries

Late filing of the CT600 attracts an automatic £100 penalty, rising to £200 after three months. Continued lateness adds a tax-geared penalty of 10% of unpaid tax after six months, and a further 10% after twelve months. Repeated lateness across consecutive accounting periods triggers escalating £500 and £1,000 fixed penalties.

Late payment incurs interest, charged at HMRC's published rate. Inaccurate returns can attract penalties of up to 100% of the tax understated, depending on whether the inaccuracy is careless, deliberate, or deliberate-and-concealed.

HMRC has 12 months from filing to open an enquiry into a return. Enquiries can be limited (a single point) or full (the whole return). Having an ACCA-qualified agent on file ensures correspondence is handled professionally, and a good professional response materially reduces the chance of escalation. Voluntary disclosure of any errors discovered later is always preferable to letting them surface during an enquiry.

Year-round planning strategies

The largest savings come from action taken before year-end. Once the period closes, the position is largely fixed. The strategies we use most often with clients:

Common mistakes to avoid

• Forgetting the associated-company rule. Two companies under common control split the £50k and £250k bands, often pushing one or both into a higher effective rate.
• Misclassifying capital vs revenue expenditure. Treating a capital item as a revenue expense (or vice versa) creates an over- or under-claim that can sit unnoticed for years.
• Missing R&D claims. Many companies undertake qualifying R&D in routine work and never claim. The two-year time limit means historic claims expire quickly.
• Director loan accounts in overdrawn position. An overdrawn director's loan at year-end attracts a 33.75% tax charge under section 455 unless repaid within nine months.
• Not registering for corporation tax on time. Failure to notify HMRC within three months of starting to trade is a separate offence with its own penalties.
• Treating dividends as a salary substitute without paperwork. Dividends require board minutes and dividend vouchers, and must be paid out of distributable reserves. HMRC can re-characterise informal payments as salary.

Frequently asked questions