Corporation tax: everything you need to know

If you own or run a limited company, you must understand corporation tax and calculate how much to pay each year. Unlike sole traders or partnerships who pay income tax on their earnings, limited companies pay corporation tax on any profit. But how much do you need to pay? When is the deadline to register? And what tax relief is available to help small businesses? Let’s break it all down.

Key takeaways

• UK corporation tax is a tax on a limited company’s profits 

• Sole traders do not have to pay corporation tax

• The standard rate is 25% for profits over £250,000 and 19% for profits under £50,000. Companies with profits between these amounts pay a marginal rate

What is corporation tax?

All limited companies must pay corporation tax on their profits. It’s a significant source of revenue for the Treasury, bringing in some £93.3 billion in 2023/24. 

How much profit a company makes during its accounting period determines how much corporation tax is due. Profit is the money a limited company earns from selling goods and services after deducting the day-to-day expenses of running the company. If the company makes no profit, it won’t owe corporation tax, but it must still file a company tax return. 

Corporation tax also applies to profits from investments and gains from selling assets for more than their purchase price. This is because both contribute towards a limited company’s overall profits.

Who pays corporation tax?

If a limited company makes a profit, it must pay corporation tax. However, other types of businesses that are not incorporated as limited companies must also pay corporation tax on any profits. These include:

• Clubs and societies – e.g. sports clubs or community groups

• Any foreign company with a UK branch or office

• Co-operatives 

Self-employed individuals don’t pay corporation tax. Instead, they calculate their tax through self assessment, with tax due on their earnings. 

A partnership does not pay corporation tax either unless any partner is a limited company or the partnership ceases to operate as a profit-making operation – for instance, by becoming a charity instead.

How much is corporation tax in the UK?

Corporation tax rates vary. They depend on how much profit a company makes during its accounting period. The rates for corporation tax on 1 April 2024 were as follows:

• 19% for companies with profits under £50,000, known as the small profits rate 

• 25% for companies with profits over £250,000, known as the main rate

If a company’s profits range between £50,000 and £250,000, it pays tax at the main rate of 25%, although this is reduced by marginal relief.

How is corporation tax calculated?

Below are the steps you need to follow to determine how much corporation tax is due. These steps can be undertaken by you, an accountant or a company director.

1. Calculate taxable profits

Add up all the profits made in an accounting period and deduct allowable business expenses, such as wages, rent, bills and raw materials. The result is the net profit, which is taxable. 

2. Check for allowances and relief

Some companies can claim relief or allowances that reduce taxable profits. These include:

• Capital allowances for equipment or machinery

• Research and development tax credits for businesses in science and technology

• Trading losses, where companies that make a loss in one year can carry forward those losses and offset them against future profits

3. Apply the tax rate

The main tax rate for companies with profits of more than £250,000 is currently 25%. Companies with profits under £50,000 pay the small profits rate of 19%. Companies with profits between £50,000 and £250,000 may be eligible for marginal relief, which allows the company to reduce the main rate. The rate gradually increases from the small profits rate to the main rate, based on the profits made.

4. Calculate the amount due

Once you calculate the taxable profits and apply the appropriate tax rate, you can determine the amount of corporation tax due. You can use the marginal relief calculator to help work out how that applies if your company’s profits range from £50,000 to £250,000.

Accounting software and a tax advisor or accountant can also help you work out how much corporation tax you need to pay if you’re unsure. 

How to register for corporation tax with HMRC

Before you can register your business for corporation tax, you must first register it with Companies House. Once that’s done, HMRC will send a letter with your company’s unique taxpayer reference (UTR). You can then register for corporation tax with HMRC, which you must do within three months of starting any business activities.

The registration process requires:

• Your company’s registration number, found on your certificate of incorporation

• The date your company became active 

• Your company’s year end date, for example, 31 March

When is the corporation tax deadline?

There are a few deadlines to be aware of in relation to corporation tax.

An accounting period is usually your financial year which cannot exceed 12 months. It determines the deadlines for submitting a company tax return and paying corporation tax. After you add corporation tax services to your business tax account, HMRC provides the dates for your first accounting period.

How do you pay corporation tax?

If your company profits are below £1.5m, you must pay your tax bill 9 months and 1 day after the end of your accounting period. If your profits exceed £1.5m you pay your tax bill in instalments. You can pay in various ways, including:

• Direct Debit

• Online banking through your business bank account

• Telephone

• Corporate credit card – note you cannot use a personal credit card

• Visiting your bank or building society with a paying-in slip from HMRC

You cannot pay your corporation tax bill by post.

How to reduce your corporation tax bill 

No one wants to pay more tax than necessary, and you can legally reduce your corporation tax bill. Consider the following before submitting your company tax return to ensure you pay only what you need to.

Claim all allowable business expenses and capital allowances

Stay organised throughout the year to easily track all the expenses necessary to run your company. These expenses include rent, utilities, salaries and wages, business insurance, travel costs and office supplies. Capital allowances cover higher-value assets like machinery, equipment, and business vehicles.

Make sure you include all allowable expenses and capital allowances on your company tax return to avoid declaring more profit than you earned.

Tax relief

There are several tax relief schemes available for limited companies. 

If your company operates in science or technology, you may qualify for research and development tax credits that reduce the corporation tax you owe. You can also receive environmental tax relief for reducing your company’s carbon footprint. 

If you’re an inventor, you may be able to claim a 10% reduction on profits made from patented inventions thanks to The Patent Box.

If your company is in a creative industry, such as film, TV or theatre, the Creative Industry Tax Relief (CITR) could help you reduce the amount of tax you need to pay. 

Use losses to offset profits

If your company makes a loss, you can carry it forward and offset it against future profits. This allows you to reduce the amount of tax your company owes once it becomes profitable again. 

Charity donations

If your company donates to an HMRC-registered charity, you can treat it as a business expense and deduct it from your profits, reducing your tax burden.

What are the penalties for late corporation tax filing?

If your company files its tax return late, HMRC can issue penalties. There’s a £100 fine if it’s one day late, and another £100 fine at three months. If it’s six months late, HMRC estimates your corporation tax bill and adds a penalty of 10% to the unpaid tax. If it’s 12 months late, it adds another 10%.

This content is for informational purposes and it's not intended as financial or professional advice. Please talk to a qualified professional for guidance relating to your business' needs.