What Is the Difference Between Corporation Tax and Income Tax

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This is one of those questions that sounds basic on the surface, yet causes real confusion in practice, particularly for directors, freelancers, and business owners who are trying to understand why they seem to be taxed more than once. I hear this question regularly, often phrased as why am I paying Corporation Tax and then still paying tax personally, or why does my friend who is self employed pay tax differently to me even though we earn similar amounts.

The short answer is that Corporation Tax and Income Tax apply to different people and different types of income, but the longer answer is more important, because misunderstanding the difference can lead to poor decisions, unexpected tax bills, and missed planning opportunities.

In this article I am going to explain clearly and practically what Corporation Tax is, what Income Tax is, who pays each one, how the rates work, how the two interact in real life, and how this affects limited companies, sole traders, and directors. I am writing this as a chartered accountant who advises UK businesses and individuals every day, and everything here is grounded in current UK tax rules and how they actually apply in practice.

What Income Tax is

Income Tax is a personal tax. It is charged on income earned by individuals, not companies. If you earn money personally in the UK, there is a very high chance that Income Tax will apply in some form.

Income Tax applies to a wide range of income, including:

• Employment income
• Self employed trading profits
• Rental income
• Pension income
• Some savings interest
• Dividends above certain thresholds

The key point to understand is that Income Tax looks at you as an individual. It does not care how a business is structured, it cares about what income you personally receive and what allowances and tax bands apply to you.

How Income Tax is calculated

Income Tax is calculated annually, based on the total taxable income you receive in a tax year, which runs from 6 April to 5 April.

In simple terms, the process works like this:

• You add up all your taxable income
• You deduct any personal allowances or reliefs
• The remaining amount is taxed in bands

Most people have a Personal Allowance, which allows them to earn a certain amount before paying any Income Tax at all. Above that, income is taxed at increasing rates as it moves through the tax bands.

This is why two people earning the same amount can pay different levels of tax, because allowances, reliefs, and income types all matter.

What Corporation Tax is

Corporation Tax is a business tax. It is charged on the profits made by limited companies and some other corporate bodies. It does not apply to individuals or sole traders.

If you run a limited company, Corporation Tax applies to the company’s profits, not to the money you personally take out.

Corporation Tax is charged on:

• Trading profits
• Investment income
• Capital gains made by the company

The important distinction here is that a limited company is a separate legal entity. The company earns profits, and those profits are taxed at company level before any money is paid to you personally.

How Corporation Tax is calculated

Corporation Tax is calculated based on the company’s accounting profits for an accounting period, usually its financial year.

The basic process is:

• Start with accounting profit
• Adjust for tax rules, such as disallowed expenses
• Apply the Corporation Tax rate
• Calculate tax due

Corporation Tax is reported through a Corporation Tax return, and it is paid directly by the company, not by the director personally.

This separation between company and individual is at the heart of the difference between Corporation Tax and Income Tax.

Who pays Income Tax and who pays Corporation Tax

One of the simplest ways to understand the difference is to look at who is responsible for paying each tax.

Income Tax is paid by:

• Employees
• Self employed individuals
• Company directors on personal income
• Pensioners
• Landlords

Corporation Tax is paid by:

• Limited companies
• Some clubs and organisations

A sole trader never pays Corporation Tax. A limited company never pays Income Tax. Instead, the director or shareholder pays Income Tax on money they personally receive from the company.

How this works for sole traders

If you are self employed as a sole trader, your business and you are treated as the same person for tax purposes. There is no legal separation.

This means:

• The business makes profits
• Those profits are treated as your personal income
• You pay Income Tax on the profits
• You also pay National Insurance

There is no Corporation Tax involved at all. Everything flows straight into your personal tax position.

This is why sole traders often feel that tax is simpler, but it also means there is less flexibility in how and when profits are taxed.

How this works for limited company directors

If you run a limited company, the position is very different.

The process usually looks like this:

• The company earns profits
• The company pays Corporation Tax on those profits
• You take money out as salary, dividends, or both
• You pay Income Tax on what you personally receive

This is where confusion often arises, because it can feel like the same money is being taxed twice. In reality, two different taxpayers are involved, the company and you as an individual.

Salary and Income Tax

If you take a salary from your limited company, that salary is:

• An expense for the company
• Deducted before Corporation Tax
• Taxable income for you personally

You pay Income Tax on the salary through PAYE, and the company may also pay employer National Insurance. Because salary reduces company profits, it reduces Corporation Tax.

Dividends and Income Tax

Dividends work differently. Dividends are paid from profits after Corporation Tax has already been paid.

This means:

• The company pays Corporation Tax first
• Dividends are paid from remaining profits
• You pay Income Tax on dividends above allowances

Dividends do not reduce Corporation Tax, because they are not an expense. This is why dividends and salary are taxed differently and used together in planning.

Why Corporation Tax and Income Tax both exist

This is something people often question, particularly when comparing sole traders and limited companies.

Corporation Tax exists because companies are separate legal entities that can accumulate wealth, invest, and trade independently of their owners. Taxing profits at company level ensures that profits are taxed even if they are not immediately paid out.

Income Tax exists to tax individuals based on their personal circumstances, including allowances, family position, and total income.

The two systems serve different purposes, even though they interact closely.

Common misconceptions

There are several misconceptions I regularly see around this topic.

Common ones include:

• Thinking Corporation Tax replaces Income Tax
• Believing dividends are tax free
• Assuming company profits are personal income
• Thinking limited companies always save tax
• Confusing turnover with profit

Understanding the distinction between company profits and personal income clears up most of this confusion.

Which tax is higher

There is no simple answer to whether Corporation Tax or Income Tax is higher, because they apply in different contexts.

Corporation Tax rates are generally lower than higher rate Income Tax, but Corporation Tax applies before money reaches you personally. Once you add personal tax on top, the overall tax position depends on how money is extracted.

This is why tax efficiency is about structure and timing, not just rates.

Why this difference matters in real life

Understanding the difference between Corporation Tax and Income Tax affects real decisions, such as:

• Whether to trade as a sole trader or limited company
• How much salary to take
• Whether to pay dividends
• When to extract profits
• How to plan for future tax bills

Poor understanding often leads to surprises, particularly when new directors realise that paying Corporation Tax does not mean they are finished with tax personally.

How accountants use this difference in planning

Good tax planning works with the distinction between Corporation Tax and Income Tax, not against it.

This can involve:

• Keeping profits in the company for future investment
• Using allowances efficiently
• Balancing salary and dividends
• Timing income across tax years

None of this is about avoiding tax, it is about understanding how the system works and making informed decisions within the rules.

Common mistakes I see in practice

The most common issues I see include:

• Taking too much money without planning for personal tax
• Forgetting that dividends are taxable
• Not setting aside money for Corporation Tax
• Assuming profits equal take home pay
• Mixing business and personal finances

Almost all of these stem from misunderstanding the difference between company tax and personal tax.

Final thoughts

Corporation Tax and Income Tax are fundamentally different taxes applied to different taxpayers, even though they are closely linked in practice. Corporation Tax applies to company profits. Income Tax applies to personal income. If you run a limited company, both usually apply, but at different stages and to different people.

Once you understand that separation, tax planning becomes clearer, decisions become more informed, and unexpected tax bills become far less likely.

You may also find our guidance on director salary and Can I take money out of my company tax free helpful when exploring related limited company questions. For a broader overview of running and managing a company, you can visit our limited company hub.