What Is the Difference Between Corporation Tax and Income Tax

In the UK, both Corporation Tax and Income Tax are major sources of government revenue, but they apply to different types of taxpayers. Corporation Tax is paid by limited companies on their profits, while Income Tax is paid by individuals on their earnings. Understanding the difference is crucial for business owners, company directors, and self employed individuals, as each tax has its own rules, rates, and reporting requirements. This article explains the key differences between Corporation Tax and Income Tax, who pays them, and how each is calculated.

What Is Corporation Tax

Corporation Tax is a tax paid by limited companies and certain other organisations on their taxable profits. These profits include:

  • Trading profits from the company’s main business activities.

  • Investment income, such as interest or rent.

  • Capital gains from selling assets like property or shares.

Corporation Tax is charged on the company’s net profit, meaning income minus allowable business expenses and reliefs.

A company must file a Corporation Tax return (CT600) with HMRC each year, detailing its profits and tax due. The tax must be paid within nine months and one day of the end of the company’s accounting period, while the return itself is due within 12 months of that date.

What Is Income Tax

Income Tax is paid by individuals on their earnings, which can include:

  • Wages and salaries from employment.

  • Self employment profits.

  • Rental income from property.

  • Interest, dividends, and pensions.

Employees usually pay Income Tax through the PAYE (Pay As You Earn) system, where the employer deducts tax automatically from wages before payment.

Self employed individuals, landlords, and others with untaxed income must report their earnings through the Self Assessment tax return each year. The deadline for online submissions is 31 January after the end of the tax year, and any tax owed must be paid by the same date.

Who Pays Each Type of Tax

The simplest way to distinguish between Corporation Tax and Income Tax is by who pays them.

Tax Type Who Pays It Applies To

Corporation Tax Limited companies and certain organisations Company profits

Income Tax Individuals, sole traders, and partnerships Personal income

If you run a limited company, your business pays Corporation Tax on its profits, and you personally pay Income Tax on any salary or dividends you receive from the company.

If you are self employed or in a partnership, you do not pay Corporation Tax; instead, you pay Income Tax on your share of the profits.

How the Tax Rates Differ

Corporation Tax and Income Tax operate on different rates and thresholds.

Corporation Tax:

  • 19 percent for companies with profits up to £50,000.

  • 25 percent for companies with profits above £250,000.

  • A marginal rate applies between £50,000 and £250,000, meaning the effective rate gradually increases as profits rise.

Income Tax (England, Wales, and Northern Ireland):

  • 20 percent basic rate on income between £12,571 and £50,270.

  • 40 percent higher rate on income between £50,271 and £125,140.

  • 45 percent additional rate on income above £125,140.

Scotland has different Income Tax bands and rates.

It is important to remember that Corporation Tax is charged on the company’s profits, while Income Tax is charged on the individual’s income after personal allowances.

Allowances and Deductions

Both taxes allow certain deductions, but the rules are different.

Corporation Tax allowances:

  • Business expenses such as rent, utilities, and salaries.

  • Capital allowances for equipment and machinery.

  • Research and development (R&D) tax relief for innovation-related costs.

  • Loss relief to offset profits in other years.

Income Tax allowances:

  • The Personal Allowance, which lets most people earn up to £12,570 tax free.

  • Business expenses for self employed individuals.

  • Pension contributions and charitable donations, which can reduce taxable income.

Limited companies do not have a personal allowance, but company directors and employees can still use their individual Personal Allowance when receiving salaries.

How the Two Taxes Interact for Company Directors

If you own or manage a limited company, you may pay both Corporation Tax and Income Tax, but in different ways.

  1. Your company pays Corporation Tax on its profits.

  2. You can take a salary, which is treated as an expense for the company but subject to PAYE Income Tax and National Insurance.

  3. You can also take dividends from company profits, which are taxed separately at lower rates than employment income.

This structure can make limited companies more tax-efficient than self employment for some people, depending on profits and personal circumstances.

Example Comparison

Example 1: Sole Trader (Income Tax)
A self employed designer earns £60,000 a year and has £10,000 in allowable expenses. Their taxable profit is £50,000. After the £12,570 Personal Allowance, they pay:

  • 20 percent tax on £37,430 = £7,486.

  • 40 percent tax on £0 (no income above £50,270).
    Total Income Tax = £7,486.

Example 2: Limited Company (Corporation Tax and Income Tax)
A limited company makes £60,000 profit before paying the owner a £12,000 salary.

  • The company pays 19 percent Corporation Tax on £48,000 (£60,000 minus £12,000 salary) = £9,120.

  • The owner pays Income Tax and National Insurance on the £12,000 salary (mostly covered by the Personal Allowance).

  • If the owner takes dividends, they pay dividend tax at 8.75 percent on the first £37,700 after the £1,000 dividend allowance.

This example shows how company profits are taxed separately from personal income.

Filing and Payment Deadlines

Corporation Tax deadlines:

  • Pay Corporation Tax within nine months and one day after your accounting period ends.

  • File your company tax return within 12 months of the year-end.

Income Tax deadlines:

  • File your Self Assessment tax return by 31 January after the tax year ends.

  • Pay any tax due by the same date.

Missing these deadlines can result in fines and interest charges from HMRC.

National Insurance Considerations

Corporation Tax does not involve National Insurance contributions, but Income Tax does.

  • Employees and directors pay National Insurance on salaries.

  • Self employed individuals pay Class 2 and Class 4 contributions.
    Companies, on the other hand, pay employer’s National Insurance on staff wages.

How an Accountant Can Help

An accountant can explain how both taxes apply to your situation and help you plan efficiently. They can:

  • Calculate and file Corporation Tax returns accurately.

  • Prepare and submit Self Assessment returns for company directors or sole traders.

  • Advise on the most tax-efficient way to take income from your company.

  • Ensure all allowances and reliefs are claimed correctly.

  • Keep you compliant with HMRC deadlines and regulations.

Having professional guidance ensures you meet your obligations while minimising the amount of tax you pay legally.

Summary

The key difference between Corporation Tax and Income Tax lies in who pays them and on what income. Corporation Tax applies to company profits, while Income Tax applies to personal income. Limited companies pay Corporation Tax and then distribute profits to shareholders, who may also pay Income Tax on dividends or salaries.

Understanding both systems is vital for managing your finances efficiently, whether you are self employed or run a limited company. Working with an accountant ensures you stay compliant and make the most of tax-saving opportunities available under each regime.