Do Charities Pay Corporation Tax?

Running a charity in the UK involves a range of compliance obligations, and one area that often causes confusion is Corporation Tax. While charities operate differently from profit-driven businesses, they can still earn income—and that raises the question: do charities have to pay Corporation Tax?

While most charities do not pay Corporation Tax on their main sources of income, things can quickly become more complex when trading activities grow or a separate subsidiary is involved. Structuring a charity and its trading arm correctly requires expertise in company law, tax rules and accounting standards. Our team of experienced limited company accountants can help you set up and manage a charity trading subsidiary, optimise how profits are gifted back to the parent charity, and ensure all HMRC obligations are met. Whether you're navigating Gift Aid payments or planning for long-term sustainability, we provide practical, specialist support to protect both your financial position and charitable status.

In this article, we’ll explain how Corporation Tax applies to charities in the UK, when it does (and doesn’t) need to be paid, and what steps charity trustees must take to ensure compliance. Whether you’re managing a small local charity or a larger not-for-profit organisation, understanding these rules is essential for staying on the right side of HMRC.

For general rules that apply to most companies, here’s what is corporation tax.

Do Charities Have to Pay Corporation Tax?

In short, registered charities in the UK do not usually pay Corporation Tax on most of their income, as long as it is used for charitable purposes. However, that doesn’t mean charities are exempt from tax entirely.

HMRC provides specific tax exemptions for income and gains that are used solely for charitable purposes, but any trading or non-charitable activity may still be taxable. If a charity operates outside of these rules or doesn’t manage its trading correctly, Corporation Tax can apply.

When Are Charities Exempt from Corporation Tax?

Your charity does not have to pay Corporation Tax on income or gains that are:

• From donations, legacies, and gift aid

• From grant funding (e.g. from the government or other charities)

• From charitable trading (such as selling goods related to your purpose, e.g. books by a literacy charity)

• From rental income, investments, or fundraising events—provided the money is used for the charity’s objectives

• From profits passed from a charity trading subsidiary (if structured and managed correctly)

To qualify for these exemptions, your charity must:

• Be registered with HMRC for tax purposes

• Ensure all income is used for charitable purposes

• Keep accurate and transparent records

• Report any non-exempt income separately

When Might a Charity Have to Pay Corporation Tax?

Charities may have to pay Corporation Tax if they:

• Carry out non-charitable trading, such as selling merchandise unrelated to their core purpose

• Use profits for non-charitable purposes

• Operate a trading activity that exceeds HMRC’s thresholds for small-scale trading

• Receive investment income not used for charitable purposes

• Own a non-charitable subsidiary that generates profit but doesn’t pass it back correctly

Example:
If a children’s literacy charity opens a café and sells branded merchandise that isn’t directly tied to its charitable mission, HMRC may treat that as non-charitable trading, and Corporation Tax may apply to those profits.

What About Charity Trading Subsidiaries?

Many charities set up a wholly owned trading subsidiary (usually a limited company) to carry out commercial activities. The subsidiary can make a profit, but must donate most or all of it back to the parent charity via a Gift Aid payment to avoid Corporation Tax.

This structure allows the charity to keep its tax-exempt status while engaging in more commercial activities. However, the setup must be done correctly, with clear separation between the charity and the company, and legal contracts in place.

Do Charities Still Need to File Returns?

Even if your charity has no tax to pay, it may still need to file a Corporation Tax return (CT600) if HMRC sends a notice to do so. In some cases, you may be able to notify HMRC that no return is needed, but you must not ignore a formal request.

If your charity has taxable income or capital gains, it will need to:

• Register for Corporation Tax

• Submit a CT600

• Pay tax on non-exempt income at the standard Corporation Tax rate (currently 25% for most companies)

Real-World Example

A charity supporting mental health services receives donations, grant funding, and income from training workshops delivered to schools. All of this is used directly to support their charitable activities. No Corporation Tax is due.

However, they also begin selling branded wellbeing merchandise online. If this trading activity grows and becomes significant, they may need to move it into a trading subsidiary and ensure profits are gifted back to the charity to avoid a Corporation Tax bill.

How to Stay Compliant

To avoid unexpected tax bills, charities should:

• Register with HMRC as a charity for tax purposes

• Use all income and gains solely for charitable purposes

• Monitor any trading activity and keep it below the small trading exemption limit (currently £80,000 or 25% of total income, whichever is lower)

• Seek advice when setting up a trading subsidiary

• Maintain proper records and submit returns when requested

Final Thoughts

Most charities do not pay Corporation Tax but this is only true when their income is used correctly and trading activity is properly managed. If you run or support a charity, it’s essential to understand where the lines are drawn and make sure your organisation operates within HMRC’s guidance.

With the right structure and advice, charities can maximise their funding impact without running into unexpected tax liabilities. If you're running a smaller charity or community organisation with modest income and limited resources, it's still important to keep the finances in order. As a small company accountant, we work closely with not-for-profits, CICs and grassroots charities to make sure their income is correctly recorded, their expenses are justifiable, and any tax risks are properly managed. We’ll help you stay compliant without the overwhelm—giving you the tools and support to grow your mission while staying on the right side of HMRC.

If you’d like to explore related tax content, check out our Corporation Tax Help hub.