UK Corporation Tax Rates Explained

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We created this webpage for company owners who want clear guidance on Corporation Tax, including how it is calculated, when it is due, and how it should be paid. Our aim is to help you understand your obligations, avoid penalties, and manage your company tax position with confidence.

Corporation Tax is one of those topics that every limited company director knows they need to understand yet many are unsure how it actually works in practice. I regularly speak to business owners who know they pay Corporation Tax but are unclear on the rate how it is calculated when it is due and why their bill changes from year to year. That uncertainty often leads to poor planning and last minute stress.

In this article I am going to explain clearly how much Corporation Tax is in the UK how the rates work who pays what and how to estimate your own bill with confidence. I am writing this in the first person based on how I explain Corporation Tax to my own clients and everything here reflects current UK rules and guidance from HM Revenue and Customs and GOV.UK.

What Corporation Tax actually is

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

In simple terms:

• Individuals pay Income Tax

• Sole traders pay Income Tax and National Insurance

• Limited companies pay Corporation Tax

Corporation Tax is paid by the company itself not by the directors personally. Directors are only taxed personally when they take money out of the company.

Who has to pay Corporation Tax

Corporation Tax applies to:

• UK limited companies

• UK branches of overseas companies

• Clubs and associations in some cases

If you run a limited company and it makes a profit Corporation Tax will almost certainly apply.

Even if a company is dormant it may still need to register for Corporation Tax although no tax will be payable if there are no profits.

The current Corporation Tax rates in the UK

The UK does not have a single flat Corporation Tax rate for all companies. The rate you pay depends on the level of taxable profits your company makes.

At the time of writing the Corporation Tax system works as follows.

There are effectively three rates:

• A lower rate for small profits

• A higher rate for large profits

• A marginal relief band in between

This structure was reintroduced to create a sliding scale rather than a single flat rate.

The small profits rate

Companies with taxable profits at or below the lower threshold pay Corporation Tax at the small profits rate.

This rate is lower than the main rate and is designed to support smaller businesses.

If your company’s profits fall entirely within this band your Corporation Tax calculation is relatively straightforward.

The main rate of Corporation Tax

Companies with profits above the upper threshold pay Corporation Tax at the main rate.

This rate applies to larger and more profitable companies.

Once profits exceed the upper threshold the entire profit is effectively taxed at the higher rate with no marginal relief.

Marginal relief explained

For companies whose profits fall between the lower and upper thresholds marginal relief applies.

This means:

• Part of the profit is effectively taxed at the lower rate

• Part is taxed at the higher rate

• An adjustment called marginal relief smooths the transition

In practice marginal relief reduces the Corporation Tax bill compared to applying the main rate to the full profit.

This is one of the areas that causes confusion because the effective tax rate sits somewhere between the two headline rates.

What counts as taxable profit

Corporation Tax is not charged on turnover. It is charged on taxable profit.

Taxable profit is broadly:

• Trading income

• Plus other income such as interest or rental income

• Less allowable business expenses

• Less capital allowances

• Plus or minus certain tax adjustments

This means the profit shown in your accounts is often not the same as the profit used for Corporation Tax.

Allowable expenses and Corporation Tax

Allowable expenses reduce your taxable profit and therefore reduce Corporation Tax.

Common allowable expenses include:

• Staff costs and salaries

• Employer National Insurance

• Rent and utilities

• Professional fees

• Marketing and advertising

• Insurance

• Software and subscriptions

Expenses must be wholly and exclusively for business purposes to be deductible.

Capital allowances and Corporation Tax

Some costs are not deducted as normal expenses but through capital allowances.

These usually relate to:

• Equipment

• Machinery

• Computers

• Vehicles in some cases

Capital allowances allow the cost of assets to be deducted over time or sometimes in full in the year of purchase depending on the rules.

Capital allowances can significantly reduce Corporation Tax in years where investment is made.

What does not reduce Corporation Tax

Not everything that leaves the company reduces Corporation Tax.

Examples include:

• Dividends paid to shareholders

• Repayment of director loans

• Fines and penalties

• Client entertaining

These costs are not deductible for Corporation Tax purposes and need to be planned around.

How to estimate your Corporation Tax bill

One of the most useful things a director can do is estimate Corporation Tax during the year rather than waiting until accounts are finished.

A simple approach is:

• Start with your estimated profit

• Apply the relevant Corporation Tax rate

• Adjust for capital allowances if applicable

This gives a rough figure which can then be refined as the year progresses.

I often encourage clients to set aside money monthly based on this estimate so the final payment is not a shock.

When Corporation Tax is due

Corporation Tax is not due at the same time as the accounts are filed.

The general rule is:

• Corporation Tax is payable nine months and one day after the end of the accounting period

For example if your year end is 31 March the Corporation Tax is due by 1 January following that year end.

The Corporation Tax return itself is due later which is another source of confusion.

Corporation Tax payment versus filing deadlines

There are two key deadlines to remember:

• Paying Corporation Tax

• Filing the Corporation Tax return

The return is usually due twelve months after the end of the accounting period.

This means you often have to pay the tax before the return is formally submitted.

Corporation Tax for new companies

New companies often underestimate their first Corporation Tax bill.

This happens because:

• The first year may cover more than twelve months

• Profits may grow quickly

• There is no previous year to compare against

Planning early in the first year is particularly important.

What happens if you pay Corporation Tax late

If Corporation Tax is paid late:

• Interest is charged automatically

• Penalties may apply

• HMRC may take recovery action

Interest runs from the due date until payment is made. This is why timing matters even if the amount is correct.

Can Corporation Tax rates change

Yes Corporation Tax rates can and do change.

Rates are set by the government and can be amended in budgets or fiscal statements.

This is why long term planning needs to be flexible and reviewed regularly.

How Corporation Tax interacts with director pay

Corporation Tax planning cannot be separated from director pay planning.

Key interactions include:

• Salaries reduce taxable profits

• Employer pension contributions reduce taxable profits

• Dividends do not reduce taxable profits

This is why directors often use a combination of salary dividends and pensions rather than relying on one method alone.

Corporation Tax and retained profits

One of the advantages of a limited company is that profits can be retained.

Retained profits:

• Are still subject to Corporation Tax

• Are not subject to personal tax until extracted

• Can be reinvested or used later

This allows companies to build up reserves for growth without triggering immediate personal tax.

Corporation Tax and losses

If a company makes a loss no Corporation Tax is payable for that period.

Losses can often be:

• Carried forward to offset future profits

• Carried back in some cases

Loss relief can be valuable and should be planned carefully.

Group companies and Corporation Tax

In group structures Corporation Tax becomes more complex.

Group relief may allow:

• Losses in one company to offset profits in another

• More efficient use of profits and losses

This is one of the reasons holding company structures are used but the rules are detailed and must be followed carefully.

Common mistakes I see with Corporation Tax

There are a few recurring issues that cause problems.

These include:

• Confusing turnover with profit

• Forgetting that dividends do not reduce Corporation Tax

• Not setting money aside during the year

• Missing payment deadlines

• Assuming the rate is flat for all profits

Most of these mistakes come from not understanding how the tax is calculated.

How HMRC checks Corporation Tax

HMRC does not automatically accept every Corporation Tax return at face value.

It may:

• Open enquiries

• Ask for supporting evidence

• Review expenses and allowances

• Challenge director loan balances

Accurate records and reasonable claims are the best defence.

How an accountant helps with Corporation Tax

This is one of the core areas where professional support adds value.

As an accountant I help by:

• Calculating taxable profits accurately

• Claiming the correct allowances

• Forecasting Corporation Tax early

• Advising on tax efficient planning

• Managing deadlines and payments

• Dealing with HMRC if queries arise

Good planning often saves far more than the cost of advice.

Planning ahead for Corporation Tax

The directors who feel most in control of their Corporation Tax are those who plan ahead.

Practical steps include:

• Monthly or quarterly profit reviews

• Setting aside tax money regularly

• Reviewing director pay strategy

• Timing investment sensibly

• Avoiding using tax money as working capital

This turns Corporation Tax from a problem into a predictable cost.

Final thoughts

So how much is Corporation Tax. The answer depends on how much profit your company makes and how that profit is structured. There is no single flat rate that applies to everyone and understanding where your company sits within the system is key.

In my experience once directors understand how Corporation Tax is calculated when it is due and how their decisions affect it the fear disappears. Corporation Tax becomes something that can be planned managed and controlled rather than a surprise bill that arrives after the year has ended.

You may also find our guidance on what is corporation tax and how to calculate corporation tax useful when dealing with related Corporation Tax questions. For a broader overview of Corporation Tax rules and support, you can visit our corporation tax help hub.