What is Corporation Tax? UK Guide for Business Owners

Corporation Tax is a tax that limited companies and other corporate bodies pay on their taxable profits. These profits can come from trading (selling goods or services), investments, or chargeable gains (such as selling an asset for more than it cost).

Unlike income tax, which individuals pay on earnings, Corporation Tax applies to the profits made by businesses that are registered as companies with Companies House.

Who Pays Corporation Tax?

Corporation Tax applies to:

• UK limited companies

• Foreign companies with a UK branch or office

• Clubs, co-operatives, and other unincorporated associations (like sports clubs or community groups)

Sole traders and partnerships do not pay Corporation Tax. Instead, they pay Income Tax and National Insurance on their business profits through Self Assessment.

If you’ve registered a company with Companies House, even if it hasn’t started trading yet, you may still need to file a return. HMRC expects all active companies to meet their Corporation Tax obligations unless they are officially dormant.

How Corporation Tax Works

Corporation Tax is based on taxable profits, not gross income. This means companies can deduct allowable expenses before calculating how much tax is due.

Here’s a step-by-step overview of how it works:

1. Calculate taxable profits: Start with your company’s income and deduct all allowable business expenses (such as salaries, rent, equipment, utilities, professional fees, and interest on business loans).

2. Apply the Corporation Tax rate: Use the correct rate to work out the tax due.

3. File a Company Tax Return: Submit form CT600 to HMRC with full accounts and computations.

4. Pay the tax: Corporation Tax must be paid within 9 months and 1 day after the end of your accounting period.

You must also register for Corporation Tax with HMRC within 3 months of starting business activity (including buying, selling, advertising, or employing someone).

Corporation Tax Rates in the UK

As of 1 April 2023, Corporation Tax rates in the UK changed:

• Main Rate: 25% for companies with profits over £250,000

• Small Profits Rate: 19% for companies with profits of £50,000 or less

• Marginal Relief: If profits fall between £50,001 and £250,000, you’ll pay a tapered rate between 19% and 25%

This means many small businesses will continue to pay 19%, while larger and more profitable firms face a higher bill.

Be aware: associated companies (e.g., if you own two or more companies under the same control) may have to share the profit thresholds, potentially pushing more of their profits into the higher band. Want to know how much you’ll pay? Take a look at how much is corporation tax.

Allowable Expenses and Deductions

To reduce your Corporation Tax bill legally, you can claim allowable business expenses such as:

• Staff wages and pensions

• Rent and business rates

• Office supplies and equipment

• Marketing and advertising

• Accountancy and legal fees

• Interest on business loans

• Travel and accommodation for business trips

• Software and subscriptions

Larger capital purchases—such as vehicles or machinery—may qualify for capital allowances, including the Annual Investment Allowance (AIA), which allows you to deduct the full value of qualifying items up to £1 million.

Make sure your records are accurate and well organised. HMRC can challenge claims they believe are excessive or not wholly for business use.

Real-World Example

Let’s say a small marketing agency earns £100,000 in revenue. They deduct £30,000 in staff salaries, £10,000 in rent and bills, and £10,000 in other expenses. That leaves them with £50,000 in profit.

Since their profit is below £50,000, they pay the Small Profits Rate of 19%. Their Corporation Tax bill would be:

£50,000 × 19% = £9,500

If their profits were, say, £150,000, the marginal relief calculation would apply and increase their tax rate gradually between 19% and 25%.

Legal and Compliance Considerations

Failing to meet your Corporation Tax responsibilities can result in fines and penalties. These include:

• A £100 penalty for missing your tax return deadline (even if you don’t owe any tax)

• Increased penalties the longer it’s late

• Interest charges on late payments

Your company must also:

• Keep detailed financial records for at least 6 years

• File annual statutory accounts with Companies House

• Submit a Confirmation Statement every year

Using cloud-based accounting software like Xero, QuickBooks, or FreeAgent can make this much easier and help you avoid mistakes.

Pros and Cons of Corporation Tax

Pros:

• Clear and structured tax system for businesses

• Many legitimate expenses and capital allowances available

• Lower tax rates (for smaller companies) compared to Income Tax and NICs paid by sole traders

Cons:

• Strict deadlines and filing requirements

• Complexity increases as profits or structures grow

• Profits are taxed, and any dividends you take are taxed again personally

If you're thinking of incorporating, it’s worth weighing up whether the tax advantages outweigh the administrative burden compared to being a sole trader.

Alternatives to a Limited Company

Not all businesses need to be limited companies. You could operate as:

• A sole trader: simpler setup, less paperwork, but taxed through Income Tax and NICs

• A partnership: shared responsibilities and profits

• A Limited Liability Partnership (LLP): good for professional services firms wanting flexibility but limited liability

Each structure has its own tax treatment, costs, and reporting requirements—so speak to an accountant before deciding.

Tips to Manage Corporation Tax Effectively

• Plan ahead: Set aside Corporation Tax as you earn to avoid cash flow issues.

• Claim all allowable expenses: Don’t leave money on the table.

• Invest in accounting software: Automate reports and track profit in real time.

• Work with an accountant: A good adviser will ensure compliance and uncover savings.

• Review your structure annually: As your business grows, check if your company setup is still tax-efficient.

• Don’t forget R&D tax relief: Innovative businesses may qualify for generous claims.

If you're wondering when your corporation tax bill is due, read when is corporation tax due.

Final Thoughts

Corporation Tax is one of the biggest responsibilities facing limited companies in the UK—but it doesn’t have to be daunting. With a solid grasp of the basics, good record-keeping, and professional advice where needed, you can stay compliant, reduce your bill, and focus on growing your business with confidence.

Running a limited company brings with it a number of financial and compliance responsibilities, and navigating Corporation Tax is just one part of the wider picture. From setting up your company structure and choosing the right accounting method, to managing directors’ salaries and dividend planning, getting expert advice early on can make a meaningful difference. If you’re looking for ongoing support that ensures your business remains compliant while maximising tax efficiency, our team of limited company accountants is here to help. We specialise in working with directors and owner-managed businesses, providing tailored guidance and hands-on support across all aspects of limited company finance—so you can focus on running the business while we handle the numbers.

For smaller companies and startups, where every penny counts, managing tax and accounts with care is vital to long-term sustainability. Whether you’re just starting out or running a lean operation with modest profits, understanding how Corporation Tax fits into your overall financial strategy is key. We work with hundreds of smaller businesses who benefit from our practical, down-to-earth approach and clear fixed-fee pricing. If you’re looking for a proactive small company accountant who understands your challenges, helps you stay compliant, and spots opportunities to reduce tax, we’d love to support your journey.

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