What is Corporation Tax and how does it work for small companies?

Learn what Corporation Tax is, how it works for small companies in the UK, and what you need to do to stay compliant. Understand the current rates, deadlines, and how to calculate and pay it correctly.

If you run a limited company in the UK, one of your most important tax obligations is paying Corporation Tax. This tax is charged on your company’s profits and applies to businesses of all sizes, including small and newly established companies.

Understanding how Corporation Tax works helps you plan your finances, avoid penalties, and make your business more tax efficient.

This article explains what Corporation Tax is, who pays it, how to calculate it, and what small companies need to do to stay compliant with HMRC.

What is Corporation Tax?

Corporation Tax is a tax on the profits made by limited companies and some other organisations such as clubs, cooperatives, and associations. It is similar to Income Tax but applies to businesses rather than individuals.

Companies pay Corporation Tax on their taxable profits, which include:

  • Trading profits from normal business activities.

  • Investment income, such as interest or rental income.

  • Capital gains from selling assets like property or equipment.

Unlike individuals, companies do not receive a tax-free personal allowance. Every pound of profit is potentially taxable, although you can reduce your bill by claiming allowable expenses, reliefs, and deductions.

Who pays Corporation Tax?

Corporation Tax applies to:

  • UK limited companies.

  • Foreign companies with a UK branch or office.

  • Some clubs, societies, and non-profit organisations.

If you are a sole trader or partnership, you do not pay Corporation Tax. Instead, you pay Income Tax on your business profits through Self Assessment.

Once your company is registered with Companies House, HMRC is automatically notified. You must then register for Corporation Tax within three months of starting to trade.

Current Corporation Tax rates

As of the 2024/25 tax year, the UK has two main Corporation Tax rates:

  • 19% small profits rate for companies with profits up to £50,000.

  • 25% main rate for companies with profits over £250,000.

Companies with profits between £50,000 and £250,000 pay a marginal rate, meaning they effectively pay a blended rate between 19% and 25%.

These thresholds are divided among associated companies. For example, if you own two companies, the £50,000 and £250,000 limits are shared between them.

How Corporation Tax is calculated

To work out how much Corporation Tax your company owes, follow these steps:

  1. Calculate your accounting profit
    This is the total income from your business minus business expenses.

  2. Adjust for tax purposes
    Some expenses are not allowable for Corporation Tax, such as client entertainment or fines. You must add these back to your profit.

  3. Apply any capital allowances
    You can deduct the cost of qualifying equipment, machinery, and vehicles through capital allowances.

  4. Claim any reliefs or deductions
    This includes research and development (R&D) tax relief, losses carried forward, or Patent Box relief.

  5. Apply the correct Corporation Tax rate
    Once you have your taxable profit figure, apply the 19%, 25%, or marginal rate as appropriate.

The final figure is your company’s Corporation Tax bill for the accounting period.

Deadlines for paying and filing Corporation Tax

Corporation Tax has two key deadlines:

  • Payment deadline: You must pay your Corporation Tax within nine months and one day after the end of your accounting period. For example, if your company’s year end is 31 December, payment is due by 1 October of the following year.

  • Filing deadline: You must file your Company Tax Return (CT600) within 12 months of the accounting period end.

You must file your return and accounts online using HMRC’s digital system or through approved accounting software.

Late filing or payment can lead to penalties and interest, so it is important to stay organised and plan ahead.

Allowable expenses for Corporation Tax

You can reduce your taxable profits by claiming expenses that are wholly and exclusively for business purposes. Examples include:

  • Staff wages and pension contributions.

  • Rent, utilities, and office supplies.

  • Professional fees such as accountancy and legal services.

  • Marketing, advertising, and website costs.

  • Business travel and vehicle expenses.

However, some costs are disallowed, such as entertaining clients, personal expenses, or fines. Your accountant can help ensure only legitimate expenses are included.

Tax reliefs available to small companies

Small businesses may qualify for several reliefs that reduce their Corporation Tax bill, such as:

  • Annual Investment Allowance (AIA): 100% relief on qualifying equipment and machinery purchases up to £1 million per year.

  • Research and Development (R&D) Relief: For companies investing in innovation or new technology.

  • Business Asset Disposal Relief (BADR): Reduces Capital Gains Tax when selling part or all of a business.

  • Loss relief: If your company makes a loss, you can carry it forward or back to reduce tax in other years.

Taking advantage of these reliefs can significantly lower your overall tax burden.

Record keeping requirements

To file accurate returns, your company must keep detailed financial records, including:

  • Sales and income records.

  • Receipts for expenses and purchases.

  • Payroll and VAT records.

  • Bank statements and invoices.

HMRC requires companies to keep these records for at least six years. Using digital accounting software helps ensure everything is stored safely and organised.

Paying Corporation Tax

You can pay Corporation Tax online via your HMRC business tax account, by bank transfer, or direct debit. Always use your company’s 17-digit payment reference to ensure it is applied to the correct account.

It is good practice to set aside funds regularly during the year so that you have enough to pay your tax when due.

How an accountant helps with Corporation Tax

An accountant plays a key role in ensuring your company meets its Corporation Tax obligations efficiently. They can:

  • Calculate your tax accurately.

  • Identify all allowable expenses and reliefs.

  • File your CT600 return and accounts on time.

  • Advise on tax planning strategies.

  • Help with HMRC correspondence or enquiries.

Working with an accountant saves time, reduces stress, and often results in lower tax bills through expert planning.

The bottom line

Corporation Tax is a fundamental part of running a limited company. While small businesses benefit from a lower rate, understanding the rules and deadlines is essential to stay compliant and avoid penalties.

By keeping accurate records, claiming all allowable expenses, and working with a qualified accountant, you can manage your Corporation Tax efficiently and ensure your business pays only what it owes.

Good tax planning is not just about compliance—it is about building a financially healthy company that retains more profit for future growth.