Corporation Tax UK Guide

Corporation Tax is the tax paid by UK limited companies on their taxable profits. It applies to all companies incorporated in the UK, as well as foreign companies with a UK permanent establishment. Sole traders and partnerships do not pay Corporation Tax — they pay Income Tax through Self Assessment instead.

What Is Corporation Tax?

When a limited company earns money, it must pay Corporation Tax on its taxable profits. This includes trading profits (revenue minus allowable expenses), investment income (such as interest on savings), and chargeable gains (profits from selling company assets). The company itself is liable for the tax — it is separate from any personal tax owed by directors or shareholders.

• Limited companies (Ltd): All UK-incorporated limited companies must register for and pay Corporation Tax.
• Foreign companies: Non-UK companies trading through a UK permanent establishment also pay Corporation Tax on UK profits.
• Not sole traders: Sole traders and partnerships pay Income Tax, not Corporation Tax. The rules are different.

Corporation Tax Rates (2025/26)

The marginal relief fraction is 3/200. In practice, a company with profits of £150,000 (midway in the band) pays an effective rate of roughly 22%. The thresholds are divided by the number of associated companies, which can significantly reduce the limits for groups.

What Counts as Taxable Profit?

Corporation Tax is charged on total taxable profits, which include:

• Trading profits: Revenue from the company’s trade or business, minus allowable expenses.
• Investment income: Bank interest, rental income, and other non-trading income.
• Chargeable gains: Profits from selling or disposing of company assets (e.g. property, shares in other companies, equipment).

Taxable profit is calculated after deducting all allowable business expenses and capital allowances, but before dividends are paid out. Dividends paid by the company are not a deductible expense.

Allowable Deductions

To qualify as an allowable deduction, an expense must be incurred "wholly and exclusively" for business purposes. Common allowable expenses include:

• Staff costs: Salaries, wages, employer NI contributions, pension contributions, and staff benefits.
• Premises costs: Rent, business rates, utilities, repairs, and maintenance of business premises.
• Materials and stock: Raw materials, goods purchased for resale, and consumables used in the business.
• Professional fees: Accountancy fees, legal fees (for trading purposes), and audit costs.
• Travel and subsistence: Business travel, accommodation, and meals where incurred for business purposes.
• Marketing and advertising: Website costs, digital marketing, printed materials, and PR fees.
• Bad debts: Specific debts that have been written off as irrecoverable can be deducted. General provisions are not allowable.
• Interest on business loans: Interest on loans taken out for business purposes (subject to the corporate interest restriction for larger groups).

Capital Allowances

When a company buys capital assets (equipment, machinery, vehicles), the cost is not deducted as a revenue expense. Instead, the company claims capital allowances, which spread the tax relief over time — or in some cases provide immediate relief.

R&D Tax Relief

Companies that carry out qualifying research and development can claim additional tax relief on their R&D expenditure. The relief is designed to encourage innovation and applies to costs such as staff, software, consumables, and subcontracted R&D work.

• Merged scheme (from 1 April 2024): The SME and large company (RDEC) schemes have been merged into a single scheme. Companies can claim an above-the-line credit of 20% of qualifying R&D expenditure.
• R&D intensive SMEs: Loss-making SMEs where R&D expenditure represents 30% or more of total expenditure can claim a higher rate of relief, with a payable credit of up to 27% of the loss surrendered.
• Qualifying expenditure: Staff costs directly engaged in R&D, software, consumable items, and payments to clinical trial volunteers. The project must seek an advance in science or technology.

R&D claims can be complex, and HMRC has increased scrutiny in recent years. Professional advice is strongly recommended to ensure claims are robust and compliant.

Key Deadlines

Loss Relief

If your company makes a trading loss, there are several ways to use that loss to reduce your Corporation Tax bill:

• Carry forward: Trading losses can be carried forward indefinitely and set against future profits of the same trade. From April 2017, carried-forward losses can also be set against total profits, subject to a £5m annual deductions allowance.
• Carry back: Trading losses can be carried back and set against profits of the preceding 12-month accounting period. This generates a tax refund for the earlier period.
• Group relief: Companies within a group (75% ownership) can surrender losses to profitable group members, reducing the group’s overall tax liability in the same accounting period.
• Same-period offset: A trading loss can be set against total profits (including investment income and chargeable gains) of the same accounting period.

Associated Companies Rules

The £50,000 small profits threshold and £250,000 main rate threshold are divided by the number of associated companies. Two companies are associated if one controls the other, or both are under common control.

For example, if a director controls two companies, each company’s thresholds are halved: the small profits rate applies up to £25,000 per company, and the main rate kicks in at £125,000. This is a critical consideration for business owners with multiple companies and directly affects the Corporation Tax rate paid.

Dividends vs Salary: Tax-Efficient Extraction

Director-shareholders of owner-managed companies need to decide how to extract profits. The two main routes are salary and dividends, and the tax treatment differs significantly:

• Salary: A deductible expense for the company (reduces Corporation Tax), but subject to Income Tax and both employee and employer National Insurance contributions. Employer NI at 15% (from April 2025) is a significant cost.
• Dividends: Paid from post-tax profits (not a deductible expense), but not subject to National Insurance. Dividend tax rates are lower than Income Tax rates: 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate).
• Common strategy: Many director-shareholders take a small salary (typically around the NI secondary threshold to preserve State Pension qualifying years while minimising employer NI), and extract the remainder as dividends.
• Pension contributions: Employer pension contributions are a deductible expense for the company and are not subject to employer NI, making them a highly tax-efficient way to extract value from the company.

The optimal split between salary, dividends, and pension contributions depends on your specific circumstances. An accountant can model scenarios to minimise the combined tax burden across the company and your personal tax position.

When Do You Need an Accountant?

While it is possible to file a CT600 yourself, most limited company directors benefit from professional support. An accountant can help with:

• Preparing statutory accounts and the CT600 return
• Maximising allowable deductions and capital allowances
• R&D tax relief claims
• Planning the most tax-efficient salary and dividend strategy
• Loss relief planning and group relief claims
• Dealing with HMRC enquiries and compliance