Corporation Tax UK: Complete Guide for Limited Companies in 2025/26

Corporation tax is the single largest annual liability for most UK limited companies. Get it wrong and you overpay, miss a deadline, or make extraction decisions that cost thousands. Get it right and you keep more profit in the business or in your pocket.

This guide covers the 2025/26 rates, how marginal relief actually works (with a step-by-step calculation), director salary and dividend strategy, R&D relief, CT600 filing, and practical year-end planning tactics. Whether you are a single-director company or scaling a team, this is the reference you need.

What is Corporation Tax and Who Pays It?

Corporation Tax applies to every company incorporated in the UK. It also applies to foreign companies with a UK permanent establishment. The tax is charged on three types of profit:

• Trading profits from the company's business activities
• Investment income such as bank interest and rental income
• Chargeable gains from selling company assets at a profit

Corporation Tax is the company's liability. It is separate from Income Tax, which directors pay personally on the salary and dividends they draw. A common misunderstanding is that the director and the company share one tax bill. They do not. The company pays Corporation Tax on its profits, and the director pays Income Tax on whatever they extract.

Every UK limited company must register for Corporation Tax with HMRC within three months of starting to trade. Even dormant companies must tell HMRC they have no tax to pay for the period. If you miss the registration window, HMRC can impose penalties.

Who does not pay Corporation Tax?

Sole traders and partnerships do not pay Corporation Tax. They pay Income Tax and National Insurance through Self Assessment instead. If you are a sole trader considering incorporation, the Ltd vs Sole Trader Calculator shows the tax difference side by side. Limited liability partnerships (LLPs) also fall outside Corporation Tax because each partner is taxed individually.

Corporation Tax Rates for 2025/26

The current rate structure has been in place since April 2023, when HMRC replaced the flat 19% rate with a two-tier system. For the 2025/26 tax year, the rates are:

Two things catch directors out with this table.

First, the marginal band is not a flat rate. It is a sliding scale. A company with £60,000 profit does not pay 25% on everything above £50,000. Instead, HMRC charges 25% on all profits and then applies marginal relief as a deduction. The effective rate creeps up gradually from 19% at £50,000 to 25% at £250,000.

Second, the marginal rate on each additional pound within the band can exceed 26%. This is counterintuitive because the headline rates are 19% and 25%, but the relief mechanism creates a steeper gradient in the middle. That matters for year-end planning, because moving £1,000 of profit from just above £50,000 to just below it saves more than the 19% rate alone would suggest.

Associated companies rule

The £50,000 and £250,000 thresholds are divided by the number of associated companies you control. If you have two associated companies, each gets a small profits threshold of £25,000 and a main rate threshold of £125,000. This anti-avoidance measure stops directors from splitting profits across multiple companies purely to stay in the small profits band.

A company is "associated" if one controls the other, or both are controlled by the same person or group. Dormant companies that have not traded during the accounting period are generally excluded from the count.

How Marginal Relief Works: A Step-by-Step Example

Marginal relief is one of the most misunderstood parts of Corporation Tax. Here is exactly how it works.

The formula

HMRC does not apply a blended percentage. Instead, the calculation follows this sequence:

1. Charge the full 25% main rate on all profits
2. Calculate marginal relief using the formula: Fraction x (Upper Limit - Profits) x (Profits / Profits)
3. Subtract the marginal relief from the 25% charge

The fraction for 2025/26 is 3/200 (0.015).

For a single company with no associated companies, the Upper Limit is £250,000 and the Lower Limit is £50,000.

Worked example: £100,000 profit

Let's say your company has taxable profits of £100,000.

Step 1: Full main rate charge £100,000 x 25% = £25,000

Step 2: Calculate marginal relief 3/200 x (£250,000 - £100,000) x (£100,000 / £100,000) = 3/200 x £150,000 x 1 = £2,250

Step 3: Corporation Tax due £25,000 - £2,250 = £22,750

Effective rate: £22,750 / £100,000 = 22.75%

That is £2,250 less than if you paid the full 25% rate, but £3,250 more than if you qualified for the 19% small profits rate. This is why profit management around the thresholds matters.

What happens at the boundaries

At exactly £50,000 profit, marginal relief reduces the tax charge to exactly 19%. At exactly £250,000, marginal relief drops to zero and you pay the full 25%. Between those points, the effective rate rises in a straight line. Use the Corporation Tax Calculator to model your exact profit level and see the effective rate instantly.

Payment Deadlines: When Corporation Tax is Due

Corporation Tax has two separate deadlines, and confusing them is one of the most common and expensive mistakes directors make.

Payment deadline: 9 months and 1 day after period end

You must pay your Corporation Tax bill 9 months and 1 day after the end of your accounting period. For a company with a 31 March year-end, the payment deadline is 1 January of the following year.

You do not need to have filed your CT600 to pay. In fact, HMRC expects you to estimate the amount and pay on time. If your final CT600 shows you overpaid, HMRC refunds the difference. If it shows you underpaid, interest runs from the original due date.

Filing deadline: 12 months after period end

The CT600 return itself is due 12 months after the end of your accounting period. For a 31 March year-end, the filing deadline is 31 March of the following year.

This means you pay three months before you file. Many directors assume they pay when they file. They do not, and this misunderstanding triggers late payment interest charges every year.

Late payment and filing penalties

Late payment interest is not a penalty. It runs automatically from the day after your payment deadline. Even if you are a week late, interest accrues. At current rates, a £20,000 bill paid two months late costs roughly £250 in interest alone.

Quarterly instalment payments

Companies with annual profits above £1.5 million (or £10 million for very large companies) must pay Corporation Tax in quarterly instalments during the accounting period, not after it. This is unlikely to affect most small companies, but if your business is growing quickly, be aware of the threshold.

CT600: What You File and How

The CT600 is your Corporation Tax return. It tells HMRC your taxable profits, the tax due, and any reliefs or deductions you are claiming. Here is what to know about the filing process.

What the CT600 contains

• Company turnover and trading profit
• Investment income and chargeable gains
• Deductions: business expenses, capital allowances, losses
• Corporation Tax calculation with marginal relief (if applicable)
• Any R&D or other reliefs claimed
• Tax already paid or due

iXBRL accounts

Most companies must submit iXBRL-tagged accounts alongside the CT600. iXBRL (Inline eXtensible Business Reporting Language) is a standardised digital format that allows HMRC to read your financial statements automatically. Your accounting software or accountant's software generates these as part of the filing process. You do not need to create them manually.

Filing methods

You can file the CT600 through HMRC's online service, through commercial software, or through your accountant. Most small companies use their accountant or a cloud accounting package that handles CT600 submission directly. HMRC no longer accepts paper returns for most companies.

First accounting period

New companies must notify HMRC of their first accounting period within three months of starting to trade. If your first period is longer than 12 months (which happens when the company incorporates several months before trading begins), you may need to split it into two periods for Corporation Tax purposes.

Director Salary vs Dividends: The Extraction Strategy

For most limited company directors, Corporation Tax is only the first layer of tax. The second layer is how you extract money from the company for personal use. The salary and dividend split is the most powerful lever you have.

Why the split matters

Salary is a deductible business expense. Every pound of salary reduces your company's taxable profit, saving 19% to 25% in Corporation Tax. But salary above certain thresholds attracts Income Tax and National Insurance for both the company (employer NI at 15%) and the director (employee NI at 8%).

Dividends are paid from post-tax profit. They carry zero National Insurance. The dividend tax rates for 2025/26 are 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). The first £500 of dividends above your Personal Allowance is tax-free under the Dividend Allowance.

The optimal salary for 2025/26

Most accountants recommend a director salary of £12,570 per year, equal to the Personal Allowance. At this level:

• No Income Tax is due (salary equals the tax-free threshold)
• No employee National Insurance is due (salary is at or below the NI Primary Threshold)
• A small amount of employer NI applies on salary above the Secondary Threshold of £9,100, roughly £520 per year
• The full £12,570 is deductible against Corporation Tax, saving between £2,388 (at 19%) and £3,143 (at 25%)

The Corporation Tax saving on the salary deduction more than offsets the employer NI cost. The net result: you extract £12,570 tax-free and save the company money compared to not paying a salary at all.

Some directors opt for a salary of £9,100 (the employer NI Secondary Threshold) to avoid employer NI entirely. This saves roughly £520 in employer NI but costs roughly £660 in lost Corporation Tax relief on the lower salary. For most single-director companies, £12,570 remains the better choice.

A worked comparison

Consider a company with £80,000 profit before any director pay.

Option A: All salary The director takes £80,000 as salary. Employer NI adds roughly £10,000. The director pays Income Tax and employee NI on the full amount. Total tax across company and director: approximately £28,000 to £30,000.

Option B: £12,570 salary + dividends The director takes a £12,570 salary (no Income Tax, no employee NI, £520 employer NI). The remaining £67,430 is subject to Corporation Tax at 19% (roughly £12,800), leaving approximately £54,600 available as dividends. Dividend tax at 8.75% on the basic rate portion costs roughly £4,700. Total tax across company and director: approximately £18,000 to £19,000.

The salary-plus-dividend approach saves over £10,000 per year at this profit level. The saving increases as profits rise. Model your own figures with the Dividend vs Salary Calculator.

Pension contributions: the third channel

Employer pension contributions are fully deductible for Corporation Tax and carry zero National Insurance for either party. For directors with profits well above the basic rate threshold, combining salary, dividends, and pension contributions produces the most tax-efficient total extraction.

A pension contribution of £40,000 (the standard Annual Allowance for most people) reduces taxable profits by £40,000. At 25% Corporation Tax, that is a £10,000 saving. The contribution grows tax-free inside the pension and is taxed at your marginal rate when you withdraw it, typically in retirement when your marginal rate is lower.

How Limited Companies Compare to Sole Traders

If you are deciding whether to incorporate, Corporation Tax is a central part of the equation. Here is how the tax position compares for the 2025/26 tax year.

For sole traders earning above roughly £30,000 to £35,000 profit, incorporation usually produces a lower overall tax bill. The crossover point depends on how much you extract, whether you use pension contributions, and your personal circumstances. The Ltd vs Sole Trader Calculator models the full comparison.

The trade-off is admin. A limited company requires annual accounts, a CT600 return, payroll for director salary, and Companies House filings. A sole trader files one Self Assessment return. If you are considering incorporation primarily to reduce tax, make sure the saving justifies the additional compliance cost.

For sole traders who are already required to file quarterly under Making Tax Digital, the admin gap is narrower. Read the MTD for sole traders guide for the full picture on quarterly reporting obligations.

Research and Development (R&D) Tax Relief

R&D relief is one of the most underused Corporation Tax reliefs. Many directors assume their work does not qualify because they do not think of it as "research." HMRC's definition is broader than most people expect.

What qualifies

Your company may qualify if it is working to:

• Advance science or technology by resolving uncertainty that a competent professional in the field could not readily resolve
• Develop new processes, products, or services that involve technical challenges
• Improve existing products or processes in ways that go beyond routine engineering

Software development, technical problem-solving, process innovation, and experimental manufacturing can all qualify. You do not need a laboratory or a white coat. A company building a new SaaS product, automating a manual process, or developing a novel construction technique may have qualifying expenditure.

The merged scheme (from April 2024)

Since April 2024, HMRC operates a single merged R&D scheme. Qualifying companies receive an above-the-line credit of 20% on qualifying R&D expenditure. This credit is taxable, giving an effective net benefit of roughly 15% for profitable companies and higher for loss-making ones.

Qualifying expenditure typically includes:

• Staff costs for employees directly involved in R&D activities
• Consumable materials used in R&D
• Software licences used for R&D
• Subcontractor costs (at a reduced rate)

How to claim

R&D relief is claimed through the CT600. You include the qualifying expenditure and the relief calculation in your return. HMRC recommends keeping detailed records of the technical work, the uncertainties involved, and how you resolved them. Many companies use specialist R&D consultants to prepare the claim, though this is not a requirement.

If you have never claimed R&D relief, review the last two accounting periods. You can amend a CT600 up to 12 months after the filing deadline, and many first-time claimants find they have qualifying expenditure they were not aware of.

Year-End Planning Tactics

The weeks before your accounting period ends are the most valuable window for Corporation Tax planning. Small decisions during this period can shift your effective rate and save thousands.

1. Manage profits around the thresholds

If your profits are just above £50,000, consider whether any allowable expenditure can be brought forward into the current period. An employer pension contribution, an equipment purchase under the Annual Investment Allowance, or pre-paying a deductible expense (such as rent or professional fees) can pull profits below the threshold and lock in the 19% rate on the full amount.

The same logic applies near £250,000, though the benefit is smaller. Moving from £255,000 to £248,000 saves the difference between 25% on the full amount and a lower blended rate with marginal relief.

2. Use the Annual Investment Allowance

The AIA lets you deduct the full cost of qualifying plant, machinery, and equipment in the year of purchase, up to £1 million per year. If you have been deferring a capital purchase, making it before year-end creates an immediate Corporation Tax deduction. This includes computers, vehicles (with some restrictions), office equipment, and machinery.

Full expensing (introduced April 2023) allows unlimited first-year relief at 100% for qualifying main rate plant and machinery, going beyond the AIA cap. This is particularly relevant for companies with significant capital expenditure plans.

3. Make employer pension contributions

Employer pension contributions are deductible against Corporation Tax and carry no National Insurance. Contributing to a director's pension before year-end reduces taxable profits pound for pound. The standard Annual Allowance is £60,000 (including any personal contributions and salary sacrifice). Directors who have not used their allowance in previous years may be able to carry forward unused allowance from up to three prior tax years.

4. Time your invoicing

If your company uses accruals accounting (most do), revenue is recognised when earned, not when received. But if you are on a cash basis for VAT or for certain small company elections, the timing of invoice issuance or payment collection can shift income between accounting periods. Discuss this with your accountant before acting.

5. Review director salary levels

If you have been paying yourself below the optimal £12,570 salary, consider adjusting it before year-end. The additional salary deduction reduces Corporation Tax. If you have been paying above that level without a clear reason, the excess may be generating unnecessary National Insurance costs.

6. Claim loss relief

If your company made a loss in a previous period, ensure it is carried forward and offset against current profits. If your company is making a loss this year, consider whether carrying it back to the previous profitable period would generate a Corporation Tax refund. Loss carry-back is limited to one year for most companies, so act before the window closes.

Using the Corporation Tax Calculator for Planning

A calculator is most useful when you run it multiple times with different scenarios. Do not just plug in your current profit and accept the result. Instead, model what happens if you:

• Increase your director salary from £9,100 to £12,570
• Make a £20,000 employer pension contribution
• Bring forward a £15,000 equipment purchase
• Claim R&D relief on qualifying expenditure

Each of these actions changes your taxable profit, and the calculator shows the exact impact on your Corporation Tax bill and effective rate. Run the scenarios before year-end so you have time to act.

Start with the Corporation Tax Calculator, then test your extraction strategy with the Dividend vs Salary Calculator. Together, they show both the company's tax position and your personal take-home.

For VAT-registered companies, the VAT Calculator completes the picture by modelling your VAT liability alongside Corporation Tax.

Good expense categorisation is the foundation of accurate tax calculations. If you are still sorting receipts manually, AI expense categorisation can automate the process and reduce errors in your quarterly reporting.

Common Mistakes That Cost Limited Companies Money

Corporation Tax errors are expensive. These are the ones accountants see most frequently.

Paying the bill late. Corporation Tax is due 9 months and 1 day after period end, not when you file the CT600. Many directors assume they can pay when they file. Late payment attracts interest from day one at the Bank of England base rate plus 2.5%.

Missing capital allowances. Qualifying plant, machinery, and equipment can be fully expensed in the year of purchase under the Annual Investment Allowance. Many companies spread the cost over several years instead, deferring tax relief they could claim immediately.

Not claiming R&D relief. The merged R&D scheme provides a 20% above-the-line credit on qualifying expenditure. Many tech, engineering, and product businesses miss this because they do not recognise their activities as R&D under HMRC's broad definition.

Taking dividends without distributable reserves. Dividends must be paid from retained post-tax profit. Drawing dividends when no distributable reserves exist creates an unlawful distribution. This is not just a tax problem: it is a Companies Act breach with personal liability implications for directors.

Ignoring marginal relief. Directors near the £50,000 or £250,000 thresholds sometimes assume they pay either 19% or 25% flat. Understanding the blended marginal rate can change pension contribution, salary, or timing decisions worth thousands of pounds.

Forgetting associated companies. If you control more than one company, the thresholds are divided. Two associated companies each get £25,000 and £125,000 thresholds instead of £50,000 and £250,000. Failing to account for this can result in underpayment and interest charges.

Not registering on time. New companies must register for Corporation Tax within three months of starting to trade. Missing this deadline can trigger penalties and means HMRC has no record of your first accounting period.

What Changes in 2026 and Beyond

The Autumn Statement 2024 confirmed that the 25% main rate and 19% small profits rate will remain in place for the foreseeable future. There are no planned changes to the marginal relief thresholds or the associated companies rules for 2026/27.

However, the broader compliance landscape is shifting. Making Tax Digital for Corporation Tax is on HMRC's roadmap, though no mandatory date has been set for limited companies. When it arrives, quarterly digital reporting will apply to Corporation Tax in the same way it currently applies to VAT and (from April 2026) to Income Tax for sole traders. Building good digital record-keeping habits now will make that transition smoother.

The government has also signalled ongoing review of R&D tax relief, particularly around compliance and preventing fraudulent claims. Companies claiming R&D relief should ensure their documentation is thorough and their claims are defensible.

Key Takeaways for 2025/26

Corporation Tax is straightforward in principle: calculate your taxable profits, apply the correct rate, pay on time, file on time. The complexity lies in optimising the result through salary, dividends, pension contributions, capital allowances, R&D relief, and loss management.

The directors who pay the least tax are the ones who plan before year-end, not the ones who react after the fact. A few hours of planning with a calculator and an accountant can shift your effective rate by several percentage points, saving thousands of pounds every year.

Start by modelling your position with the Corporation Tax Calculator. Then test your extraction strategy. Then act before your accounting period closes.

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