How much corporation tax does your
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What is Corporation Tax and who pays it?

Corporation Tax is a direct tax on the profits of UK limited companies. Every company incorporated in the United Kingdom, and every foreign company with a UK permanent establishment, must pay Corporation Tax on its taxable profits. This includes trading profits, investment income, and chargeable gains. Unlike Income Tax, which is paid by individuals, Corporation Tax is the company's own liability and is entirely separate from any personal tax the directors pay on salaries or dividends they draw from the business.

For the 2025/26 tax year, HMRC applies two main rates. Companies with profits up to £50,000 pay the small profits rate of 19%. Companies with profits above £250,000 pay the main rate of 25%. Profits that fall between £50,000 and £250,000 are subject to marginal relief, which produces an effective blended rate that can reach as high as 26.5% at the margins. This marginal relief mechanism replaced the flat 19% rate that applied to all companies before April 2023.

Associated companies share the £50,000 and £250,000 thresholds. If you control two companies, each threshold is divided by the number of associated companies. Two associated companies each get a small profits threshold of £25,000 and a main rate threshold of £125,000. This anti-avoidance measure prevents directors from splitting profits across multiple companies purely to stay within the small profits band.

How Corporation Tax is calculated: rates and marginal relief

Corporation Tax is calculated on your company's taxable profits for the accounting period. Start with total income (trading profits, interest received, rental income, and chargeable gains), then deduct allowable business expenses, capital allowances, and any losses brought forward from previous periods. The resulting figure is your taxable profit.

For companies in the marginal relief band (£50,001 to £250,000), the calculation is not a simple percentage. HMRC first charges the full 25% main rate on all profits, then applies marginal relief as a deduction. The formula is: marginal relief = fraction x (£250,000 minus profits) x (profits / profits). The fraction for 2025/26 is 3/200. This means a company with exactly £50,000 profit pays an effective 19%, while a company at £250,000 pays exactly 25%. At around £60,000 profit, the marginal rate on the last pound earned can exceed 26%.

Understanding this mechanism matters because it affects decisions about timing of expenditure, pension contributions, and director salary levels. Moving £1,000 of profit from just above £50,000 to just below it can save more than the standard 19% rate would suggest, because marginal relief amplifies the tax saving on pounds near the threshold boundaries.

How to legally reduce your Corporation Tax bill

The most direct way to reduce Corporation Tax is to increase allowable deductions. Director salary is a deductible expense: paying a salary of £12,570 (the Personal Allowance) reduces company profits by that amount, saving between 19% and 25% in Corporation Tax with no personal Income Tax liability for the director. Employer pension contributions are also fully deductible and carry no National Insurance cost for the company.

Capital allowances let you deduct the full cost of qualifying plant, machinery, and equipment in the year of purchase under the Annual Investment Allowance (AIA), which currently covers up to £1 million per year. Full expensing, introduced in April 2023, allows unlimited first-year relief at 100% for qualifying plant and machinery. This is particularly powerful for companies planning significant capital expenditure.

R&D tax relief remains one of the most underused reliefs. Under the merged R&D scheme (from April 2024), qualifying companies can claim an above-the-line credit of 20% on qualifying expenditure. Loss-making companies can claim a higher rate. If your company develops new processes, products, or technical solutions, the activities may qualify even if you do not consider them "research" in the traditional sense.

Common mistakes that cost limited companies money

Corporation Tax errors can be expensive. The mistakes below are the ones HMRC encounters most frequently with limited company returns, and each can cost hundreds or thousands of pounds in overpaid tax, penalties, or interest charges.

Paying the bill late. Corporation tax is due 9 months and 1 day after period end, months before the CT600 is due. 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 (up to £1 million). Many companies spread the cost incorrectly over several years instead.

Not claiming R&D relief.SME R&D relief allows qualifying companies to deduct 130% of research and development costs. Many tech and product businesses miss this because they don't recognise their activities as R&D under HMRC's definition.

Taking dividends when the company has no retained profit.Dividends must be paid from distributable reserves (retained profits after tax). Drawing dividends when no distributable reserves exist creates an unlawful distribution, treated as a director's loan.

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

Reporting to HMRC: CT600 deadlines and requirements

The CT600 is the Corporation Tax return you file with HMRC. It is due within 12 months of the end of your accounting period. This is important: the filing deadline is after the payment deadline. Corporation Tax must be paid 9 months and 1 day after period end, but the CT600 can be filed up to 12 months after. Many directors confuse the two and pay late because they assumed the filing date was also the payment date.

iXBRL (Inline eXtensible Business Reporting Language) accounts must accompany the CT600 for most companies. This is a standardised digital format that allows HMRC to read your financial statements automatically. Most accounting software generates iXBRL-tagged accounts as part of the filing process. Companies must also notify HMRC of their first accounting period within 3 months of starting to trade.

Penalties for late filing start at £100 if the return is up to 3 months late, and increase to £200 for returns more than 3 months overdue. After 6 months, HMRC can estimate the tax due and charge 10% of that amount as a penalty. After 12 months, a further 10% is added. Interest on late payment runs from the original due date, currently at the Bank of England base rate plus 2.5%.