Corporation tax can feel confusing when you first face it. Many business owners worry about getting it wrong, missing deadlines, or paying more than they should.
The good news is that once you understand the key steps, corporation tax becomes much easier to manage. With the right records, clear figures, and the right support, you can work out your liability with confidence.
In this guide, we break everything down in simple terms. You will learn what corporation tax is, how the rate works, and how to calculate it step by step.
This guide is written for UK small businesses, limited company owners, and directors who want clear, no-nonsense advice.
What Is Corporation Tax?
Corporation tax is a tax paid on the profits of UK limited companies. It is similar to income tax, but it is applied to businesses instead of individuals.
You pay corporation tax on profits that come from:
- Trading income
- Rental or investment income held by the company
- Capital gains when the company sells assets at a profit
Sole traders and partnerships do not pay corporation tax. They pay income tax through self assessment instead.
If you run a limited company, you must calculate your profit, apply the correct tax rules, and pay HMRC on time.
Why Your Accounting Period Matters
Your accounting period is the time period used for your company’s financial records. In most cases, it matches your financial year.
Corporation tax is calculated based on the profit your company makes during this accounting period.
Your accounting period usually:
- Starts the day your company begins trading
- Lasts up to 12 months
- Matches the period shown on your company accounts
If your first year is longer than 12 months, it may be split into two periods for tax.
Understanding the dates is important, because deadlines for filing and payment are linked to your accounting period.
Corporation Tax Rates in the UK
The main corporation tax rate applies to most companies.
From recent rule changes, the rate depends on the level of profit your business makes.
- Small profits are taxed at a lower rate
- Higher profits are taxed at the main rate
- Medium profits may receive marginal relief
These rules aim to make tax fairer for businesses of different sizes. Your rate is not always the same each year.
This is why it is important to calculate taxable profit correctly before applying the rate.
How Is Corporation Tax Calculated in the UK?
Calculating corporation tax may seem daunting at first. However, it follows a clear sequence of steps that take you from your business revenue to the final amount of tax due. These steps ensure that your tax bill reflects your true business position after adjustments, reliefs, and allowable costs.
Step 1: Calculate Your Total Income and Sales
The first step to working out corporation tax is to figure out your total income or revenue. This is the total money your company received during the accounting period from all business activities.
Start by gathering:
- Sales income from goods or services
- Interest or investment income
- Any rental income if your company lets property
- Other revenue sources like royalties or licensing
It is important that this figure includes every payment your business received in the period. This total figure does not yet consider expenses or costs, it simply shows what you earned.
Accurate record keeping at this stage makes everything that follows easier. Good bookkeeping tools and bank feeds help ensure you do not miss any income.
Step 2: Understand Your Accounting Profit
Once you have your total income, the next step is to calculate your accounting profit. This is usually shown in your company accounts before tax is taken off.
Accounting profit is:
Income minus business expenses
Expenses may include salaries, office rent, costs of goods sold, and professional fees. At this stage, the profit reflects the outcome before any tax adjustments are made.
This accounting profit is not the figure HMRC uses directly for tax. It is the starting point before tax adjustments.
Step 3: Deduct Allowable Business Expenses
Not all costs are equal when calculating tax. Allowable business expenses are those that relate directly to running the business and are permitted as deductions for tax purposes.
Common allowable expenses include:
- Staff wages and salaries
- Rent and utility bills for business premises
- Office supplies and equipment
- Business travel and vehicle costs related to work
- Marketing and advertising costs
- Accountancy and legal fees
These allowable costs reduce your taxable profit. Make sure that each expense claimed is genuine and supported by receipts or invoices. HMRC may ask for proof, so keep records secure and organised.
Step 4: Add Back Disallowable Expenses
Some costs that appear in your accounts cannot be deducted for tax. These are called disallowable expenses. They must be added back to your profit when calculating taxable profit.
Common disallowable expenses include:
- Client entertainment costs
- Fines and penalties paid to authorities
- Personal expenses run through the business
- Certain legal costs not related to trading activities
Adding back disallowable expenses ensures that only genuine business costs reduce your taxable profit. Failure to add these back can lead to an underpayment of tax.
Step 5: Apply Capital Allowances and Depreciation
Assets your business buys, such as machinery, equipment, or vehicles, are treated differently for tax compared to normal business expenses. In your accounts, you may show depreciation, which spreads the cost over several years. However, for tax, depreciation is not usually allowed.
Instead, you claim capital allowances. These allow you to deduct a portion of the cost of qualifying assets from your taxable profits. The most common type is the Annual Investment Allowance (AIA), which often allows a full deduction in the year of purchase up to a set limit.
Other allowances may apply for certain types of assets. Claiming capital allowances correctly can significantly reduce your taxable profit.
Step 6: Consider Tax Reliefs and Adjustments
Several tax reliefs and adjustments may reduce the amount of corporation tax you pay. These include:
- Research and Development (R&D) relief for innovative projects
- Loss relief, which allows trading losses to be offset against profits
- Investment reliefs for certain long-term capital investments
Each relief has specific rules and qualifying conditions. Make sure you understand the criteria and keep relevant documentation.
Some reliefs can be claimed in the current year, while others can be carried forward or back to reduce tax in other periods.
Step 7: Calculate Your Taxable Profit
After adjusting for disallowable expenses, capital allowances, and reliefs, you arrive at your taxable profit. This is the final profit figure that HMRC uses to calculate your corporation tax.
Taxable profit is not the same as accounting profit. It reflects adjustments required by tax law, rather than accounting standards.
Getting this figure correct is vital. It ensures you pay the right amount of tax and reduce the risk of HMRC queries.
Step 8: Apply the Relevant Corporation Tax Rate
Once your taxable profit is known, you apply the correct corporation tax rate. In the UK, different rates may apply depending on the size of your profit.
The rate you use depends on whether your profits fall into:
- Small profits band
- Main corporation tax rate
- Marginal relief if profits sit between bands
After applying the relevant rate, you arrive at your corporation tax liability for the year. This is the amount you need to pay HMRC, subject to timing and payment deadlines.
Business Expenses and Allowable Expenses
Understanding expenses is one of the easiest ways to reduce corporation tax legally. If an expense is wholly and exclusively for business, it is usually allowable.
Allowable expenses
Allowable expenses reduce taxable profit. Common examples include:
- Staff salaries and wages
- Office rent, utilities, and broadband
- Software and subscriptions
- Equipment repairs and maintenance
- Professional fees such as bookkeeping and accountancy
- Marketing, advertising, and websites
- Business travel and mileage
- Training related to the job
- Employer pension contributions
Recording expenses correctly ensures you do not overpay tax.
Disallowable expenses
Some costs cannot be deducted because they are personal or not directly related to business operations. These include:
- Personal spending mixed into business accounts
- Fines and penalties
- Donations that do not qualify for relief
- Depreciation charges in accounts
These items must be added back when calculating taxable profit.
Entertaining and non-deductible costs
Client entertainment is a common mistake. Meals, drinks, events, and hospitality are not allowable for corporation tax, even if they help build relationships.
Staff entertainment, such as an annual staff party, may sometimes be allowable, but rules apply. When unsure, it is safer to check or seek advice before claiming.
Capital Allowances and Tax Reliefs
Some business purchases, such as machinery, computers, vehicles, and equipment, are treated as assets rather than day-to-day expenses. Instead of claiming them as normal costs, companies use capital allowances to reduce taxable profits.
The most common relief is the Annual Investment Allowance (AIA), which often lets you deduct the full cost of qualifying assets up to a set yearly limit. Other schemes, such as writing-down allowances, spread relief over several years for items that do not qualify for AIA.
On top of this, there are specialist tax reliefs such as Research & Development (R&D) relief and reliefs for investing in certain types of plant, machinery, or environmentally-friendly equipment.
Claiming capital allowances correctly can significantly reduce a company’s corporation tax bill, but each relief has rules, so accurate records and, where needed, professional advice are important.
Marginal Relief and How It Affects Corporation Tax
Marginal Relief applies to companies whose profits fall between the small-profits threshold and the main corporation tax rate threshold. Instead of jumping straight to the higher rate, Marginal Relief gradually increases the effective tax rate as profits rise.
This system ensures that businesses in the middle band do not face a sudden tax spike simply because they slightly exceeded the small-profits limit.
The calculation can be technical, as it considers your profits, associated companies, and any distributions. The result is a blended effective rate that sits between the lower and higher rates.
Using a Marginal Relief calculator or speaking with an expert accountant can help ensure the right amount of tax is applied.
Calculating Your Final Corporation Tax Liability
To calculate your final corporation tax liability, you follow a structured process:
- Start with your accounting profit from your company accounts.
- Deduct allowable expenses.
- Add back any disallowable expenses.
- Apply capital allowances and qualifying tax reliefs.
- Account for Marginal Relief if applicable.
- Apply the correct corporation tax rate to the resulting taxable profit.
Once the tax figure is calculated, compare it against any payments on account or group adjustments. The final result is the corporation tax due to HMRC.
This figure must then be paid by the deadline, usually nine months and one day after the end of your accounting period.
Example of Corporation Tax Calculation
Let’s look at a simple example to show the process in action.
A company earns £180,000 in total revenue. Its allowable expenses, including wages, rent, and operating costs, total £80,000. The accounting profit is therefore £100,000.
Within those costs, there is £2,000 of client entertainment, which is disallowable, so it must be added back. The company also purchased equipment worth £10,000, which qualifies for capital allowances under AIA.
Calculation:
- Accounting profit: £100,000
- Add disallowable expenses: +£2,000
- Subtotal: £102,000
- Deduct capital allowances: −£10,000
Taxable profit = £92,000
You then apply the relevant corporation tax rate (and Marginal Relief if appropriate) to arrive at the final tax bill.
How Much Corporation Tax on £100k Profit?
The corporation tax on £100,000 profit depends on whether the business qualifies for the small-profits rate, the main rate, or Marginal Relief. For many companies, the effective rate will sit somewhere between the two.
As a simple estimate, you can expect corporation tax on £100,000 profit to be several tens of thousands of pounds, depending on reliefs and adjustments available.
However, capital allowances, losses brought forward, and other reliefs can significantly reduce the final amount payable, which is why planning ahead is so valuable.
Using a Corporation Tax Calculator
Corporation tax calculators are helpful tools to estimate your tax bill. They can give you a snapshot of what to expect before you complete your final figures.
Calculators are especially useful for planning and budgeting, as they show how changes in profit affect your tax.
Marginal Relief Corporation Tax Calculator
A Marginal Relief calculator is designed for businesses whose profits are in the mid-range. It shows how marginal relief reduces the tax rate gradually rather than jumping from one rate to another.
This tool helps companies estimate the exact tax when profits sit close to band thresholds.
Limited Company Tax Calculator
A limited company tax calculator helps you estimate tax based on your company profit and expected allowances. It typically involves inputting:
- Profit amount
- Capital allowances
- Amount of reliefs claimed
The tool then gives an approximate tax figure. Remember, online calculators provide estimates only. They should not replace professional advice or precise year-end calculations.
When and How to Pay Corporation Tax
Corporation tax payments are due nine months and one day after the end of your accounting period. For example, if your accounting period ends on 31 March, payment must be made by 1 January the next year.
Payment methods include:
- Online banking using your corporation tax reference
- Direct debit with HMRC
- Business debit or credit card (fees may apply)
Late payments can result in interest and penalties. Always check the exact deadline on HMRC’s online services and set reminders to avoid missing dates.
Corporation Tax Filing Obligations
Filing a corporation tax return is a legal requirement for UK limited companies. You must submit:
- Your company accounts
- Your corporation tax calculation (CT600 form)
- Details of any tax reliefs claimed
Returns are usually filed online using HMRC’s Corporation Tax Online service or through commercial accounting software.
Your accounts must support the figures you enter. Discrepancies can lead to HMRC enquiries or penalties, so accuracy is important.
Common Corporation Tax Calculation Mistakes
Even experienced directors can make errors when calculating corporation tax. Some common mistakes include:
- Claiming personal expenses as business costs
- Forgetting to add back disallowable items
- Incorrect capital allowance claims
- Missing reliefs you are entitled to
- Miscalculating the accounting period dates
Avoiding these mistakes saves you time, stress, and potential penalties. Good record keeping throughout the year helps reduce errors at tax time.
How to Reduce Corporation Tax Legally
There are lawful ways to reduce your corporation tax bill without risking trouble with HMRC. These include:
- Claiming all legitimate business expenses
- Making use of capital allowances
- Utilising loss reliefs from previous periods
- Considering tax-efficient remuneration strategies such as pension contributions
- Planning expenditure to maximise reliefs
Careful planning throughout the year makes a real difference to your tax position. Professional advice can help you choose the most effective approach for your business.
