What is Corporation Tax?

/Published:19th December 2025/inBusiness, Limited Company, Running a business
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If you run a limited company in the UK, you’ll need to pay Corporation Tax on your profits. It’s a core part of running a company, yet many new directors find the rules confusing, especially since rates, filing deadlines, and HMRC requirements change regularly.

So, what exactly is Corporation Tax? How is it calculated, who pays it, and what does HMRC expect from you when submitting a Company Tax Return?

This guide breaks everything down clearly and practically, giving you the confidence to handle your company’s tax obligations correctly. We’ll walk through:

Whether you’re a first-time director or simply want a clearer understanding of your responsibilities, this guide pulls together everything you need, with links to official HMRC resources, practical examples, and expert tips from our UK accounting team.

Useful resource: You can find HMRC’s official Corporation Tax guidance here: gov.uk/corporation-tax.

If you’d like support managing your company tax obligations, our team at Accounting Wise can take care of registrations, filings, bookkeeping and year-end accounts for you. Get in touch for tailored advice.

What is Corporation Tax?

Corporation Tax is a tax paid on the profits of UK limited companies. It’s charged on the money your company earns after allowable expenses, reliefs, and other deductions have been applied. Unlike sole traders – who pay Income Tax through Self Assessment – limited companies pay Corporation Tax directly to HMRC based on their annual accounts and Company Tax Return.

Corporation Tax applies to:

  • UK-incorporated limited companies – any business registered with Companies House must pay Corporation Tax on its taxable profits.
  • Foreign companies with a UK branch or office – these entities must pay Corporation Tax on profits generated within the UK.
  • Certain non-profit or member-led organisations such as clubs, co-operatives and unincorporated associations, if they generate taxable profits.

Your company is considered active for Corporation Tax as soon as it starts trading – even if you haven’t yet made a sale. Activities such as advertising, buying stock, or seeking investment can all count as “trading” under HMRC rules.

Tip: HMRC provides a clear definition of when a company becomes active for tax purposes. You can check the criteria here: Active or dormant for Corporation Tax.

Important: You must register for Corporation Tax with HMRC within 3 months of starting to trade. Failure to do so can lead to penalties.

Even if your company makes no profit, or even a loss, you still need to file a Company Tax Return unless HMRC explicitly tells you otherwise.

What Do You Pay Corporation Tax On?

Your company pays Corporation Tax on the profits it makes during its accounting period. HMRC splits these into several categories, and understanding each one helps ensure you report your income correctly and avoid penalties.

You’ll typically pay Corporation Tax on your company’s:

  • Trading profits – income from your core business activities, such as sales, services, consultancy work or manufacturing. This is your revenue minus allowable business expenses.
  • Investment income – including bank interest, rental income from company-owned property, and dividends from non-UK companies. (Dividends from UK companies are usually exempt from Corporation Tax, but must still be reported.)
  • Chargeable gains – profits made when your company sells or disposes of assets such as property, shares, equipment or intellectual property. These are similar to Capital Gains Tax for individuals but are calculated within the Corporation Tax system.

Corporation Tax is calculated on the profit after allowable expenses, depreciation adjustments, reliefs, and capital allowances have been applied. This means good bookkeeping and accurate year-end accounts play a crucial role in keeping your tax bill correct and often lower.

Tip: HMRC’s full breakdown of taxable profits is available here: Taxable profits for Corporation Tax.

Current Corporation Tax Rates

From April 2025, the UK uses a tiered Corporation Tax system based on your company’s taxable profits. This means not all companies pay the same rate – smaller profit levels are taxed at a lower rate, while larger companies pay a higher “main rate”.

The current Corporation Tax rates are:

  • 19% – the small profits rate for companies with profits up to £50,000.
  • 25% – the main rate for companies with profits over £250,000.
  • Companies with profits between £50,000 and £250,000 pay a rate based on marginal relief, which tapers the tax gradually from 19% up to 26.5%.

For the most up-to-date information see our corporation tax rates and allowances guide.

These thresholds may be reduced if your company has associated companies (businesses under the same control). In those cases, the profit limits are divided between the associated entities, meaning you may reach the higher rate sooner.

Example: If your company has one associated company, the £50,000 and £250,000 thresholds become £25,000 and £125,000 respectively.

Marginal relief ensures that companies do not jump straight from paying 19% to 26.5%. Instead, the effective rate increases smoothly, depending on your total profits and the number of associated companies.

Useful tool: HMRC’s marginal relief calculator helps you work out the exact amount due: Corporation Tax Marginal Relief.

For year-end planning and forecasting, our team can calculate your expected Corporation Tax liability and identify reliefs that might reduce your bill. Speak to an accountant.

What is a Company Tax Return?

A Company Tax Return is the formal process of reporting your company’s income, expenses, profits and tax calculations to HMRC. It tells HMRC how much Corporation Tax your company owes for its accounting period. Every active limited company must file a Company Tax Return – even if it makes a loss or owes no tax.

The return includes several key elements:

  • Form CT600 – the main tax return submitted to HMRC, containing your profit figures, tax adjustments, reliefs claimed and the final tax calculation.
  • Statutory accounts and supporting computations – detailed financial statements (balance sheet, profit and loss, notes) plus tax computations that explain how you arrived at your taxable profit.
  • Separate filing to Companies House – while HMRC and Companies House share some data, you must still file your statutory accounts with Companies House independently.

Your Company Tax Return deadlines are:

  • File your CT600 within 12 months of the end of your accounting period.
  • Pay your Corporation Tax within 9 months and 1 day after your accounting period ends.

These deadlines do not always align with your Companies House filing dates, which can cause confusion for new directors. Missing either deadline can result in penalties and interest charges from HMRC.

If you want support preparing accurate accounts, completing your CT600, or avoiding HMRC penalties, our specialists at Accounting Wise can manage the entire process for you. Get expert tax return help.

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What is Corporate Taxation?

Corporate taxation refers to the system through which governments tax the profits made by companies. In the UK, this system is known as Corporation Tax, and it applies to limited companies and certain other corporate bodies that generate taxable profits.

While the terminology varies around the world, the principle remains broadly consistent: businesses pay tax on the profits they make after allowable expenses, reliefs and deductions have been applied. However, individual countries set their own:

  • tax rates
  • profit thresholds
  • allowable expense rules
  • reliefs and incentives (e.g., R&D tax credits, investment allowances)
  • filing and payment deadlines

For companies operating internationally, these differences can affect how profits are allocated and taxed across borders. Many jurisdictions also operate double taxation treaties, which prevent the same income from being taxed twice. The UK holds treaties with over 130 countries.

Useful resource: You can view the UK’s full list of double taxation agreements here: UK tax treaties.

If your company trades globally or receives overseas income, it’s worth getting tailored advice to ensure you remain compliant and tax-efficient.

Corporation Tax Example

To see how Corporation Tax works in practice, let’s look at a simplified example of a UK limited company preparing its year-end figures.

  • Turnover: £200,000
  • Allowable expenses: £120,000
  • Profit before tax: £80,000

Since the company’s profits fall between £50,000 and £250,000, it will normally be subject to the main rate of 25% but may benefit from marginal relief, which reduces the effective rate slightly for companies in this profit band.

Basic calculation (before marginal relief): Corporation Tax owed = £80,000 × 25% = £20,000

In reality, HMRC’s marginal relief formula may reduce the final tax bill a little below £20,000, depending on:

  • the exact level of taxable profits
  • whether the company has any associated companies
  • capital allowances or other reliefs claimed
Tip: You can calculate your exact liability using HMRC’s Marginal Relief calculator: Corporation Tax Marginal Relief.

For a more accurate estimate, your accountant will also adjust profits using tax computations, capital allowances and any reliefs your company qualifies for – which often reduces the final Corporation Tax bill.

Common Mistakes with Corporation Tax

Corporation Tax can be straightforward once you understand the rules, but many new directors fall into the same traps. Here are the most common mistakes and how to avoid them.

  • Failing to register with HMRC within 3 months of starting to trade – your company becomes “active” for tax purposes as soon as it begins any trading activity. Not registering on time can lead to penalties. Register for Corporation Tax
  • Missing filing or payment deadlines – HMRC issues automatic fines starting at £100 for late submissions, and interest is charged on late payments. Remember:
    • CT600 filing deadline: 12 months after your accounting period ends
    • Corporation Tax payment deadline: 9 months and 1 day after year end
  • Mixing up director’s personal taxes with company taxes – your company is a separate legal entity. Director’s salary is taxed through PAYE, dividends are handled via Self Assessment, and none of this replaces the need for a Company Tax Return.
  • Not claiming allowable expenses, capital allowances or available reliefs – many companies overpay because they overlook items such as equipment purchases, software, mileage, R&D reliefs, or Annual Investment Allowance. Accurate bookkeeping and early tax planning can significantly reduce your bill.
  • Assuming dividends reduce Corporation Tax – dividends are paid from post-tax profits, so they do not reduce the Corporation Tax owed.
  • Poor record-keeping – missing receipts or incomplete accounts often lead to higher taxable profits or HMRC queries. Keep digital records and reconcile regularly.
Tip: Good bookkeeping throughout the year is the easiest way to avoid Corporation Tax errors. We recommend using accounting software such as Balance, Xero, QuickBooks or FreeAgent or letting an accountant manage it for you.

If you want help staying compliant and avoiding HMRC penalties, our team at Accounting Wise can handle your bookkeeping, year-end accounts and CT600 filing. Get support today.

Why Use an Accountant for Corporation Tax?

Corporation Tax is one of the more complex areas of running a limited company. The rules change frequently, HMRC expects accurate calculations, and penalties apply quickly if you get things wrong. Working with a qualified accountant ensures your company stays compliant while keeping your tax bill as low as legally possible.

An accountant can help you with:

  • Preparing and filing your Company Tax Return (CT600) – ensuring all figures, adjustments and computations meet HMRC requirements.
  • Claiming all allowable expenses, capital allowances and reliefs – from everyday business costs to Annual Investment Allowance, R&D tax relief and more. Missed claims often mean paying more tax than necessary.
  • Year-round tax planning – helping you structure your business, salary, dividends and investments in a tax-efficient way to reduce your overall liability.
  • Staying fully compliant – ensuring you never miss deadlines and avoiding HMRC penalties, interest or compliance checks caused by filing mistakes.
  • Support during HMRC enquiries – if HMRC raises a query, your accountant can respond professionally and protect your position.

At Accounting Wise, our dedicated team provides expert Corporation Tax services for UK companies of all sizes – from new startups to established businesses. We handle everything from bookkeeping to final accounts and CT600 submissions, giving you complete peace of mind.

Final Thoughts on ‘What is Corporation Tax’

So, what is Corporation Tax? In simple terms, it’s the tax UK companies pay on their profits and every active limited company must file a Company Tax Return and pay what’s owed each year. Understanding how the system works, knowing what HMRC expects, and keeping accurate records are essential parts of running a compliant and financially healthy business.

With the right guidance, Corporation Tax doesn’t have to be stressful. Staying informed and getting expert support ensures your company remains compliant, avoids unnecessary penalties, and makes the most of any reliefs or allowances available.

Need help with Corporation Tax? At Accounting Wise, we handle everything from bookkeeping and year-end accounts to CT600 filing, tax planning and HMRC compliance – giving you clarity, accuracy, and peace of mind.

Request a callback today about managing your Corporation Tax and keeping your business on the right track.

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What is Corporation Tax FAQ

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Any active UK limited company, plus certain clubs, associations and overseas companies with a UK branch, must pay Corporation Tax on their taxable profits.

You must register with HMRC within 3 months of starting to trade. Trading includes activities like advertising, buying stock or taking on clients.

As of April 2025, companies pay 19% on profits up to £50,000, 25% on profits over £250,000, and tapered rates in between using marginal relief.

Yes. You must file a CT600 unless HMRC explicitly tells you that you don’t need to. Loss-making companies still need to report their figures.

HMRC applies automatic penalties starting at £100, with interest added for late payments. Continued delays trigger larger fines.

You can claim allowable expenses such as software, marketing, travel and professional fees, as well as capital allowances on equipment and machinery.

Capital allowances let companies claim tax relief on significant business assets. The Annual Investment Allowance (AIA) often allows 100% deduction in the year of purchase.

Dividends do not reduce Corporation Tax. They are paid from post-tax profits and are taxed separately for the shareholder.

Marginal relief helps companies with profits between £50,000 and £250,000 gradually transition from the 19% rate to the 25% main rate.

Yes, especially if you’re new to running a company. An accountant helps with CT600 filing, tax planning, relief claims, compliance and avoiding HMRC penalties.

Glossary of Corporation Tax Terms

Corporation Tax – The tax UK limited companies pay on their taxable profits. Calculated and reported via the Company Tax Return.

Company Tax Return (CT600) – The formal tax return submitted to HMRC, detailing profits, adjustments, reliefs and the final Corporation Tax calculation.

Taxable Profits – The profits your company pays Corporation Tax on, including trading profits, investment income, and chargeable gains.

Allowable Expenses – Business costs that reduce taxable profit (e.g. software, marketing, travel, equipment). Must be “wholly and exclusively” for business use.

Capital Allowances – Tax relief on capital items like machinery, equipment, or vehicles. May be claimed through the Annual Investment Allowance or Writing Down Allowances.

Annual Investment Allowance (AIA) – A generous form of capital allowance allowing companies to deduct the full cost of qualifying assets (up to the AIA limit) from their profits.

Marginal Relief – A calculation that gradually increases the Corporation Tax rate for companies with profits between £50,000 and £250,000.

Small Profits Rate – The lower 19% Corporation Tax rate applied to companies with taxable profits up to £50,000.

Main Rate – The standard 25% Corporation Tax rate for companies with profits over £250,000.

Associated Companies – Companies under common control. Profit thresholds for Corporation Tax are shared between them, which can increase your effective tax rate sooner.

Chargeable Gains – Profits from selling company assets such as property, equipment, shares or intellectual property.

Trading Profits – Income from your company’s main business activities, minus allowable expenses.

Investment Income – Income such as bank interest, rental income or dividends from overseas companies.

Tax Computations – Detailed calculations showing how your accountant arrived at your taxable profit figure, including adjustments required by HMRC.

Statutory Accounts – Annual financial statements your company must prepare. Submitted to Companies House and attached to your CT600 for HMRC.

HMRC (His Majesty’s Revenue & Customs) – The UK government department responsible for collecting taxes, enforcing compliance, and administering Corporation Tax.

Accounting Period – The time period your Corporation Tax return covers. Usually matches your financial year but can differ when a company is newly formed or changes year-end.

Payment Deadline – Corporation Tax must be paid within 9 months and 1 day after the end of your accounting period.

MTD (Making Tax Digital) – An HMRC initiative requiring businesses to maintain digital records and submit tax returns using compliant software. Will apply to Corporation Tax in future phases.

Double Taxation Treaty – Agreements between the UK and other countries to ensure the same income isn’t taxed twice.

Disallowed Expenses – Costs that cannot be claimed against profit (e.g., client entertaining, fines, personal expenses). Including them incorrectly may trigger HMRC penalties.
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