What is Corporation Tax and How Does It Affect Your UK Business?
If you run a limited company in the UK, you’ve likely encountered Corporation Tax, one of your business’s most important financial obligations. But what exactly is it, how much do you need to pay, and what are the consequences of getting it wrong?
This post gives an overview of what Corporation Tax is, who pays it, how much it costs, and what you can do to manage and reduce your business’s tax liability.
What Is Corporation Tax?
Corporation Tax is a direct tax on company profits. If you run a UK limited company, the profits your business makes after allowable expenses are subject to this tax. It’s a self-assessed tax, meaning it’s your responsibility to calculate how much you owe, report it to HMRC, and make payment by the deadline.
Corporation Tax is charged on:
- Trading profits (from selling goods or services)
- Investment income (such as bank interest or dividends)
- Capital gains (when your business sells an asset like equipment or property for more than it cost)
It is paid annually and is separate from taxes paid by business owners or employees. Directors who take salaries or dividends may also have personal tax liabilities, but those are dealt with through PAYE or Self Assessment, not Corporation Tax.
Who Needs to Pay Corporation Tax?
Corporation Tax applies to:
- Limited companies registered in the UK
- Foreign companies with a UK branch or office
- Unincorporated associations like sports clubs, co-operatives, or membership organisations that have business activities
If you’re a sole trader or in a partnership, you don’t pay Corporation Tax but you will pay Income Tax instead through Self Assessment.
New Company? You Must Register
If you’ve recently set up a limited company, you must register for Corporation Tax within three months of starting trading. “Trading” can mean:
- Making your first sale
- Advertising or marketing your service
- Renting an office
- Purchasing stock or materials
Failure to register on time could result in fines.
Register online here: Register for Corporation Tax – GOV.UK
Corporation Tax Rates for 2025/26
As of the 2025/26 tax year, Corporation Tax rates depend on your company’s taxable profits:
| Profit Band | Corporation Tax Rate |
| £0 – £50,000 | 19% (small profits rate) |
| £50,001 – £250,000 | Tapered rate between 19% and 25% |
| Over £250,000 | 25% (main rate) |
If your company has associated companies (i.e. under common control), the profit thresholds are divided across them, potentially pushing more of your profit into a higher tax band.
Marginal Relief Explained
If your company earns between £50,001 and £250,000, your tax rate is tapered using Marginal Relief, a formula that gradually increases the effective tax rate between 19% and 25%. It’s not a simple midpoint you’ll need your accountant or accounting software to calculate it correctly.
Example:
A company with taxable profits of £100,000 may pay an effective rate around 22%, not a flat rate of 19% or 25%.
Important:
If your business has associated companies (e.g. sister companies or subsidiaries), the thresholds are divided equally among them, potentially lowering the point at which the higher rates apply.
