How Do I Calculate Corporation Tax

Calculate your company’s corporation tax liability for the current financial year

Corporation tax is a tax on the profits of UK-limited companies and other organisations including clubs, societies, associations, and unincorporated bodies. Unlike income tax for individuals, corporation tax applies specifically to business profits, with different rules, rates, and deadlines.

This comprehensive guide explains everything you need to know about calculating corporation tax in the UK, including:

• Current corporation tax rates and thresholds
• Step-by-step calculation process
• How marginal relief works for profits between £50,000-£250,000
• Key deadlines and payment rules
• Common deductions and allowances
• Special cases (associated companies, ring fence profits)

1. Current Corporation Tax Rates (2024/25)

The UK corporation tax rate depends on your company’s taxable profits and whether you qualify for marginal relief. Here are the current rates:

Profit Range	Main Rate (2024/25)	Small Profits Rate	Marginal Relief Applies
Up to £50,000	–	19%	No
£50,001 – £250,000	25%	–	Yes
Over £250,000	25%	–	No

Important Note About Associated Companies

The £50,000 and £250,000 thresholds are divided by the number of associated companies. For example, if you have 2 associated companies:

• Lower threshold becomes £25,000 (£50,000 ÷ 2)
• Upper threshold becomes £125,000 (£250,000 ÷ 2)

2. Step-by-Step Corporation Tax Calculation

Calculating your corporation tax involves several steps. Here’s the complete process:

1. Calculate your accounting period

   This is typically 12 months but can be shorter for your first accounting period or if you change your accounting date.

2. Determine your taxable profits

   Start with your net profits from your accounts and make adjustments for:

   • Disallowed expenses (e.g., client entertaining, depreciation)
   • Capital allowances (instead of depreciation)
   • Other tax adjustments
3. Apply the correct tax rate

   Use the rates shown above based on your profit level and whether you have associated companies.

4. Calculate marginal relief (if applicable)

   For profits between the lower and upper thresholds, you’ll pay a tapered rate between 19% and 25%.

5. Subtract any tax credits or reliefs

   Such as R&D tax credits, creative industry reliefs, or patent box deductions.

6. Calculate your final liability

   This is the amount you need to pay to HMRC.

Marginal Relief Calculation

Marginal relief provides a gradual increase in the tax rate for companies with profits between the lower and upper thresholds. The formula is:

Marginal Relief = (Upper Limit – Taxable Profits) × (Standard Fraction)

Where:
– Upper Limit = £250,000 (divided by number of associated companies + 1)
– Standard Fraction = 3/200 (for 2024/25)

Then calculate your tax as:

Tax Due = (Taxable Profits × Main Rate) – Marginal Relief

3. Key Deadlines and Payment Rules

Unlike self-assessment for individuals, corporation tax has specific deadlines that depend on your accounting period:

Deadline	When It’s Due	Penalty for Late Payment
File Company Tax Return (CT600)	12 months after your accounting period ends	£100 immediate penalty, then daily penalties
Pay Corporation Tax	9 months and 1 day after your accounting period ends	Interest charged from due date
First payment on account (for large companies)	14 days after end of 6th month of accounting period	Interest on late payments

Example: If your accounting period ends on 31 December 2024:

• Tax return deadline: 31 December 2025
• Payment deadline: 1 October 2025

Payment Methods

You can pay your corporation tax:

• Online via HMRC’s payment service
• By bank transfer (CHAPS, Bacs, or Faster Payments)
• By debit/credit card (fees apply for credit cards)
• At your bank or building society

4. Common Deductions and Allowances

Before calculating your taxable profits, you can deduct allowable business expenses. Common deductions include:

Allowable Expenses

• Salaries and wages (including employer’s NI contributions)
• Rent for business premises
• Business rates
• Utilities (gas, electricity, water)
• Office supplies and equipment
• Business insurance
• Marketing and advertising costs
• Travel expenses (business-related only)
• Professional fees (accountants, solicitors)
• Bank charges and interest on business loans

Capital Allowances

Instead of deducting the full cost of capital assets (like equipment or vehicles) in one year, you claim capital allowances:

• Annual Investment Allowance (AIA): 100% deduction on qualifying plant and machinery up to £1 million per year
• Writing Down Allowance: 18% or 6% on remaining pool balances
• First-Year Allowances: 100% on certain energy-efficient equipment
• Structures and Buildings Allowance: 3% per year on qualifying construction costs

Disallowed Expenses

You cannot deduct:

• Client entertaining expenses
• Depreciation (use capital allowances instead)
• Fines or penalties
• Your own salary (if you’re a sole trader or partner)
• Non-business related expenses
• Costs of commuting between home and work

5. Special Cases and Exceptions

Associated Companies

If your company is associated with other companies (under common control), the tax thresholds are divided by the number of associated companies plus one. This can significantly affect your tax rate.

Example: If you have 2 associated companies:

• Lower threshold: £50,000 ÷ 3 = £16,667
• Upper threshold: £250,000 ÷ 3 = £83,333

Ring Fence Profits

Companies involved in oil extraction or oil rights in the UK or UK continental shelf pay a different rate:

• Ring fence corporation tax: 30%
• Supplementary charge: 10% (total 40%)

Non-Resident Companies

Non-UK resident companies are only taxed on:

• Profits from a UK permanent establishment
• Income from UK property
• Certain other UK-sourced income

6. How to Reduce Your Corporation Tax Bill Legally

There are several legitimate ways to reduce your corporation tax liability:

1. Claim all allowable expenses

   Ensure you’re claiming for all legitimate business expenses. Many companies miss out on valid deductions.

2. Maximise capital allowances

   Use the Annual Investment Allowance to get 100% tax relief on qualifying equipment purchases up to £1 million.

3. Research & Development (R&D) tax credits

   If your company is involved in innovative projects, you may qualify for R&D tax relief which can be worth up to 230% of your qualifying costs.

4. Patent Box regime

   Companies that own or exclusively license patents can apply a 10% corporation tax rate to profits derived from patented inventions.

5. Pension contributions

   Employer pension contributions are tax-deductible and can reduce your taxable profits.

6. Loss relief

   If your company makes a loss, you can carry it back to offset against previous years’ profits or carry it forward to offset against future profits.

7. Creative industry tax reliefs

   Companies in film, television, video games, and theatre production may qualify for enhanced deductions.

7. Common Mistakes to Avoid

Many companies make errors when calculating corporation tax that can lead to penalties or overpayment:

• Missing deadlines: Both the payment and filing deadlines are strict. Set reminders well in advance.
• Incorrect profit calculations: Forgetting to add back disallowed expenses or not claiming all allowable deductions.
• Ignoring associated companies: Not declaring associated companies can lead to incorrect tax calculations.
• Wrong tax rate: Applying the wrong rate (19% vs 25%) or not calculating marginal relief correctly.
• Late payment interest: HMRC charges interest on late payments from the due date.
• Not keeping proper records: You must keep records for at least 6 years after the end of the accounting period.
• Forgetting about payments on account: Large companies must make quarterly payments on account.

8. How to File Your Company Tax Return

You must file your Company Tax Return (form CT600) online using:

• HMRC’s online services
• Commercial accounting software
• An accountant or tax agent

The CT600 form includes:

• Company details
• Accounting period dates
• Profit and loss account information
• Tax calculations
• Claims for allowances and reliefs

You’ll need your:

• Company’s Unique Taxpayer Reference (UTR)
• Government Gateway user ID and password
• Accounts and tax calculations
• Details of any reliefs or allowances claimed

9. Corporation Tax vs Other Business Taxes

It’s important to understand how corporation tax differs from other business taxes:

Tax Type	Who Pays	Rate (2024/25)	Key Differences
Corporation Tax	Limited companies, organisations	19%-25%	Paid on company profits, separate from personal taxes
Income Tax	Individuals, sole traders, partners	20%-45%	Paid on personal income including business profits for unincorporated businesses
VAT	VAT-registered businesses	20% (standard rate)	Charged on sales, not profits. Quarterly returns.
National Insurance	Employers, employees, self-employed	Varies by class	Paid on salaries and self-employed profits
Business Rates	Business property occupiers	Varies by property	Local tax on business premises

10. Recent Changes and Future Outlook

The corporation tax landscape has changed significantly in recent years:

Recent Changes

• April 2023: Main rate increased from 19% to 25% for companies with profits over £250,000. Small profits rate remains at 19% for profits up to £50,000.
• April 2023: Introduction of marginal relief for profits between £50,000-£250,000.
• April 2023: Associated company rules changed to divide thresholds by number of associated companies + 1.
• April 2023: Bank corporation tax surcharge introduced (8% on profits over £100m).
• April 2024: Full expensing for capital allowances made permanent (100% first-year relief on qualifying plant and machinery).

Future Proposals

The government has indicated potential future changes:

• Possible reforms to the associated company rules
• Review of the bank surcharge
• Potential changes to R&D tax credits
• Consideration of environmental tax incentives

11. When to Seek Professional Advice

While many small companies can handle their own corporation tax calculations, you should consider professional advice if:

• Your company has profits near the threshold limits (£50,000 or £250,000)
• You have associated companies or complex group structures
• You’re claiming R&D tax credits or other specialist reliefs
• Your company has international operations or non-resident status
• You’re involved in property development or investment
• You’ve received a tax enquiry from HMRC
• You’re planning significant capital investments
• Your company is loss-making and you want to optimise loss relief

A qualified accountant or tax advisor can:

• Ensure you’re claiming all available reliefs and allowances
• Help with complex calculations like marginal relief
• Advise on tax-efficient profit extraction
• Handle communications with HMRC
• Help with tax planning for future years

12. Useful Resources and Further Reading

For official guidance on corporation tax, consult these authoritative sources:

• GOV.UK: Corporation Tax Overview – Official government guide to corporation tax
• GOV.UK: Calculate Your Corporation Tax – Official calculation guidance from HMRC
• GOV.UK: Corporation Tax Rates and Allowances – Current rates and thresholds
• ICAEW: Corporation Tax Guidance – Professional guidance from the Institute of Chartered Accountants

Important Reminder

This guide provides general information about corporation tax in the UK. Tax laws are complex and subject to change. For specific advice about your company’s situation, always consult a qualified tax professional or contact HMRC directly.