If you run a limited company in the UK, corporation tax is one of the most important financial obligations you’ll face. It affects your profits, cash flow, and long-term planning—so knowing how it works is essential. This guide explains what corporation tax is, how to calculate it, when to pay it, and how to avoid common mistakes that could cost your business money.
What Is Corporation Tax?
Corporation tax is a government levy on the profits earned by UK-based companies and certain foreign entities with a UK presence. It applies to:
- Private limited companies (Ltds)
- Overseas companies operating through a UK branch
- Clubs, co-operatives, and some non-profit organisations
If you’re self-employed or part of a partnership, you don’t pay corporation tax. Instead, you’re taxed on your personal income through self-assessment.
Corporation tax is reported and paid annually to HM Revenue & Customs (HMRC). It’s your responsibility—not HMRC’s—to calculate, report, and settle the amount due.
Corporation Tax Rates for 2025
The rate your company pays depends on your level of profit. As of 2025:
| Taxable Profit | Tax Rate |
|---|---|
| Up to £50,000 | 19% (Small Profits Rate) |
| £250,000 or more | 25% (Main Rate) |
| Between £50,001 and £249,999 | Marginal Relief applies |
Companies with smaller profits pay the lower 19% rate, while those above £250,000 are taxed at 25%. If your profits fall between the two thresholds, Marginal Relief reduces the jump between rates, giving you a gradual increase in tax rather than a sharp one.
How to Calculate Corporation Tax
Corporation tax is based on your taxable profits, which include:
- Trading income from selling products or services
- Investment returns such as interest and dividends
- Gains from selling assets like property or equipment
Here’s a step-by-step outline of how to work out your liability.
Step 1: Determine Total Income
Start with all income earned during the accounting period. This includes sales, investment income, and any other business-related earnings.
Step 2: Deduct Allowable Expenses
Subtract expenses that are “wholly and exclusively” for business purposes—such as salaries, rent, travel, software, and professional fees.
Step 3: Apply Allowances and Reliefs
Reduce your profits further by claiming eligible deductions, such as:
- Annual Investment Allowance (AIA)
- Research and Development (R&D) relief
- Carried-forward losses
- Patent Box relief
Step 4: Calculate Taxable Profit and Apply the Correct Rate
Once you’ve accounted for all expenses and reliefs, apply the correct corporation tax rate to the remaining profit.
Example:
A company earns £220,000 in revenue, with £80,000 in expenses and £20,000 in capital allowances.
Taxable profit = £220,000 − £80,000 − £20,000 = £120,000.
This falls in the marginal relief range, meaning the effective tax rate will be slightly below 25%. You might owe roughly £28,000–£29,000, depending on the calculation.
Deadlines for Paying Corporation Tax
Your payment is due nine months and one day after the end of your company’s accounting period.
For instance, if your financial year ends on 31 March 2025, your payment deadline is 1 January 2026.
You must also file your Company Tax Return (CT600) within 12 months of your year-end, even though the payment is due earlier. Missing either deadline can result in penalties or interest charges.
How to Pay Corporation Tax
There are three key steps to staying compliant:
1. Register with HMRC
You must register for corporation tax within three months of starting business activities. Even early actions like marketing or purchasing stock count as trading.
2. File Your Company Tax Return
Once your financial year ends, submit your CT600 through HMRC’s online portal or accounting software. Include your financial statements and tax computation.
3. Pay the Amount Owed
Payment options include bank transfer, Direct Debit, or corporate debit card. Always use your company’s 17-character payment reference so HMRC can correctly identify your payment.
Late Payments and Penalties
If you miss the payment deadline, HMRC will charge interest from the day after your due date until the payment is made. Consistent delays can result in additional fines or even trigger a compliance review. Using accounting software or working with a tax adviser can help ensure deadlines are met without issue.
Common Corporation Tax Mistakes to Avoid
Even experienced business owners can make errors when managing corporation tax. Here are five of the most frequent pitfalls and how to avoid them:
1. Failing to Register on Time
You must register within three months of starting to trade. Missing this deadline can lead to penalties, even if you haven’t yet generated income.
2. Ignoring Allowable Expenses
Not claiming legitimate expenses—such as utilities, equipment, or professional services—means you’ll pay more tax than necessary. Keep detailed records to support your deductions.
3. Submitting Incorrect Figures
Errors in your tax return can result in an HMRC enquiry. Always double-check your accounts or have a professional review your CT600 before filing.
4. Confusing Filing and Payment Deadlines
The tax payment deadline (nine months and one day) is earlier than the filing deadline (twelve months). Mark both dates in your calendar to avoid confusion.
5. Treating Dividends as Tax-Deductible
Dividends are distributions of profit, not business expenses. They cannot be deducted from taxable income, so plan accordingly when determining your company’s total liability.
Final Thoughts
Corporation tax is a vital part of running a limited company in the UK. By understanding how it works, meeting deadlines, and making the most of available reliefs, you can manage your tax obligations confidently and efficiently. Staying organised—and seeking expert advice when needed—ensures your business remains compliant, profitable, and prepared for future growth.
