Ask most new limited company directors about corporation tax and you will often get a nervous look. It sounds official and complicated, but the core idea is simple: if your company makes a profit, it pays tax on that profit. The details — rates, deadlines, what counts as a deductible expense — are all manageable once they are laid out clearly. That is exactly what this guide does.
This article is general information, not financial or legal advice. Rules and figures change, so always check the latest guidance on GOV.UK or speak to a qualified accountant.
What Is Corporation Tax?
Corporation tax is the tax a limited company pays on its taxable profits. Unlike income tax, which applies to individuals, corporation tax applies to UK-registered companies and some other organisations. It is charged on your profits after allowable expenses have been deducted — not on your total income. That distinction matters, because every legitimate expense you can claim reduces the profit you are taxed on.
The Two Rates and Marginal Relief: What They Mean for You
Since April 2023, the UK has operated two main corporation tax rates: a small profits rate for companies with lower profits and a higher main rate for companies with larger profits. Between those two thresholds, a mechanism called marginal relief applies, which means your effective rate gradually increases rather than jumping suddenly.
The exact profit thresholds and the precise rates can be updated by government, so always check the current rates on GOV.UK. The important practical takeaway is this: if your company's profits are modest, you will pay tax at the lower rate, which is meaningfully less than the main rate. As profits grow, marginal relief kicks in and your effective rate rises until it reaches the main rate.
It is also worth knowing that if your company is associated with other companies — for example, if you or a connected person controls more than one company — the thresholds may be divided between those companies, potentially placing each one into a higher effective rate band.
What Counts as Taxable Profit?
Your taxable profit is broadly your accounting profit adjusted for tax purposes. HMRC starts with your company's profit as shown in your accounts and then makes certain adjustments. Some accounting expenses are not allowable for tax (for example, entertaining clients, most fines and penalties, and depreciation). Some tax reliefs and allowances — such as capital allowances on equipment — can reduce the figure further.
Common allowable costs that reduce your taxable profit include:
- Staff wages, salaries and employer's National Insurance contributions.
- Rent, rates and utilities for business premises.
- Professional fees such as accountancy and legal costs directly related to the business.
- Marketing and advertising costs.
- Stock and materials used in delivering your products or services.
- Business insurance premiums.
- Interest on business loans (subject to rules on financing costs).
- Capital allowances on qualifying plant, machinery and equipment.
The tax you pay is calculated on what is left after allowable costs. Keeping thorough records of every business expense is not just good admin — it directly affects how much corporation tax you owe.
When Do You File and Pay?
Corporation tax works on your company's accounting period, which is usually 12 months and aligns with your financial year rather than the tax year. Two separate deadlines apply:
- Filing your Company Tax Return (CT600): You must file this with HMRC within 12 months of the end of your accounting period.
- Paying your corporation tax: Payment is due 9 months and 1 day after the end of your accounting period — which is earlier than the filing deadline.
This means you often need to calculate your approximate tax liability and pay it before you have finished preparing the full return. Larger companies with very high profits may need to make quarterly instalment payments, but this typically does not apply to small businesses. Check GOV.UK if you are unsure which payment regime applies to you.
HMRC will charge interest on late payments, and they can issue penalties for late or inaccurate returns. Your company's corporation tax obligations are separate from your personal Self Assessment obligations as a director, so you may need to manage both.
Why Good Records Are Not Optional
HMRC can open an enquiry into your company's tax return, usually within one year of the filing deadline — longer if they suspect there has been a mistake or deliberate inaccuracy. You are required by law to keep your company's financial records for at least six years from the end of the accounting period they relate to.
Good records mean being able to evidence every item of income and every expense. This includes bank statements, invoices (both sales and purchase), payroll records, and receipts for capital purchases. Accounting software makes this much easier to manage throughout the year, rather than trying to reconstruct records at year-end.
Corporation Tax Quick-Reference Checklist
- Check the current small profits rate, main rate and profit thresholds on GOV.UK.
- Calculate your taxable profit by deducting all allowable business expenses.
- Do not forget capital allowances — they can significantly reduce your bill.
- Pay your corporation tax bill 9 months and 1 day after your accounting period ends.
- File your CT600 within 12 months of the end of your accounting period.
- Keep all financial records for at least six years.
- Speak to an accountant about marginal relief if your profits sit near the threshold.
Corporation tax does not exist in isolation — how you extract profit from your company (salary versus dividends) also affects the overall tax picture. Our guide on dividend tax for limited company directors explains how dividend income is taxed and how to plan around the annual allowance.
