A guide to corporation tax in the UK

Corporation tax is a tax paid by companies in the UK on their annual profits. It’s a key part of the UK’s corporate taxation system, directly affecting most limited companies operating within the country. This guide outlines how corporation tax works, who pays it, and what deductions and reliefs may be available.

Corporation tax is defined as a tax that all limited companies (and some others) pay on their profits. These profits can come from:

• Trading or running a business
• Investments
• Selling assets for more than they cost, known as chargeable gains 

Corporation tax is a type of business tax separate from personal income tax. It applies specifically to businesses that trade or are incorporated under UK law. 

Companies calculate their tax for each accounting period. They do this based on their profits after deducting allowable expenses, such as the costs of running a business, staff wages, or the gradual loss in value of business equipment.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

Corporation tax is payable by companies and certain other bodies that make taxable profits in the UK. This typically includes:

• Companies resident in the UK for tax purposes.
• Overseas companies that generate profits in the UK. They may trade through a UK branch, for example.
• Unincorporated associations and clubs that generate taxable profits, such as sports clubs.

Businesses operated by sole traders or partners may be subject to personal income tax, not corporation tax. Business profits will be declared as part of a self-assessment tax return.

For limited liability partnerships (LLPs),the LLP itself usually doesn’t pay corporation tax, but each member is taxed on their share of profits. This typically means that individual members pay income tax, whereas members that are companies pay corporation tax on their share.

Corporation tax is calculated for each accounting period. This is usually the 12-month period covered by the company’s annual accounts, although it can be shorter, especially in the first year of trading. A company has to calculate its taxable profits for this period, and these are then adjusted to account for any allowable expenses such as staff wages.

Once this taxable profit is calculated, the corporation tax rate is applied depending on the level of profit and whether it qualifies for marginal relief. This means smaller companies may pay a lower effective rate than larger ones. UK resident companies are taxed on their worldwide profits, but non-resident companies only pay tax on profits made in the UK.

Companies are responsible for calculating their own corporation tax bill, submitting a company tax return, and paying the tax due by the deadline.

UK corporation tax rates depend on how much taxable profit a company makes. There are two main rates:

• Companies with profits of up to £50,000 are charged at the small profits rate of 19%
• Companies with profits of more than £250,000 pay the main rate of 25%

Companies with taxable profits between £50,000 and £250,000 may be eligible for marginal relief, which gradually tapers the effective corporation tax rate between the small profits rate (19%) and the main rate (25%). For many small businesses, this means a lower rate of corporation tax and a smoother transition between thresholds. 

The government announced that these corporation tax rates will remain in place until at least April 2027. For the latest rates and thresholds, see the UK government’s page on corporation tax rates.

Marginal relief eases the transition from the small profits rate of 19% to the main rate of 25%. This is designed to provide a gradual increase in the effective corporation tax for profits between £50,000 and £250,000, so mid-sized companies aren’t faced with a sudden jump.

Marginal relief is available to companies that are resident in the UK. The way the relief is calculated varies depending on whether there are associated companies and if so, how many. The profit thresholds are then adjusted accordingly. Companies with multiple subsidiaries may see reduced thresholds because the limits are divided among them.

For most companies, standard corporation tax rates apply, with marginal relief available between profits of £50,000 and £250,000. However, businesses involved in oil and gas exploration or production in the UK can fall under a special regime known as ring fence corporation tax. Profits for this type of business are taxed at a rate of 30%. Plus, the ring fence rules mean that profits are taxed separately and can’t be reduced by losses made elsewhere in the business.

Corporate taxation is calculated through a series of steps based on a company’s financial and accounting information. The government offers a marginal relief calculator for businesses to find their correct rate of tax.

Most businesses can deduct everyday running costs (costs of staff, utilities, and so on) straight away when working out their taxable profits.

However, some spending is treated differently. Large purchases that a business expects to use for several years, for example machinery, vehicles, or computers, are usually treated as capital expenditure. You don’t normally deduct the full cost as a normal running expense. Instead you claim capital allowances, which let you write off the cost against taxable profits over time (or, in some cases, in the year you buy them).

Examples include the annual investment allowance (AIA) and full expensing, which may allow qualifying assets to be written off either up to a set limit, or in full during the year they’re bought.

Other reliefs include: 

• Research and development (R&D) tax relief, which supports businesses investing in innovative science and technology projects
• Group relief, which lets one company in a group use another group member’s losses to reduce its own taxable profits
• Patent box, which applies a lower rate of corporation tax (10%) to profits from qualifying patented inventions
• Double taxation relief, which prevents the same profits being taxed twice when income is earned overseas.

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