What’s Corporation Tax?
Corporation Tax is a tax on company profits in the UK, charged at 25% for most companies, with reliefs and thresholds depending on profit levels.
Corporation Tax is the tax a UK limited company pays on its profits. It applies to money made from trading, investments and selling business assets.
If you run a limited company, Corporation Tax is one of the main taxes you need to plan for. Understanding how it works helps you keep control of cash flow, avoid surprises and make confident decisions about what your business can afford.
Who pays Corporation Tax?
Corporation Tax is paid by three groups:
Limited companies registered in the UK
Foreign companies with a UK branch or office
Some clubs, societies and associations
Sole traders and partnerships do not pay Corporation Tax. They pay Income Tax instead.
This is HMRC’s guidance on Corporation Tax.
How much is Corporation Tax?
The current Corporation Tax system has more than one rate.
The main rate is 25% for companies with profits over £250,000
The small profits rate is 19% for companies with profits of £50,000 or less
Companies with profits between £50,000 and £250,000 pay a tapered rate through marginal relief
These thresholds are reduced if you have associated companies. HMRC explains the rates and marginal relief here.
What profits are taxed?
Corporation Tax is charged on taxable profits, which usually include:
Trading profits from your core business activity
Investment income, such as interest
Capital gains from selling company assets
Taxable profit isn’t the same as money in the bank. It’s calculated after allowable business expenses but before dividends are paid. This difference matters because a company can owe Corporation Tax even when cash feels too tight to owe anything.
How do expenses affect Corporation Tax?
Most expenses that are incurred wholly and exclusively for business purposes can usually be deducted when calculating taxable profit. Common examples of business expenses include:
Staff salaries and employer pension contributions
Rent, utilities and office costs
Software, systems and professional fees
Marketing and advertising
Business travel costs
Some items receive tax relief in different ways, such as capital allowances for equipment and vehicles. You can find HMRC’s guidance on allowable expenses here:
Expenses if you’re self-employed
When is Corporation Tax due?
Corporation Tax is due nine months and one day after the end of your accounting period. For example, if your year end is 31 March, the tax is due by 1 January the following year.
That gap is there to give you time to understand your position and plan for the payment, rather than having to deal with it immediately.
Your Corporation Tax return, known as a CT600, must be filed within 12 months of the year end, even if the tax itself has already been paid. In practice, many businesses file earlier so everything is wrapped up and out of the way.
HMRC sets out the deadlines clearly here.
How do you pay Corporation Tax?
Corporation Tax is paid directly to HMRC online, over the phone, using CHAPS or BAC, or by Direct Debit.
There’s no automatic collection, which is why many companies choose to set money aside gradually as profits build. Treated this way, Corporation Tax becomes a known, planned cost rather than something that arrives unexpectedly.
How does Corporation Tax link to dividends?
In a limited company, the way you take money out usually comes down to a mix of salary and dividends.
A salary is a business expense and reduces the company’s taxable profit, which in turn reduces the Corporation Tax bill. Dividends can only be paid from profits after Corporation Tax has been accounted for.
Your post-tax profit will give you a solid reference point for dividends. Once salary costs and Corporation Tax are accounted for, it’s much clearer what the company can realistically afford to pay out. Income can then be taken in a consistent, sustainable way as the year goes on.
How to plan for Corporation Tax
Corporation Tax tends to feel more manageable when it’s treated as part of the business’ normal flow, rather than something dealt with at the end of the year.
Keeping an eye on profits as the year moves along makes it easier to set money aside gradually, take advantage of the reliefs and allowances available to business owners, and keep cash flow feeling steady.
Regular check-ins and management accounts help by showing where things stand now and what’s likely to be coming up, so decisions feel measured rather than last-minute.