The Small Business Guide to Corporation Tax

If you run a limited company in the UK, corporation tax is one of your primary tax obligations. It's charged on your company's profits — and understanding how it works, what you can deduct, and when to pay is essential for managing your business finances properly.

This guide covers the fundamentals of small business corporation tax for limited-company owners who want to understand their obligations without getting lost in technical jargon.

What Is Corporation Tax?

Corporation tax is the tax that limited companies pay on their taxable profits. It applies to:

Trading profits (the money your business makes from its activities)
Investment income
Capital gains (profits from selling assets)

Here's the distinction: it does not apply to sole traders or partnerships, who pay income tax through self-assessment instead. Corporation tax is exclusively for incorporated businesses. If you're just starting out, that decision — sole trader or limited company — is one of the biggest tax decisions you'll make (which is why it's worth getting professional advice on early).

The Rates You'll Actually Pay

The UK has a two-tier corporation tax system, which sounds complicated but isn't:

Small profits rate (19%) — For companies with profits up to £50,000
Main rate (25%) — For companies with profits above £250,000
Marginal relief — For companies with profits between £50,000 and £250,000

That middle band is where things get interesting. Instead of jumping straight from 19% to 25%, the rate tapers gradually. So a company making £150,000 doesn't pay the full 25% — it pays an effective rate somewhere between the two, calculated using a specific formula. (The formula itself is less important than knowing it exists, which means you won't get socked with a sudden rate jump.)

Note: These rates are correct as of April 2026. Check gov.uk/corporation-tax-rates before filing, as rates can change in the Budget.

The associated companies rule

If you have associated companies — companies controlled by the same people — the profit thresholds are divided by the number of associated companies. So if you have two associated companies, the small profits threshold drops from £50,000 to £25,000 per company.

This prevents people from splitting a single business into multiple companies purely to benefit from the lower rate.

Calculating Your Taxable Profit

Your taxable profit is not the same as your accounting profit. You start with your accounting profit and then make adjustments. Think of it this way: your accountant calculates one number for your bank, HMRC calculates another for your tax bill.

What you can deduct

These reduce your taxable profit:

Staff costs — Salaries, employer's National Insurance, pension contributions
Rent and property costs — Rent, rates, utilities, maintenance
Professional fees — Accountancy, legal, consultancy (revenue in nature)
Marketing and advertising — All legitimate promotional costs
Travel and subsistence — Business travel costs (commuting doesn't count)
Insurance — Business insurance premiums
Software and subscriptions — Business software, professional memberships
Bad debts — Debts you've written off that were previously included in income
Capital allowances — Instead of depreciation (see below)

What you cannot deduct

These cannot be deducted from your taxable profit:

Client entertaining — Business entertainment is not deductible (staff entertainment at Christmas and similar events may be, within limits)
Depreciation — Replaced by capital allowances in your tax calculation
Fines and penalties — Parking fines, HMRC penalties
Personal expenses — Anything not wholly and exclusively for business purposes
Dividends — Dividends are paid from post-tax profits, so they're not a deduction

Capital allowances explained

You cannot deduct the cost of buying equipment, vehicles, or fixed assets as an expense. Instead, you claim capital allowances, which either spreads relief over time or gives it upfront:

Annual Investment Allowance (AIA) — 100% first-year relief on qualifying plant and machinery up to £1 million per year
Writing Down Allowance (WDA) — 18% or 6% per year on the reducing balance for assets not covered by AIA
Full expensing — 100% first-year relief on main rate qualifying assets (available for limited periods — check current availability)

Capital allowances replace the depreciation charge in your accounts. When calculating taxable profit, you add back depreciation and deduct capital allowances instead. (It's the same relief, just claimed differently for tax purposes — and that distinction matters when HMRC is reading your return.)

Key Deadlines

Corporation tax has its own calendar, which is different from the self-assessment calendar:

Filing the company tax return (CT600): Due 12 months after the end of your accounting period. If your year end is 31 March, the return is due by 31 March the following year.

Paying corporation tax: Due 9 months and 1 day after the end of your accounting period. Using the same example, tax would be due by 1 January.

Here's the disconnect that catches people out: you must pay before you file. This means you need to calculate your tax bill before the return is formally submitted — and if you get the estimate wrong, you'll either owe more or get a refund later.

Quarterly instalments: Large companies (broadly, those paying more than £150,000 in tax) must pay in quarterly instalments during the accounting period rather than nine months after. This is unlikely to apply to most small businesses, but it's worth knowing.

The company tax return must be filed online with HMRC. It includes your taxable income and gains, tax calculations, claims for reliefs and allowances, and full statutory accounts. Most small companies use their accountant to prepare and file it, but you can file it yourself using HMRC's online service or commercial tax software.

Your statutory accounts are also filed with Companies House. The filing requirements depend on your company size — small companies can file abbreviated accounts with less detail.

Tax Planning That Works

As a director and shareholder, you can take money from your company as a salary, as dividends, or a combination. The most tax-efficient split depends on your personal circumstances, your company's profits, and current tax rates.

A common strategy is to take a salary up to the National Insurance threshold (to maintain your NI record without triggering employer's NI) and take the rest as dividends, which are taxed at lower rates than salary. However, this changes with every Budget and depends on your individual situation — this is an area where professional advice is essential.

Pension contributions are an allowable deduction for corporation tax and are not subject to National Insurance. This makes them a very tax-efficient way to extract money from the company. If you're not already thinking about pensions, this is a good reason to start.

Research and Development (R&D) relief: If your company spends money on qualifying R&D activities, you may be able to claim R&D tax relief, which provides an enhanced deduction (or a tax credit for loss-making companies). The rules are complex, but the relief can be substantial.

Timing your equipment purchases: If you are planning to buy equipment or machinery, consider timing the purchase to maximise your AIA claim. If you are near your year end and have unused AIA, bringing a planned purchase forward can reduce your tax bill for the current year.

As you plan your finances, these levers matter — but they all require good record-keeping throughout the year, not panic-calculation in March.

Common Mistakes

Missing payment deadlines — Late payment incurs interest from day one and penalties if significantly overdue. Set a reminder well in advance of the nine-month deadline.

Not keeping proper records — HMRC can open an enquiry into your company's tax affairs. If your records are incomplete, you may face penalties on top of any additional tax due. This is where a proper business bank account and good bookkeeping software actually saves money.

Claiming non-allowable expenses — Deducting client entertainment, personal expenses, or other non-allowable costs will be corrected by HMRC, potentially with penalties.

Forgetting to add back depreciation — Your accounting profit includes a depreciation charge, but your tax computation should replace this with capital allowances. Forgetting to add back depreciation means you are effectively claiming the deduction twice.

Not claiming all allowable expenses — On the flip side, some companies fail to claim everything they are entitled to. Review your expenses thoroughly and ensure nothing is missed.

Frequently Asked Questions

What's the difference between corporation tax and income tax? Corporation tax is paid by limited companies on their profits. Income tax is paid by individuals (including sole traders) on their personal income. If you're a director taking a salary, you pay income tax on that salary — but your company still pays corporation tax on its remaining profits.

When is corporation tax actually due? Nine months and one day after the end of your accounting period. So if your year end is 31 March, corporation tax is due by 1 January. The return itself is due 12 months after your year end.

Can I deduct my home office? Yes, but only the proportion attributable to business use. If you use one room out of a ten-room house exclusively for business, you can deduct 10% of your rent (or mortgage interest), utilities, and council tax. HMRC requires proper records.

How do dividends work with corporation tax? Your company pays corporation tax on its profits. What's left is post-tax profit, which you can distribute to shareholders as dividends. Dividends are not deductible as a company expense — they're paid from profits that have already been taxed.

What happens if I miss the deadline? Late payment incurs interest (currently 7.25% per annum) from the due date until paid, plus potential penalties. For significant lateness (more than 12 months), penalties escalate. Missing the filing deadline triggers separate penalties.

Do I need an accountant? Corporation tax is more complex than personal income tax, and the consequences of getting it wrong are more significant. Most small companies engage an accountant for their corporation tax return — it is genuinely money well spent, especially given the cost of getting it wrong.

Can I claim Making Tax Digital relief? Making Tax Digital applies to VAT returns and (from April 2026) to corporation tax returns. The software requirements are straightforward — you need to use compatible bookkeeping software or an accountant who files digitally.

Corporation tax is straightforward once you understand the key rules, but the consequences of getting it wrong are significant. Good accounting software helps by keeping your records accurate throughout the year, making the year-end process much smoother. The key to painless corporation tax is good record-keeping from January through December — if your books are up to date and your expenses are properly categorised, the year-end computation is straightforward rather than a forensic investigation.

Whether you do it yourself or use an accountant, the goal is the same: get it right the first time, claim everything you're entitled to, and pay on time. Try Relentify free for 14 days to see how proper bookkeeping software simplifies the entire process.