Corporation Tax Explained
Corporation tax is a tax levied on the profits of UK limited companies, as well as some other organisations including clubs, co-operatives, and unincorporated associations. It is administered by HMRC and governed primarily by the Corporation Tax Act 2009 and Corporation Tax Act 2010.
Every company incorporated in the UK, or carrying on business through a UK permanent establishment, must register for corporation tax within three months of starting to trade. This applies regardless of whether the company makes a profit.
Who Pays Corporation Tax?
The following entities are liable for corporation tax:
- Limited companies (both private and public)
- Limited liability partnerships in certain circumstances
- Foreign companies with a UK branch or office
- Clubs, societies, and associations conducting business
- Housing associations and trade unions with investment income
Sole traders and ordinary partnerships do not pay corporation tax. Instead, they pay income tax through the self-assessment system.
Current Corporation Tax Rates
Since April 2023, the UK operates a two-tier corporation tax system:
| Annual Taxable Profits | Rate |
|---|---|
| Up to £50,000 | 19% (small profits rate) |
| £50,001 to £250,000 | Marginal relief applies |
| Over £250,000 | 25% (main rate) |
Marginal relief provides a gradual increase from 19% to 25% for companies with profits between £50,000 and £250,000. The effective marginal rate in this band is 26.5%.
Associated Companies
If a company has associated companies, the profit thresholds are divided by the number of associated companies plus one. Two companies are associated if one controls the other, or both are under common control. This prevents groups from splitting activities across multiple entities to access the small profits rate.
What Counts as Taxable Profit?
Corporation tax is charged on a company’s total taxable profits, which include:
- Trading profits from the company’s business activities
- Investment income such as interest and rental income
- Capital gains on the disposal of assets (known as chargeable gains)
- Profits from overseas branches (with potential double tax relief)
Companies can reduce their taxable profits through allowable expenses and capital allowances such as the Annual Investment Allowance.
Accounting Periods
A company’s accounting period for corporation tax purposes is normally 12 months. If a company prepares accounts for a period longer than 12 months, HMRC splits this into two accounting periods for tax purposes.
The accounting period starts when a company:
- Begins trading
- First comes within the charge to corporation tax
- Starts a new period immediately after the previous one ends
Filing and Payment Deadlines
Companies must meet two separate deadlines:
Payment Deadline
Corporation tax is due 9 months and 1 day after the end of the accounting period. For example, if your accounting period ends on 31 March, payment is due by 1 January the following year.
Filing Deadline
The Company Tax Return (CT600) must be filed within 12 months of the end of the accounting period. This must be submitted online and include:
- The CT600 form
- Full statutory accounts
- Tax computations
- Any supplementary pages
Large Companies
Companies with profits exceeding £1.5 million must pay corporation tax in quarterly instalments. Payments are due in months 7, 10, 13, and 16 after the start of the accounting period.
Very large companies with profits over £20 million pay in months 3, 6, 9, and 12.
Key Deductions and Reliefs
Trading Losses
Companies can use trading losses in several ways:
- Set against total profits of the same accounting period
- Carry back to the previous 12 months
- Carry forward indefinitely against future trading profits
- Group relief to surrender losses to other group companies
Research and Development Relief
R&D tax relief allows companies to claim additional deductions or tax credits for qualifying research expenditure. For accounting periods starting on or after 1 April 2024, most companies claim through the merged scheme, a taxable expenditure credit calculated on qualifying spend. Loss-making SMEs that are R&D intensive can instead claim enhanced R&D intensive support. The credit rates are set in legislation and published by HMRC.
Capital Allowances
The full expensing regime allows companies to deduct 100% of qualifying plant and machinery expenditure in the year of purchase. The Annual Investment Allowance provides a similar benefit for expenditure up to £1 million per year.
Patent Box
Companies can elect for a reduced 10% tax rate on profits earned from patented inventions, provided they have made a significant contribution to creating the patent.
Penalties for Late Filing and Payment
HMRC imposes penalties for failing to meet deadlines:
| Offence | Penalty |
|---|---|
| CT600 filed 1 day late | £100 |
| CT600 filed 3 months late | Additional £100 |
| CT600 filed 6 months late | 10% of unpaid tax (minimum £100) |
| CT600 filed 12 months late | Additional 10% of unpaid tax |
| Late payment | Interest charged at a margin above the Bank of England base rate |
Repeated late filing within a three-year period doubles the initial penalties to £500 each.
How to Register
New companies must register for corporation tax with HMRC within three months of starting any business activity. This includes:
- Trading
- Buying or selling assets
- Receiving income
- Advertising or employing staff
Registration can be done online through the HMRC website. Once registered, HMRC issues a Unique Taxpayer Reference (UTR) which is needed for all tax filings.
Corporation Tax and VAT
Corporation tax and VAT are entirely separate taxes. VAT is a consumption tax collected on behalf of HMRC, while corporation tax is charged on company profits. However, if a company is not VAT-registered, the irrecoverable VAT on purchases can form part of the cost base for corporation tax purposes.
Companies that are VAT-registered must also comply with Making Tax Digital requirements for their VAT records.
Record Keeping
Companies must keep records for at least 6 years from the end of the accounting period. These records must support the figures in the CT600 and include:
- Annual accounts and balance sheets
- Bank statements and paying-in slips
- Sales and purchase invoices
- Contracts and agreements
- Records of assets bought and sold
Proper accounting records form the foundation of accurate corporation tax returns. Under the Companies Act 2006, directors have a legal duty to maintain adequate accounting records that show the company’s financial position with reasonable accuracy.
To reduce your bill legitimately, see our guide on corporation tax planning for limited companies.