What is corporation tax? Rates, rules and how it works

Published Tuesday 26 May 2026

Table of contents

• What is corporation tax?
• Who pays corporation tax?
• Who doesn't pay corporation tax
• Corporation tax rates in the UK
• How marginal relief works
• How to register for corporation tax
• How to calculate your corporation tax
• How to pay corporation tax
• Corporation tax deadlines and penalties
• Corporation tax reliefs and allowances
• How to reduce your corporation tax bill
• Simplify your corporation tax with Xero
• FAQs on corporation tax

Key takeaways

• Corporation tax is the tax limited companies pay on their profits. The current rates are 19% for profits under £50,000 and 25% for profits over £250,000, with marginal relief for profits in between.
• You must register for corporation tax within 3 months of starting to trade and file a Company Tax Return (CT600) each year, even if your company made no profit.
• Missing the filing or payment deadline triggers automatic penalties starting at £200, plus interest on any late payments. Staying on top of deadlines helps you avoid unnecessary costs.
• You can reduce your corporation tax bill by claiming all allowable expenses, making employer pension contributions, and using capital allowances on business equipment.

What is corporation tax?

Corporation tax is the tax that limited companies in the UK pay on their profits. If you run a limited company, understanding how it works is essential for staying compliant and managing your cash flow effectively.

Unlike sole traders and partnerships, who pay income tax through Self Assessment, limited companies pay corporation tax on their taxable profits. This includes profits from trading, investments, and selling assets (known as capital gains tax).

HM Revenue and Customs (HMRC) is responsible for collecting corporation tax. You can find a full overview on the HMRC corporation tax page.

Who pays corporation tax?

Corporation tax applies to several types of organisations in the UK. If your business falls into one of these categories, you're required to register and pay.

You pay corporation tax if you operate as a:

• UK limited company (Ltd)
• public limited company (PLC)
• foreign company with a UK branch or office
• club, co-operative, or unincorporated association (for example, a community group or sports club)

Sole traders and partnerships don't pay corporation tax. Instead, they pay income tax on their profits through Self Assessment. If you're thinking about setting up a limited company, it's worth understanding the tax differences before you make the switch.

Who doesn't pay corporation tax

Not every business or organisation pays corporation tax. Here's a quick breakdown of who is exempt or not liable.

• Sole traders and partnerships pay income tax through Self Assessment, not corporation tax.
• Dormant companies that have told HMRC they're not trading don't need to pay, though they may still need to file a Company Tax Return.
• Companies that made no profit still don't owe any corporation tax, but they must file a CT600 return to let HMRC know.

Even if you don't owe any tax, filing your return on time is still a legal requirement. Late filing triggers penalties regardless of whether there's tax to pay.

Corporation tax rates in the UK

The UK corporation tax rate depends on your company's taxable profits. These rates have been in place since April 2023.

• 19% small profits rate: applies if your taxable profits are £50,000 or less.
• 25% main rate: applies if your taxable profits are over £250,000.
• Marginal relief: applies if your profits fall between £50,000 and £250,000, so you pay an effective rate between 19% and 25%.

If your company has associated companies (for example, other companies controlled by the same people), the profit thresholds are divided between them. This could push you into a higher rate bracket even with relatively modest profits.

You can check the latest rates on the HMRC corporation tax rates page.

How marginal relief works

If your company's taxable profits fall between £50,000 and £250,000, you don't jump straight to the 25% rate. Instead, marginal relief reduces the amount of tax you owe so the effective rate sits somewhere between 19% and 25%.

HMRC uses a standard formula to calculate marginal relief. The fraction is 3/200, and the calculation works like this:

Marginal relief = (upper limit - taxable profits) x 3/200

Here's a worked example. Say your company's taxable profits are £75,000:

1. Start with the main rate: £75,000 x 25% = £18,750.
2. Calculate the marginal relief: (£250,000 - £75,000) x 3/200 = £2,625.
3. Subtract the relief: £18,750 - £2,625 = £16,125.

So on £75,000 of profit, you'd pay £16,125 in corporation tax. That works out to an effective rate of 21.5%.

You can use the HMRC marginal relief calculator to work out your own figure.

How to register for corporation tax

Once your limited company starts trading, you need to register for corporation tax with HMRC. You must do this within 3 months of your company becoming active.

To register, you'll need your company's Unique Taxpayer Reference (UTR), which HMRC sends to your registered office address shortly after you incorporate. You'll also need details such as the date you started trading, your company registration number, and your accounting period end date.

After registering, you're responsible for filing a Company Tax Return (CT600) each year. This is separate from your annual accounts filed at Companies House. For a step-by-step walkthrough, see the guide on how to file a corporation tax return.

How to calculate your corporation tax

Calculating your corporation tax is straightforward once you have your financial records in order. Follow these 3 steps to work out what you owe.

1. Work out your taxable profits

Start with your company's total turnover for the accounting period. Then subtract your allowable expenses, which are costs you've incurred wholly and exclusively for business purposes. The figure you're left with is your taxable profit.

Common allowable expenses include staff salaries, office rent, travel costs, professional fees, and software subscriptions. Keeping accurate records throughout the year makes this step much simpler.

2. Identify the right corporation tax rate

Check your taxable profit against the current thresholds. If it's £50,000 or less, you pay 19%. If it's over £250,000, you pay 25%. Profits between £50,000 and £250,000 qualify for marginal relief.

Remember to account for any associated companies, as the thresholds are divided between them.

3. Calculate the tax you owe

Multiply your taxable profits by the relevant rate. For example, if your taxable profits are £40,000, you'd pay £40,000 x 19% = £7,600.

If marginal relief applies, use the formula covered in the marginal relief section above to reduce your tax bill accordingly. Always double-check your figures before submitting your CT600.

How to pay corporation tax

Once you know how much corporation tax you owe, you need to pay HMRC by the deadline. There are several ways to make your payment.

You can pay by:

• direct debit (set up through your HMRC online account)
• online or telephone bank transfer (Faster Payments, CHAPS, or Bacs)
• debit or corporate credit card online

You'll need your 17-character corporation tax payment reference to make sure HMRC allocates your payment correctly. This is different from your UTR; you can find it in your HMRC online account or on previous correspondence.

Some payment methods take longer to process than others. Direct debits and bank transfers typically take 3 working days, so plan ahead to avoid missing the deadline. For full details, visit the HMRC pay corporation tax page.

Corporation tax deadlines and penalties

Keeping track of your corporation tax deadlines helps you avoid unnecessary penalties and interest charges. There are 2 key dates to remember.

Your payment deadline is 9 months and 1 day after the end of your accounting period. For example, if your accounting period ends on 31 March 2026, your payment is due by 1 January 2027.

Your filing deadline is 12 months after the end of your accounting period. You must submit your CT600 return by this date, even if you've already paid the tax or your company made a loss.

If you file your CT600 late, penalties escalate:

• 1 day late: £200 penalty (doubled from April 2026)
• 3 months late: another £200 penalty
• 6 months late: HMRC estimates your tax bill and adds a penalty of 10% of the unpaid tax
• 12 months late: another 10% of any unpaid tax

HMRC also charges interest on late payments, calculated from the day after the payment deadline. If you're struggling to pay on time, you may be able to set up a Time to Pay arrangement with HMRC to spread the cost.

Corporation tax reliefs and allowances

The UK offers several reliefs and allowances that can reduce your corporation tax bill. Taking advantage of these can make a real difference to your bottom line.

• Allowable expenses: day-to-day costs of running your business, such as rent, utilities, staff salaries, and software subscriptions, are deducted from your profits before calculating tax.
• Capital allowances: claim the Annual Investment Allowance (AIA) of up to £1 million on qualifying plant and machinery. Full expensing allows 100% deductions on qualifying assets. From January 2026, a new 40% first-year allowance is also available for main pool expenditure. Note that the main Writing Down Allowance rate reduced from 18% to 14% from April 2026.
• Research and Development (R&D) tax credits: if your company spends money on innovation, you may be able to claim R&D tax credits to reduce your tax bill or receive a cash payment. The SME and RDEC schemes merged into a single scheme from April 2024.
• Patent Box: companies that earn profits from patented inventions can apply to pay a reduced rate of 10% on those profits.
• Loss relief: if your company makes a loss, you can carry it forward to offset against future profits, or in some cases carry it back to the previous accounting period.
• Creative industries relief: companies in film, animation, video games, theatre, and other creative sectors may qualify for additional tax relief.

Each relief has its own eligibility rules and claim process. Consider working with an accountant or tax adviser to make sure you're claiming everything you're entitled to.

How to reduce your corporation tax bill

Beyond reliefs and allowances, there are practical strategies you can use throughout the year to keep your corporation tax as low as legally possible.

• Claim all allowable expenses: review your spending regularly to make sure nothing is missed. Even smaller costs like postage, stationery, and business insurance add up.
• Pay yourself a salary: director salaries are a business expense that reduces your taxable profits. Many small business owners combine a modest salary with dividend tax payments for tax efficiency.
• Make employer pension contributions: contributions your company makes to your pension are an allowable business expense and don't attract National Insurance.
• Plan ahead with quarterly reviews: checking your finances regularly throughout the year, rather than at year end, gives you time to make decisions that could reduce your tax bill.

Good record-keeping is the foundation of all of these strategies. If your records are accurate and up to date, you're in a much stronger position to claim everything you're entitled to.

Simplify your corporation tax with Xero

Staying on top of corporation tax starts with accurate, up-to-date financial records. Accounting software can help you keep your books in order throughout the year, so you're not scrambling at year end.

Xero can help you automate bank reconciliation, track expenses as they happen, and generate reports that give you a clear view of your taxable profits at any time. With everything in one place, preparing your tax return becomes far less time-consuming.

Xero also connects with your accountant or bookkeeper, so they can access your records directly and help you file accurately and on time. Spend less time on financial admin and more time running your business, and get one month free.

FAQs on corporation tax

Here are answers to frequently asked questions about corporation tax.

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 and partners, on their personal income. If you run a limited company, the company pays corporation tax and you pay income tax on any salary or dividends you take from it.

What happens if my company makes a loss?

If your company makes a loss, you won't owe any corporation tax for that period. You can carry the loss forward to offset against future profits, which reduces your tax bill in a later year. In some cases, you can also carry losses back to the previous accounting period to claim a refund.

How can I reduce my corporation tax bill?

Claim all your allowable expenses, use capital allowances for equipment purchases, and consider employer pension contributions. Reviewing your finances quarterly rather than annually gives you more opportunities to plan ahead. Working with an accountant can help you identify reliefs you might otherwise miss.

Do sole traders pay corporation tax?

No. Sole traders pay income tax on their profits through Self Assessment. Corporation tax only applies to limited companies and certain other organisations. If you're considering switching from sole trader to limited company status, it's worth understanding the tax implications first.

What happens if you miss the corporation tax deadline?

Missing the filing deadline triggers automatic penalties starting at £200. After 3 months, another £200 penalty applies. At 6 and 12 months, HMRC adds penalties of 10% of the estimated unpaid tax. Late payments also attract interest from the day after the deadline.

What is Making Tax Digital for corporation tax?

Making Tax Digital (MTD) is HMRC's programme to move tax administration online. MTD for VAT is already in effect, and MTD for Income Tax is rolling out from April 2026. HMRC has confirmed that MTD will not be extended to corporation tax, so there are no additional digital filing requirements beyond the existing CT600 process. That said, keeping your records in cloud accounting software gives you a clear advantage when preparing your return.