Corporation Tax explained

Corporation Tax rates

Corporation Tax works on financial years running 1 April to 31 March, not the personal tax year.

What counts as taxable profit

Taxable profit is accounting profit adjusted for tax: add back disallowable costs such as entertaining, depreciation and fines, deduct capital allowances (including the Annual Investment Allowance of £1 million and full expensing for companies), and include chargeable gains on assets the company sells. Salaries, employer NI and employer pension contributions are deductible. Dividends paid to shareholders are not.

Marginal relief worked example

Marginal relief formula: main rate tax minus 3/200 x (upper limit - profits). For a company with £100,000 taxable profit, a 12-month period and no associated companies:

• Tax at 25%: £25,000
• Marginal relief: 3/200 x (£250,000 - £100,000) = £2,250
• Corporation Tax: £22,750 (effective rate 22.75%)

The 26.5% marginal rate

Between £50,000 and £250,000, each extra £1 of profit costs 26.5p in tax. That makes deductible spending, such as employer pension contributions, particularly valuable in this band. Bringing profit from £60,000 down to £50,000 saves £2,650 in Corporation Tax.

Associated companies and short periods

The £50,000 and £250,000 limits are divided by the number of associated companies plus one. Two companies under common control each get limits of £25,000 and £125,000. Dormant companies and passive holding companies are generally ignored. The limits are also reduced proportionally for accounting periods shorter than 12 months.

Deadlines

Example: for a year ending 31 March 2027, tax is due by 1 January 2028 and the CT600 by 31 March 2028.

Penalties

A late CT600 attracts £100, rising to £200 at 3 months, then a percentage of unpaid tax at 6 and 12 months. Repeated lateness raises the fixed penalties to £500 and £1,000. Late-paid tax carries interest at base rate plus 4%.

From accounts profit to Corporation Tax: a worked example

To get from accounting profit to taxable profit, add back costs the tax rules disallow, then deduct capital allowances in place of depreciation.

A company reports £80,000 profit. The accounts include £6,000 of depreciation and £1,500 of client entertaining, both disallowed, and it bought a £20,000 van, which qualifies for the Annual Investment Allowance. Taxable profit is £80,000 + £6,000 + £1,500 - £20,000 = £67,500. That falls in the marginal relief band, so Corporation Tax is £14,137.50, an effective rate of 20.9%.

Without the van purchase the tax would be £19,437.50. The £20,000 van therefore saved £5,300.00, more than 25%, because the relief came off profit in the band where the marginal rate is 26.5%.

Capital allowances in 2026/27

Capital allowances are how a company gets tax relief on equipment, vehicles and machinery, because depreciation is not deductible.

Trading losses

A trading loss can reduce Corporation Tax in three ways: set against other profits of the same period, carried back against profits of the previous 12 months (producing a repayment), or carried forward against future profits.

Carry-back is the fastest way to turn a loss into cash. A company that paid £7,600.00 on £40,000 last year and makes a £40,000 loss this year can claim the whole amount back. The company must have been carrying on the same trade in the earlier period. Carried-forward losses from April 2017 are restricted for large profits, broadly to £5 million plus 50% of profits above that. Claims are made on the CT600.

Director's loans and the section 455 charge

If a director owes the company money at the year end and does not repay it within 9 months, the company pays a temporary extra Corporation Tax charge (section 455) on the outstanding amount. The law sets this charge at the dividend upper rate, so it follows that rate: 35.75% in 2026/27. GOV.UK's director's loans page still quotes the earlier 33.75%, so check the rate for the year the loan was made. The charge is refunded once the loan is repaid or written off, but only after the corporation tax deadline for the period in which repayment happens, so the cash can be tied up for over a year.

Loans over £10,000 at any point also count as a benefit in kind unless the director pays interest at the official rate, and writing a loan off is taxed as income for the director. Repaying a loan just before the year end and drawing it again soon after can be challenged under anti-avoidance rules.