Corporation tax is one of those subjects that many limited company directors leave entirely to their accountant — and while getting professional advice is always sensible, having no idea how the tax is calculated or when it falls due is a risk. Unexpected tax bills damage cash flow. Missed deadlines trigger automatic penalties. And not understanding the difference between your accounting profit and your taxable profit means you can’t have an informed conversation about your tax position. This guide covers the essentials: what corporation tax is, how taxable profit is calculated, what rates apply, and how the liability appears in your financial statements.
What Is Corporation Tax and Who Pays It?
Corporation tax is a tax on the profits of UK limited companies. Unlike income tax — which is levied on individuals — corporation tax is charged on the profits earned by the company as a legal entity in its own right. It applies to UK-resident companies on their worldwide profits, and to non-UK-resident companies on profits arising from UK activities.
Sole traders and partnerships do not pay corporation tax. Their profits are taxed through self-assessment income tax instead. Corporation tax is specifically a limited company obligation — one of the key financial differences between operating as a sole trader and incorporating. Our post on sole trader vs limited company accounting covers these structural differences in more detail.
Every UK limited company must register with HMRC for corporation tax within three months of starting to trade. The company then files a corporation tax return (form CT600) and pays any tax due each year, regardless of whether it actually distributes profits to its shareholders.
Accounting Profit vs Taxable Profit
The most important concept to grasp is that the profit figure in your accounts and the profit figure on which you pay tax are not the same thing. Your accountant starts with accounting profit — the net profit shown in your income statement — and then makes a series of adjustments to arrive at taxable profit.
Disallowed expenses are costs that have been deducted in arriving at accounting profit but which HMRC does not permit as tax deductions. Common examples include client entertainment (meals, events, hospitality), fines and penalties, and the depreciation charge itself.
Capital allowances are HMRC’s own system for giving tax relief on capital expenditure — they replace the depreciation charge that is disallowed. Rather than deducting accounting depreciation, the company claims capital allowances instead. The Annual Investment Allowance (AIA) currently allows most businesses to deduct 100% of qualifying capital expenditure in the year of purchase, up to the AIA limit. Writing Down Allowances (WDAs) apply to expenditure above the AIA limit. Our guide on capital vs revenue expenditure explains the distinction between capital items and revenue costs in detail.
The golden rule: accounting depreciation is always added back when calculating taxable profit, and capital allowances are claimed in its place. These two figures will rarely be the same, which is why your tax charge almost never equals your accounting profit multiplied by the tax rate.
Other adjustments may include timing differences on accruals, losses carried forward from earlier years, and any income that is taxable but not yet recognised in the accounts (or vice versa).
Corporation Tax Rates (UK)
From 1 April 2023, the UK moved to a two-rate corporation tax system based on the level of profits. The previous flat rate of 19% was replaced with a tapered structure.
| Profit Level | Rate | Notes |
|---|---|---|
| Up to £50,000 | 19% (Small Profits Rate) | Full small profits rate applies |
| £50,001 – £250,000 | 19%–25% (Marginal Relief) | Effective rate tapered between the two rates |
| Over £250,000 | 25% (Main Rate) | Full main rate applies |
The profit thresholds are divided by the number of associated companies — so a group of three companies would each have thresholds of £50,000 ÷ 3 and £250,000 ÷ 3, meaning the main rate kicks in earlier for each entity. Associated company rules are a common area of complexity for group structures.
Marginal Relief provides a smooth transition between the small profits rate and the main rate. Rather than jumping sharply from 19% to 25% at the £50,000 threshold, the effective rate rises gradually as profits increase through the marginal band. Your accounting software or accountant will calculate the exact relief applicable.
Worked Example — Stoneleigh Digital Ltd
Stoneleigh Digital Ltd is a UK software development company. For the year ended 31 March, the company’s accounts show the following.
| Item | £ | Notes |
|---|---|---|
| Net profit per accounts | 85,000 | Per income statement |
| Add back: depreciation | 12,000 | Disallowed — replaced by capital allowances |
| Add back: client entertainment | 3,200 | Disallowed expense |
| Less: Annual Investment Allowance | (18,000) | Capital allowance on equipment purchased |
| Less: prior year loss relief | (5,000) | Losses carried forward from prior period |
| Taxable Profit | 77,200 | |
| Corporation Tax @ 25% (main rate) | 19,300 | Profits above £250k threshold — n/a here |
| Marginal Relief | (1,540) | Relief calculated on profits in marginal band |
| Corporation Tax Liability | 17,760 | Effective rate approx 23% |
Stoneleigh’s accounting profit of £85,000 becomes a taxable profit of £77,200 after the required adjustments. The tax liability of £17,760 represents an effective rate of approximately 23% on taxable profit — higher than the small profits rate of 19% but below the main rate of 25%, because the profits fall in the marginal relief band.
Key Deadlines: When to File and Pay
Two separate deadlines govern corporation tax — one for filing and one for payment — and they are not the same date.
Payment deadline: For most small companies, corporation tax must be paid to HMRC within nine months and one day after the end of the accounting period. For a company with a 31 March year end, tax for that period is due by 1 January of the following year. Large companies (broadly those with profits above £1.5 million) pay in quarterly instalments during and after the accounting period.
Filing deadline: The CT600 corporation tax return must be filed with HMRC within twelve months of the end of the accounting period — three months after the payment deadline. HMRC imposes automatic late filing penalties starting at £100, rising to £200 after three months, with additional tax-geared penalties for returns more than six months late.
Missing the payment deadline triggers interest charges on the unpaid amount from the due date. These are not discretionary — HMRC calculates and charges them automatically. Provisioning for the tax liability well in advance and keeping it separate in a dedicated savings account is standard good practice for any limited company.
How Corporation Tax Appears in Your Accounts
The corporation tax charge is shown on the income statement as a separate line below operating profit and interest, reducing net profit to the post-tax figure.
Before the tax is actually paid, the liability sits on the balance sheet as a current liability — “Corporation Tax Payable” or “Tax Creditor.” It is created by the journal entry that recognises the charge (debit: Tax Expense; credit: Tax Payable) and cleared when the payment reaches HMRC (debit: Tax Payable; credit: Bank).
In the cash flow statement (indirect method), the tax payment appears as a cash outflow within operating activities — typically as a separate line “Corporation tax paid,” because the timing of payment rarely matches the period the charge was recognised in. A company might recognise the tax charge for the year ended 31 March in those accounts, but not pay it until the following January.
Key Takeaways
- Corporation tax is paid by UK limited companies on their taxable profits. Sole traders are not subject to it — they pay income tax through self-assessment instead.
- Taxable profit is not the same as accounting profit. Depreciation is disallowed and replaced by capital allowances; client entertainment and penalties are disallowed outright; prior year losses can be offset.
- UK corporation tax rates (from April 2023): 19% on profits up to £50,000, 25% on profits over £250,000, with marginal relief tapering the rate in between. Thresholds are divided among associated companies.
- Tax must be paid within nine months and one day of the period end. The CT600 return must be filed within twelve months. These are separate deadlines — missing either triggers penalties or interest.
- The corporation tax liability sits on the balance sheet as a current liability until paid, and the tax charge appears below operating profit on the income statement.
Related reading: If you found this guide useful, you may also want to read our posts on gross, operating, and net profit margins, capital vs revenue expenditure, understanding the income statement, and understanding the balance sheet.