How to Calculate Corporation Tax in the UK

Corporation tax in the UK is straightforward once you understand the bands and allowable expenses. If you run a limited company, you'll pay corporation tax on your profits — and the amount depends on your profit level. There are several legitimate ways to reduce what you owe. This guide explains the calculation with real numbers and practical steps to minimize your bill.

What is Corporation Tax?

Corporation tax is the tax you pay on the profits of a limited company. It's different from personal income tax (which employees pay on salary) and different from self-employment tax (which sole traders and partnerships pay). Only limited companies pay corporation tax.

If you're a sole trader or run a partnership, you don't pay corporation tax — you pay income tax on your profits instead. If you've incorporated as a limited company, corporation tax is your main business tax liability.

Current UK Corporation Tax Rates (as of 2026)

The UK operates a tiered system with marginal relief to smooth the transition between rates:

Small profits rate: 19% on profits up to £50,000
Marginal relief band: 19–25% on profits between £50,000 and £250,000
Main rate: 25% on profits above £250,000

Marginal relief means you don't jump suddenly from 19% to 25% when you cross the £50,000 threshold. Instead, the rate rises gradually. This rewards small companies without penalizing growth.

For example:

A company with £40,000 profit pays 19% corporation tax: £7,600
A company with £60,000 profit doesn't pay 25% on everything; the effective rate is around 19.5%, not a sudden jump
A company with £300,000 profit pays 25%: £75,000

The exact marginal relief formula is: (profit – £50,000) × 19/400. Most accounting software calculates this automatically, but HMRC's guidance on corporation tax has the full detail.

How to Calculate Your Corporation Tax: Step-by-Step

Step 1: Calculate your profit Start with revenue, subtract all allowable expenses, and you have profit. Only profit is subject to corporation tax — not revenue.

Step 2: Identify allowable expenses These reduce your taxable profit:

Salaries and employee costs (including Employer's National Insurance)
Pension contributions you make on behalf of employees (see our guide on pension contributions and corporation tax relief)
Office rent and utilities
Equipment, computers, and office furniture (via capital allowances)
Professional fees (accountancy, legal, business insurance)
Vehicle running costs (fuel, maintenance, insurance)
Interest on business loans
Training and professional subscriptions
Repairs and maintenance (but not improvements)

Not allowable:

Director's drawings
Loan repayment principal (interest is allowed)
Depreciation (use capital allowances instead)
Entertaining clients (mostly disallowed)

Step 3: Apply capital allowances Instead of depreciation, UK companies claim capital allowances for tax relief on assets. Write-off periods depend on asset type. If you've bought equipment, vehicles, or office fixtures, capital allowances reduce your taxable profit. For detailed guidance, see our post on calculating depreciation for business assets.

Step 4: Calculate taxable profit Taxable profit = Revenue – allowable expenses – capital allowances

Step 5: Apply the corporation tax rate

If profit ≤ £50,000: multiply by 19%
If profit £50,001–£250,000: marginal relief applies (effective rate 19–25%)
If profit > £250,000: multiply by 25%

Step 6: Pay on time Corporation tax is due 9 months and 1 day after your accounting year end. If you owe more than [STAT NEEDED: large company installment threshold], you must pay in quarterly installments.

Worked Example: How £100,000 Profit Becomes a Tax Bill

Scenario: A digital marketing agency turns over £200,000 in year 1.

Revenue: £200,000 Less expenses:

Salaries (2 staff, with NI): £80,000
Office rent: £9,600
Software subscriptions: £3,200
Professional indemnity insurance: £1,800
Accountancy fees: £1,500
Vehicle running costs: £2,100
Phone & internet: £900
Capital allowance (new laptops, desks): £5,000

Taxable profit: £200,000 – £104,100 = £95,900

Because profit falls between £50,001 and £250,000, the effective rate is around 19.5% after marginal relief:

Corporation tax owing: approximately £18,700

The agency keeps roughly £77,200 of the £95,900 profit after tax. (They'd also pay dividend tax if they draw money as dividends, but that's separate.)

Ways to Reduce Your Corporation Tax Bill

Maximize allowable expenses Many directors forget to claim costs they're entitled to: training, professional subscriptions, home office (if you have a qualifying office), equipment. Keep detailed records.

Claim pension contributions Contributions to a pension on behalf of yourself or employees are allowable deductions before calculating taxable profit. A £20,000 pension contribution reduces profit by £20,000, saving corporation tax at 19–25%. Our guide on pension contributions and corporation tax relief explains this in detail.

Use capital allowances Depreciation is not allowable. You must use capital allowances instead — which are more generous in early years because of the written-down allowance method. See how to calculate depreciation for the full picture.

Offset losses If your company made a loss in a previous year, you can offset it against this year's profit, reducing tax liability. Losses carry forward indefinitely.

Pay salaries strategically If you and a spouse both work in the company, paying salary up to the personal allowance (£12,570) to each means no income tax or Employee's National Insurance. This is worth reviewing with an accountant based on your profit level.

Claim R&D relief If you do research and development, R&D tax relief can increase deductions on qualifying spend — worth exploring in tech, biotech, engineering, and pharma.

Common Corporation Tax Mistakes

Not separating personal and business expenses Director's drawings and personal vehicle use aren't business expenses. Keep clear records of what's business versus personal.

Forgetting capital allowances Depreciation is not allowable. Capital allowances are. If you buy equipment and don't claim capital allowances, you're overpaying tax.

Missing payment deadlines Corporation tax is due 9 months and 1 day after your accounting year end. Miss it, and HMRC charges interest and penalties: 5% if under 12 months late, 10% if over. Set a calendar reminder.

Using the wrong profit figure Profit for tax purposes differs from profit on your financial statements. Add back depreciation and disallowed expenses. A spreadsheet or accountant keeps these separate.

Failing to plan for installments If you owe more than [STAT NEEDED], you must pay in quarterly installments. This catches growing companies off guard.

Frequently Asked Questions

Q: Do I pay corporation tax if I'm a sole trader? A: No. Sole traders and partnerships pay income tax on profits, not corporation tax. Corporation tax only applies to limited companies. Incorporating has accounting costs (usually £500–£2,000 yearly for filing) — factor that in before switching.

Q: Can I reduce corporation tax by paying myself a higher salary? A: Partially. Salaries are allowable expenses, reducing taxable profit. But you pay income tax and Employee's National Insurance on salary — combined rate around 32% up to £50,270 — so there's no free lunch. The optimal salary often sits around £12,570 (the personal allowance) plus what minimizes total tax and National Insurance. Talk to your accountant; it depends on profit level and dividend policy.

Q: What's the difference between corporation tax and capital gains tax? A: Corporation tax applies to company profits year-on-year. Capital gains tax applies when the company (or you personally) sells an asset for more than you paid. If your company buys a property for £200,000 and sells it for £250,000, the £50,000 gain is taxed as corporation tax, not capital gains tax separately. Read our guide on capital gains tax to understand when you owe CGT personally.

Q: When do I pay corporation tax — monthly, quarterly, or once? A: Standard payment is a single lump sum 9 months and 1 day after your accounting year end. If you owe more than [STAT NEEDED], you must pay in installments: typically due at months 7, 10, and 16 of your accounting period (so the last installment arrives after year-end). Most small companies pay once.

Q: Can I reduce corporation tax by donating to charity? A: Yes. Charitable donations are allowable expenses if made in the accounting period. A £10,000 donation reduces taxable profit by £10,000, saving corporation tax at 19–25%. This applies only to donations the company makes; personal donations don't count.

Q: What records must I keep for corporation tax? A: Keep records for 6 years: invoices (sales and expenses), bank statements, payroll records, VAT records (if registered), capital asset purchases, and loan agreements. Digital copies are fine. HMRC can enquire up to 4 years back for careless errors and 6 years for deliberate errors. Our guide on HMRC tax enquiries covers how to respond.

Q: Can I claim home office expenses? A: Yes, if you have a dedicated office used only for business. Claim:

Proportional mortgage interest or rent
Proportional council tax
Utilities: gas, electricity, water
Internet and phone (business use)
Office equipment and furniture

Or use the simplified approach: £26/month (£312/year) without detailed records.

Q: How does the ROI of a business investment affect corporation tax? A: It doesn't directly. Investment in equipment, property, or research is claimed via capital allowances, not corporation tax itself. However, understanding the return on investment helps you decide which assets to buy. See our guide on calculating ROI to model profitability and plan your deductions.

Next Steps

Run your numbers, claim everything you're entitled to, and file on time. Your accountant or bookkeeper can handle detailed calculations, but understanding the principles means you can spot errors and ask better questions. For more detail, check out our posts on payroll tax for small businesses and keep the gov.uk corporation tax page bookmarked — rates and rules change annually.