What corporation tax is and who pays it

Corporation tax is charged on the taxable profits of UK limited companies, and also applies to some clubs, societies, and unincorporated associations. It covers trading profits, investment income, and chargeable gains from selling business assets for more than their original cost.

Sole traders and partnerships don’t pay corporation tax — their profits are taxed through Income Tax and Self Assessment instead. If you’re comparing structures, that’s one of the more significant practical differences between operating as a sole trader and incorporating.

You register for corporation tax as soon as you start trading through a limited company, whether or not you expect to make a profit in year one.

Current rates and thresholds

Since April 2023, the UK has run a two-rate system rather than a single flat rate:

These thresholds are for a standalone company with a 12-month accounting period and no associated companies. Both figures are reduced if either of those doesn’t apply to you (see the following two sections).

How marginal relief works

Rather than jumping straight from 19% to 25% once profits pass £50,000, marginal relief smooths the transition, producing an effective rate somewhere between the two across the £50,000–£250,000 band. The effective marginal rate on profits within this band works out at 26.5% — higher than the main rate itself — because the relief is designed to gradually claw back the benefit of the lower rate as profits rise, rather than applying it as a simple sliding scale.

In practice, most small business owners don’t calculate marginal relief manually — accounting software or an accountant will apply the formula automatically as part of preparing your corporation tax computation. What’s worth understanding is the shape of it: profits just above £50,000 are taxed at a rate noticeably higher than 19%, and it isn’t until profits approach £250,000 that the effective rate converges on 25%.

Associated companies

If your company has associated companies — broadly, other companies under common control — the £50,000 and £250,000 thresholds are divided by the total number of associated companies plus one. This catches out a fair number of business owners who set up multiple companies without realising it affects their tax bands.

For example, a company with one associated company has its thresholds halved: £25,000 and £125,000 rather than £50,000 and £250,000. With three associated companies, the thresholds divide by four: £12,500 and £62,500.

The rules for what counts as “associated” are broader than many people expect — common shareholders with control across multiple companies can trigger this even where the businesses operate entirely independently of each other. If you have more than one company, or you’re considering setting one up, it’s worth checking this specifically with your accountant rather than assuming it won’t apply.

Calculating taxable profit

Taxable profit isn’t the same as the profit shown in your management accounts. Starting from your accounting profit, you need to:

• Add back disallowable expenses — client entertaining, most fines and penalties, and depreciation (which is replaced by capital allowances for tax purposes)
• Deduct capital allowances — most equipment purchases qualify for the Annual Investment Allowance, which gives 100% relief on qualifying plant and machinery up to £1 million a year, covering the overwhelming majority of small business capital spending
• Adjust for any chargeable gains on the disposal of business assets for more than their original cost
• Account for any losses brought forward from previous accounting periods, which can usually be set against current profits

Getting this calculation right is one of the main reasons small companies use an accountant rather than attempting it themselves — see our guide to choosing an accountant if you don’t already have one.

Registering for corporation tax

If you register your company through Companies House using their standard incorporation process, you can usually set up corporation tax at the same time. If you register your company in another way, or start trading after incorporation, you must notify HMRC within three months of starting to trade.

“Starting to trade” is interpreted broadly — it can include buying stock, advertising, or taking on staff, not just making your first sale. Registering late can result in a penalty, so it’s worth doing as soon as you’re genuinely underway rather than waiting for your first invoice.

Filing and payment deadlines

Two separate deadlines apply, and they’re often confused:

Larger companies, with profits above £1.5 million, pay in quarterly instalments rather than a single lump sum — not a scenario most small businesses need to plan around, but worth knowing exists if your company is growing quickly.

Common mistakes

Useful resources

• HMRC Corporation Tax rates — gov.uk/corporation-tax-rates
• HMRC guidance on marginal relief — gov.uk/simpler-corporation-tax-marginal-relief-calculator
• Our sole trader vs limited company guide — which structure fits your business
• Our guide to choosing an accountant — qualifications, costs, and questions to ask