UK Corporation Tax: A Beginner's Guide to Business Tax

What is UK Corporation Tax?

Corporation Tax is a tax on the taxable profits of a UK-based limited company. This includes profits from trading, investments, and selling assets for a gain (chargeable gains). It's a key part of the government's revenue and a significant cost for every business.

You must register your company with HMRC for Corporation Tax when you start trading, and you must pay it nine months and one day after the end of your company's accounting period.

How is Corporation Tax Calculated?

Unlike Income Tax, which has multiple tax bands, UK Corporation Tax has a simpler structure based on your company's profits.

Corporation Tax Rates (2025/26 Tax Year)

• Small Profits Rate: 19% for companies with profits up to £50,000.
• Main Rate: 25% for companies with profits of £250,000 or more.
• Marginal Relief: For companies with profits between £50,000 and £250,000, a tapered rate applies to bridge the gap between the small profits rate and the main rate. This ensures a smooth transition.

Note: These thresholds are pro-rated if your company's accounting period is less than 12 months or if you have associated companies (companies under common control).

What is a "Deductible Expense"?

To calculate your company's taxable profit, you can subtract certain business expenses from your total income. These are known as "deductible" or "allowable" expenses.

General Rule: An expense is deductible if it is "wholly and exclusively" for the purpose of your trade.

Common Deductible Expenses:

• Salaries and wages, including Employer National Insurance Contributions.
• Office costs, such as rent, utilities, and stationery.
• Travel costs, including fuel, train tickets, and hotel stays for business purposes.
• Marketing and advertising costs.
• Professional fees for accountants, solicitors, or consultants.
• Interest on business loans.

Note: Some expenses, like entertaining clients, are not deductible for Corporation Tax purposes.

How to Reduce Your Corporation Tax Liability

Beyond claiming all your legitimate expenses, there are several tax reliefs and strategies you can use to reduce your company's tax bill.

1. Capital Allowances

Capital Allowances allow you to deduct the cost of certain long-term assets, such as machinery, equipment, vehicles, and computers, from your profits. This is a crucial relief for businesses that invest in new assets.

• Annual Investment Allowance (AIA): Allows you to deduct 100% of the cost of most plant and machinery, up to a certain limit (currently £1 million).

2. Research and Development (R&D) Tax Credits

If your company undertakes innovative projects to create new products, processes, or services, you may be able to claim R&D tax relief. This can significantly reduce your tax bill or, for loss-making companies, result in a cash payment from HMRC.

3. Loss Relief

If your company makes a loss in a financial year, you can use that loss to reduce your tax bill. You can either carry the loss forward to offset future profits or, in some cases, carry it back to offset profits from previous years.

Final Thoughts for New Business Owners

• Record Keeping is Key: You must keep accurate records of all your income and expenses for at least six years. This is essential for preparing your company's accounts and Corporation Tax return.
• Professional Advice: The world of corporate tax can be complex. While this guide provides a solid overview, working with an accountant is highly recommended to ensure compliance and to help you take advantage of all available reliefs.
• Dividends vs. Salary: As a director, you have the choice of taking your income as a salary or as dividends. Both have different tax implications for you personally and for the company. An accountant can advise you on the most tax-efficient combination.