How Is Corporation Tax Calculated?

If you run a limited company in the UK, corporation tax is one of the most important financial obligations to understand and manage. It’s not just about compliance—knowing how corporation tax is calculated can help you plan better, avoid penalties, and potentially reduce your tax bill legally.

In this guide, we’ll explain what corporation tax is, how to calculate it step by step, how to pay it, and how to make sure you don’t pay more than you need to. Whether you’re just starting out or are an experienced business owner looking for clarity, we’ve got you covered.

What is Corporation Tax?

Corporation tax is a tax paid by UK limited companies and certain other organisations, such as clubs, societies, and co-operatives, on their taxable profits. These profits can come from a variety of sources, including trading (the core business activity), investments, and the sale of assets like property or shares.

Unlike income tax, which individuals pay progressively, corporation tax is charged at a flat rate depending on the level of profit. Since April 2023, the UK has operated a two-tiered system:

• Companies with profits of £50,000 or less pay a small profit rate of 19%.
• Companies with profits over £250,000 pay the main rate of 25%.
• Companies with profits between these two thresholds pay a tapered rate, known as marginal relief, which gradually increases the effective tax rate from 19% to 25%.

Understanding which rates your company falls under is the first step in working out your corporation tax liability. Your accountant, or an online corporation tax calculator, can help you determine this based on your figures.

How to Calculate Corporation Tax

While the final figure you pay may seem straightforward, getting to that number requires working through a few key steps. Here’s how to calculate your corporation tax accurately:

Step 1: Work out your company’s total income

Start by calculating your company’s gross income for the accounting period. This includes all sources of revenue, such as sales, commissions, service income, dividends from investments, interest earned, and gains made from selling assets. All of this contributes to your total revenue.

Step 2: Deduct allowable business expenses

From your total income, subtract the costs incurred solely for the purpose of running your business. These expenses must be “wholly and exclusively” for business use to qualify as deductible. Examples include employee salaries and National Insurance contributions, rent for your business premises, office utilities like electricity and broadband, insurance premiums, equipment hire, professional services such as legal and accountancy fees, and business-related travel costs.

Even things like staff training, website maintenance, and marketing expenses can qualify, provided they are directly related to your trade. Keeping detailed records of all expenses is essential for making accurate deductions.

Step 3: Apply capital allowances

If your company has invested in significant business assets—such as vehicles, machinery, or computers—these may not be deducted as day-to-day expenses but instead fall under capital allowances. Capital allowances let you write off the cost of these assets over time against your taxable profit.

There are several types of capital allowance. The most common is the Annual Investment Allowance (AIA), which allows you to deduct the full cost of qualifying items up to a set limit (currently £1 million). For assets not covered by AIA, writing down allowances lets you claim a percentage of the cost each year. In some cases, you can also claim First Year Allowances (FYA) for energy-efficient equipment.

Step 4: Add back disallowable expenses

Certain expenses may not be allowed for tax purposes, even if they’ve been deducted from your profit and loss accounts. Examples include client entertainment, fines and penalties, and depreciation charges. These need to be added back to your profit before calculating your final taxable amount.

Step 5: Calculate your taxable profit

After working through the above adjustments, you’ll arrive at your taxable profit. This figure is used to calculate how much corporation tax your business owes.

Step 6: Apply the appropriate corporation tax rate

Finally, you apply the correct corporation tax rate to your taxable profits. Depending on your profit band, you’ll use either the 19% small profits rate, the 25% main rate, or apply marginal relief if your profit falls between the two thresholds. Marginal relief reduces the tax liability gradually rather than making a sharp jump from 19% to 25%.

When Do I Need to Pay My Corporation Tax?

Corporation tax is due nine months and one day after the end of your accounting period. For example, if your company’s accounting year ends on 31 March 2025, your corporation tax payment must reach HMRC by 1 January 2026.

Larger companies that have taxable profits over £1.5 million must pay their corporation tax in installments across the year. Missing a payment deadline will result in interest being charged on the outstanding amount, so it’s vital to plan ahead and ensure funds are available in advance.

How to Pay Corporation Tax

Corporation tax must be paid electronically. There are several methods to choose from:

You can pay through online banking using Faster Payments, CHAPS, or Bacs transfers. You can also use a corporate credit or debit card via HMRC’s online payment portal. If you’d prefer, you can set up a direct debit, but bear in mind that it takes several days to process, so allow enough time before the deadline.

Regardless of the method you choose, make sure to include your 17-character payment reference—this is unique to your business and helps HMRC identify your payment correctly. You can find this reference in your HMRC online account or in previous correspondence.

Allowed Expenses and Capital Allowances

Understanding what qualifies as an allowable expense can significantly reduce your taxable profit and therefore your corporation tax bill.

Allowable expenses

Allowable expenses include most of the costs incurred in running your company. For example, if you rent an office, your monthly rent and utilities are fully deductible. If you hire a marketing agency or pay for digital ads, those are allowable too. Business-related travel, including mileage, train tickets, and overnight accommodation, also qualify—though personal or mixed-use travel does not.

Costs for software subscriptions, employee training, legal advice, and even interest on business loans may also be deducted if they serve a clear business purpose.

Capital Allowances

In contrast, capital allowances apply to high-value items that your business will use over several years, such as machinery, commercial vehicles, or computer systems. These are claimed over time, though the Annual Investment Allowance lets you claim 100% of eligible costs up to the set limit within the first year. Make sure to keep detailed purchase invoices and dates for accurate record-keeping.

Corporation Tax Filing Obligations

Filing obligations for corporation tax are strict and time-sensitive. Here’s what you need to do:

Your company must file a Company Tax Return (CT600) with HMRC every year. This includes your calculated taxable profits, the corporation tax owed, and supporting documentation such as tax computations and capital allowance claims. The return must be submitted within 12 months of the end of your accounting period.

In addition to this, your company accounts must be submitted to Companies House, typically within nine months of the year-end. Most companies file both their CT600 and annual accounts online using HMRC-approved software.

Filing late can result in automatic penalties—even if you don’t owe any tax—so it’s vital to stay on top of your deadlines.

How to Reduce Your Corporation Tax Bill

There are several legitimate strategies that UK companies can use to reduce their corporation tax bill:

Firstly, ensure you are claiming all allowable expenses. Even small recurring costs can add up over the year. Secondly, consider making pension contributions, either for employees or directors—these are tax-deductible and can also be a great staff benefit.

If your company is investing in product development, software, or technical processes, you may qualify for Research and Development (R&D) tax credits, which can reduce your bill significantly. You can also explore capital allowances for asset purchases and use the Annual Investment Allowance to deduct full asset costs in the year of purchase.

Tax planning methods such as extracting profits through dividends rather than salary, or timing investments strategically before your year-end, can also help reduce your liability.

Common Corporation Tax Mistakes to Avoid

It’s easy to make errors when dealing with corporation tax—especially if you’re doing it alone. Here are some of the most common mistakes:

Missing deadlines is perhaps the most frequent error. HMRC enforces strict timelines, and late payments or filings can lead to penalties and interest. Another common mistake is not claiming all allowable expenses, often due to poor record-keeping or lack of awareness.

Businesses also regularly misapply tax rates, especially when dealing with marginal relief or group structures. Misclassifying capital assets as expenses (or vice versa) can lead to incorrect tax bills and trigger HMRC scrutiny. Ignoring tax relief schemes like R&D credits or failing to review your financial strategy annually can result in overpaying taxes unnecessarily.

Working with a professional accountant is the best way to avoid these pitfalls.

Choose Braant for Corporation Tax Advice

At Braant Accountants, we understand that navigating corporation tax can be complex. That’s why we offer tailored advice and hands-on support for businesses of all sizes. Whether you need help calculating your tax bill, preparing your CT600, or developing a long-term tax strategy, we’re here to make the process seamless and stress-free.

We don’t just ensure compliance—we help you operate more efficiently, spot opportunities for tax relief, and stay ahead of HMRC deadlines. From allowable expenses to R&D claims and capital allowances, we help you make informed decisions that benefit your bottom line.