Corporation tax is simple in principle and easy to get wrong in the detail. This note sets out how it works for an ordinary UK trading company, so that the bill and the dates come as no surprise.
What is taxed
A limited company pays corporation tax on its taxable profits: its trading profits, investment income such as interest and rent, and most gains on selling assets. There is no tax-free allowance like the personal allowance that an individual has. A company making a profit of one pound has corporation tax to pay on it.
Taxable profit is not the same as the profit in your accounts. The accounts are the starting point, and the tax computation then adds back items that tax law does not allow, such as depreciation and client entertaining, and takes off the deductions it does allow, such as capital allowances.
A new company must tell HMRC within three months of starting to trade. Tax is then worked out for each accounting period, which is normally the twelve months to your year end and has no connection with the 5 April tax year that individuals use.
The rates
Two rates have applied since 1 April 2023, and the government confirmed at the October 2026 Budget that the main rate stays at 25%.
| Taxable profits | Rate |
|---|---|
| Up to £50,000 | 19% |
| £50,001 to £250,000 | 25%, less marginal relief |
| Over £250,000 | 25% |
The limits are shared. They are divided by one plus the number of associated companies, broadly those under common control, so an owner with four companies has limits of £10,000 and £50,000 for each. They are also reduced in proportion for a period shorter than twelve months.
Marginal relief
Between the two limits, tax is charged at 25% and then reduced by a calculation that smooths the step between the rates. The formula is 3/200 of the difference between the upper limit and your profits.
Take a company with profits of £100,000 and no associated companies. Tax at 25% would be £25,000. Marginal relief is 3/200 of £150,000, which is £2,250. The bill is therefore £22,750, an overall rate of 22.75%.
The figure worth knowing is the rate on each extra pound within that band, which works out at 26.5%. That is higher than the main rate, and it is why a pension contribution or a capital purchase can be especially valuable to a company in this range.
What you can deduct
A cost is deductible if it is revenue in nature and incurred wholly and exclusively for the purposes of the trade. Wages, rent, materials, insurance and professional fees normally qualify without any trouble, as do employer pension contributions in most cases.
- Client entertaining is never deductible, however useful the lunch.
- Depreciation is added back and replaced by capital allowances.
- The annual investment allowance gives full relief on up to £1 million a year of most plant and machinery, though not on cars.
- Fines and penalties, including those from HMRC, are not deductible.
- Directors’ salaries are deductible. Dividends are not, as they are paid out of profit after tax.
The three dates
Each year end brings three deadlines, and they do not fall in the order most people expect, because the tax has to be paid before the return is due.
| What | When | Date |
|---|---|---|
| Accounts at Companies House | 9 months after the year end | 31 December 2026 |
| Corporation tax payment | 9 months and 1 day after | 1 January 2027 |
| Company tax return | 12 months after | 31 March 2027 |
Our tax calendar works these out for any year end. Companies with profits above £1.5 million, a limit which is also shared among associated companies, generally pay by quarterly instalments instead, starting during the year itself. First accounts after incorporation follow different rules.
If you are late
For returns due on or after 1 April 2026, the fixed penalty for a late company tax return is £200, rising to £400 once it is more than three months late. These were doubled from £100 and £200. If three returns in a row are late, the figures rise to £1,000 and £2,000. HMRC can add a further charge of 10% of the unpaid tax if the return is still outstanding six months after the due date, and again at twelve months.
Late payment carries interest from the due date. Late accounts are a separate matter handled by Companies House, with penalties of £150 to £1,500 for a private company depending on how late they are, doubled if they are late two years running.
A useful habit
The simplest protection is a second bank account. Moving a fixed percentage of each month’s profit into it means that the money is already there when the payment falls due, and nobody is tempted to treat it as cash the business can spend.
Written for general guidance on the rules as they stood in November 2026, covering the 2026/27 tax year. Tax depends on individual circumstances and the rules change, so please take advice before acting on anything here.