Corporation tax is the single largest tax most UK limited companies pay. It applies to every pound of taxable profit, from the first sale to the last, and the structure of the company's tax position over the year shapes everything from director pay to investment timing to whether claiming a particular relief is worth the administrative cost. Getting it right is not optional. Getting it efficient is what separates a well-run small business from one that hands tax money to HMRC unnecessarily.
This guide covers the corporation tax system end to end. The current rates and the marginal relief band that applies between £50,000 and £250,000 of profit. What expenses you can deduct and what HMRC consistently rejects. How the CT600 return works in practice. The deadlines and the penalties for missing them. R&D tax credits for companies doing genuine technical work. Capital allowances on equipment and commercial assets. And the salary-versus-dividends question that every owner-managed limited company faces. Each section links to a detailed companion piece for the specific decision you are working through.
Corporation tax is paid before the return is filed
A quirk that catches new directors out: corporation tax is due 9 months and 1 day after the end of your accounting period, but the CT600 return is due 12 months after period end. You pay first, file later. Late payment incurs interest from the payment due date even when the return is still in time.
How UK corporation tax works in 2026
A limited company pays corporation tax on its profits. Profits, for tax purposes, are calculated as taxable income less allowable expenses, less capital allowances, less reliefs (R&D, patent box, group relief, and so on). The result is the figure the corporation tax rate is applied to.
For accounting periods ending in the 2025/26 tax year, the headline rates are:
- 1Small profits rate: 19% on profits up to £50,000.
- 2Main rate: 25% on profits above £250,000.
- 3Marginal relief: a tapered effective rate between £50,000 and £250,000 that rises smoothly from 19% to 25% as profit grows. Companies in this band pay the main 25% rate and then claim marginal relief to bring the effective rate down.
Most early-stage limited companies sit firmly in the 19% small profits rate. Once profits cross £50,000 the marginal relief calculation kicks in and the effective rate starts to rise. Once profits cross £250,000 the company pays a flat 25% on every additional pound. The marginal band is structurally important because it means the marginal rate of tax on the next pound of profit can briefly hit 26.5% inside the band, which has implications for timing of expenses, dividends, and capital expenditure.
The CT600 return: what it actually contains
The CT600 is the UK corporation tax return. It is filed online with HMRC and accompanied by full statutory accounts and tax computations. Most limited companies file via accounting software (Xero, QuickBooks, FreeAgent) or via an accountant's tax software. Direct filing through HMRC's online portal is possible but rare in practice.
The return reports profits, calculates tax, claims any reliefs (R&D, capital allowances, losses brought forward), and produces the tax liability. HMRC processes routine returns automatically. Returns selected for compliance review are taken out and looked at by a caseworker, sometimes followed by formal enquiry.
You file accounts twice
A limited company files its annual accounts twice in slightly different formats. Once at Companies House (statutory accounts, due 9 months after period end) and once at HMRC alongside the CT600 (full accounts plus computations, due 12 months after period end). Most accounting software prepares both from the same underlying data so the two are consistent by construction.
What expenses you can deduct from profit
Corporation tax is paid on profits, and profits are calculated after deducting allowable business expenses. The legal test for deductibility is that the expense was incurred "wholly and exclusively" for the purposes of the trade. If an expense fails this test, it cannot be deducted, even if it was paid from the company bank account.
In practice, most ordinary running costs are deductible: salaries and employer National Insurance, rent, utilities, software subscriptions, professional fees, advertising, training related to current work, and so on. The patterns that get pushed back on by HMRC tend to be entertainment (largely disallowed), private use of business assets, and expenses with a personal element where the wholly-and-exclusively test is hard to satisfy.
Capital expenditure (equipment, vehicles, fit-out work) is not deducted as an expense in the normal sense. Instead it is depreciated through the capital allowances regime, which we cover in detail in a dedicated spoke.
The reliefs that materially reduce the bill
Beyond ordinary expenses, several specific reliefs can reduce corporation tax substantially when they apply.
R&D tax credits
For companies doing genuine technical work (resolving scientific or technological uncertainty), the R&D tax credits scheme returns 20% of qualifying R&D expenditure (or 27% for R&D-intensive SMEs spending over 30% of total expenditure on R&D). Qualifying spend covers staff time, contractor costs, software, cloud computing, and consumables. Loss-making companies can take the credit as a cash payment. Misunderstood by many small businesses, who assume the scheme is for academic-style research only when in practice it covers most novel software development, engineering, and process innovation.
Capital allowances
For purchases of equipment, machinery, vehicles, and certain commercial property fit-out, the capital allowances regime determines how the cost is deducted from taxable profits. The Annual Investment Allowance (AIA) gives 100% first-year relief on qualifying spend up to £1,000,000 per year. Full Expensing gives 100% first-year relief on most plant and machinery for limited companies (introduced 2023, made permanent 2024). For most small businesses the AIA covers their entire annual capital spend in year one.
Loss relief
Trading losses can be carried forward against future profits, carried back against the previous year's profits, or used as group relief where the company is part of a group. Loss-making companies may also be able to surrender losses for an R&D cash credit at the same time. The mechanics are slightly intricate but the principle is straightforward: losses do not disappear, they offset tax in another year.
Deadlines and the penalty system
Corporation tax has two distinct deadlines that new directors frequently confuse:
Corporation tax key deadlines
| Obligation | Due | Penalty for missing |
|---|---|---|
| Pay corporation tax | 9 months and 1 day after period end | Interest from due date; no fixed penalty for late payment alone |
| File CT600 return | 12 months after period end | £100 to £200 flat penalty; rising to 10% of unpaid tax at 6 months |
| File statutory accounts at Companies House | 9 months after period end | £150 to £1,500 (doubles for repeat lateness) |
| Notify HMRC of new company | Within 3 months of starting to trade | Calculated against tax that would have been due |
The CT600 late filing penalty escalator: £100 if up to 3 months late (£200 if previous year was also late), another £200 at 3-6 months, then 10% of unpaid corporation tax at 6 months, and another 10% at 12 months. On a £40,000 corporation tax bill, twelve months of lateness is £8,000 in percentage-based penalties alone, on top of interest and the flat charges.
Director pay: the salary-versus-dividends decision
For owner-managed limited companies, director pay is the highest-impact ongoing tax decision. Director-shareholders can extract money via three routes: salary, dividends, and pension contributions. Each has different tax consequences for the company and the individual, and the optimal split depends on profit level, personal circumstances, and the year-to-year tax thresholds.
The standard pattern for owner-directors in 2026 is roughly: a small salary equal to the personal allowance (around £12,570) which uses the allowance and triggers minimal personal tax; the bulk of remuneration as dividends from post-tax profits, taxed at dividend rates that are lower than equivalent salary income tax rates; and pension contributions made by the company directly, which are deductible against corporation tax and accumulate in a tax-free pension wrapper.
The exact split that minimises total tax depends on profit level, other income, and pension contribution capacity. Most accountants will model this annually as part of year-end planning. The dedicated spoke walks through the numbers in detail.
Common questions about UK corporation tax
Does my company pay corporation tax if it makes no profit?
No. Corporation tax is a tax on profits, not turnover. A company that breaks even or makes a loss has no corporation tax to pay (other than potentially an interest charge on overdue past liabilities). It still has to file a CT600 return showing the position, even when the result is nil.
Can I reduce my corporation tax by paying myself a higher salary?
Salary is deductible from corporation tax but is itself subject to income tax and National Insurance. The arithmetic of whether higher salary saves money depends on the rates at each level. For most owner-directors, salary above the personal allowance is more expensive in total tax than equivalent dividends. This is why the "small salary plus dividends" pattern is standard.
When are the rate changes likely?
The 19% small profits rate, 25% main rate, and £50,000/£250,000 marginal band have been stable since April 2023 and are confirmed for 2025/26. Future Budget announcements may change them; always check the current year's position before committing to a planning decision.
How is corporation tax different from income tax?
Corporation tax is paid by limited companies on company profits. Income tax is paid by individuals on personal income. A limited company's profits are taxed first at the company level (corporation tax), then again at the individual level (income tax on salary, dividend tax on dividends) when extracted to the director-shareholder. Sole traders, by contrast, pay only income tax on their entire trading profit; there is no separate corporate layer.
Want a corporation tax return done properly?
We match Harrow limited companies with vetted bookkeepers and accountants who specialise in CT600 preparation, R&D claims, and director pay optimisation. Free, no obligation.