Corporation Tax is a direct tax levied on the profits of limited companies. If your company is a UK resident for tax purposes, it pays Corporation Tax on all its profits, whether arising in the UK or abroad. Non-UK resident companies are also within the scope of Corporation Tax if they carry on a trade in the UK through a permanent establishment, such as a branch or office.
When you start doing business, you must register for Corporation Tax with HMRC. The deadline is within three months of starting business activity, which is not necessarily the same as the date your company was incorporated. A company can be formed and remain dormant for some time before it begins trading, and the start of that trading activity triggers the registration clock.
Once registered, your company must file a Company Tax Return when HMRC issues a notice to deliver one. This obligation applies even if your company makes a loss or has no Corporation Tax to pay for that period.
What Is Taxable Profit for Corporation Tax?
Corporation Tax is charged on the profits your company makes in each accounting period. An accounting period cannot exceed 12 months and is normally the same as the financial year covered by your company’s annual accounts.
A company’s taxable profits can include trading income, investment income, and chargeable gains. It is worth noting that chargeable gains are the correct term for Corporation Tax purposes, rather than capital gains, which is the terminology used for individuals. Taxable profits for Corporation Tax purposes often differ from the pre-tax profits shown in the company’s accounts, because certain items are treated differently for tax. You work out your taxable profits when you prepare your Company Tax Return.
Corporation Tax Rates for Limited Company
The rate of Corporation Tax your company pays depends on the level of its taxable profits in the accounting period. The current rates are set out below.
Understanding Marginal Relief
Marginal Relief is not simply a middle rate that sits between 19% and 25%. It is a specific relief calculated by reference to the upper and lower limits, and it gradually reduces the effective rate of Corporation Tax as profits approach the upper threshold. The practical effect is that a company with profits in the marginal band pays somewhere between 19% and 25%, with the exact rate depending on where its profits fall within that range.
To make this concrete: suppose your company has taxable profits of £150,000 for a full 12-month accounting period and has no associated companies. The main rate of 25% would apply in full at that level, but Marginal Relief reduces the amount of tax due, bringing the effective rate below 25%. The closer your profits are to £50,000, the closer your effective rate is to 19%. The closer they are to £250,000, the closer it is to 25%.
How the thresholds are adjusted
Neither the £50,000 lower limit nor the £250,000 upper limit is fixed in all circumstances. They are reduced proportionately in two situations. First, if your accounting period is shorter than 12 months, the thresholds are scaled down accordingly. Second, if your company has associated companies, the thresholds are divided by the total number of associated companies, including your own. This means that a group structure or a series of commonly controlled companies can significantly reduce the profit level at which the main rate begins to apply.
For example, if your company has two associated companies, making three companies in total, the lower threshold reduces from £50,000 to £16,667, and the upper threshold reduces from £250,000 to £83,333. A company that might otherwise qualify for the small profits rate could find itself within the marginal or main rate band once associated companies are taken into account.
Capital Expenses and Revenue Expenses under Corporation Tax for Limited Companies
When calculating your taxable profit, you need to understand the difference between capital expenses and revenue expenses, as they are treated differently for Corporation Tax purposes.
Capital expenses
Capital expenses generally involve the cost of buying, improving, or disposing of assets that the business will use over a longer period. These cannot be deducted directly when calculating taxable profit. However, the company may be able to claim capital allowances on qualifying capital expenditure, providing tax relief for the wear and tear of those assets over time.
It is also worth noting that the depreciation charge shown in your company’s accounts is not, in itself, a deductible expense for Corporation Tax purposes. HMRC does not accept accounting depreciation as a tax deduction. Instead, capital allowances serve as the tax equivalent, and the two figures will often differ.
Revenue expenses
Revenue expenses are the day-to-day running costs of the business. These are generally regular or recurring in nature and can be deducted when calculating taxable profit, provided they were incurred wholly for a business purpose.
A practical example
How to tell the difference
Suppose your company buys a piece of machinery for use in its operations. That is a capital expense. The cost cannot be deducted in full from your profits in the year of purchase, but the company may be able to claim capital allowances on it instead. By contrast, if the company pays for repairs to that machinery, subscribes to accounting software, or settles its accountancy fees, those are revenue expenses and can generally be deducted in the period they are incurred.
Whether something is capital or revenue in nature depends on several factors: what the business does, what it has spent the money on, how any purchased asset is used in the business, and the overall effect the expenditure has on the business. In some cases, the distinction is straightforward, but where there is doubt, it is worth taking advice, as misclassifying expenses can affect the amount of tax your company pays.
Corporation Tax Allowable Expenses for Limited Companies
To determine whether a cost can be deducted from profits, you need to establish whether it is a capital or revenue expense and whether it was incurred wholly and exclusively for the trade. This is the underlying statutory test for most trading expenses, and it is a stricter condition than simply showing that a cost had some business connection.
Some expenses are specifically disallowed and cannot be deducted regardless of how they are characterized. Client entertaining is a common example. Others fall outside the wholly and exclusively test because they serve a dual purpose, part business and part personal. In those cases, no deduction is usually available unless the expense can be clearly apportioned.
It is also worth noting that certain categories of expenditure follow their own separate rules rather than the general trading expenses test. Loan relationships, for example, follow a specific regime for accounting for interest and financing costs. Expenditure on intangible assets such as intellectual property is also governed by its own set of rules. Where your company has costs in these areas, the standard wholly and exclusively analysis may not be the right starting point.
Keeping accurate and detailed business records is essential to support the position taken on each expense. Capital allowances, which provide relief for qualifying capital expenditure, are claimed separately on the Company Tax Return and reduce taxable profits in a different way from revenue expenses. If you are unsure whether a particular cost is allowable, speaking to an accountant is the most reliable way to avoid errors on your return.
Get Professional Support Early
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Filing Your Limited Company Tax Return
Your Company Tax Return, filed on form CT600, must be submitted to HMRC within 12 months of the end of the accounting period it covers. You must file a return even if your company made no profit and has no Corporation Tax to pay.
Payment deadline versus filing deadline
The deadline for paying your Corporation Tax bill is separate from, and earlier than, the filing deadline. For most companies, payment is due 9 months and one day after the end of the accounting period. This means the tax must be paid before the return itself is due.
To make this concrete: if your accounting period ends on 31 March 2024, your Corporation Tax payment is due by 1 January 2025, and your Company Tax Return must be filed by 31 March 2025.
It is important to note that the 9-month-and-1-day rule applies to most small and medium-sized companies. Large companies with profits above £1.5 million are generally required to pay Corporation Tax in quarterly installments during the accounting period itself, rather than as a single payment after it ends. If your company falls within that regime, different payment dates will apply.
Long accounting periods
Where a company’s first set of accounts covers more than 12 months, which is common when a company is newly incorporated, HMRC will split that period into two separate Corporation Tax accounting periods. This means two separate Company Tax Returns will need to be filed, each covering its own period, with its own filing and payment deadlines. This is a detail that catches some new companies off guard, so it is worth being aware of from the outset.
What the return must include
Your Company Tax Return must include your accounts and a tax computation showing how the taxable profit figure was arrived at from the figures in those accounts. Most companies are required to file online, with accounts tagged in iXBRL format.
Penalties for Late Filing
If you do not file your Company Tax Return by the deadline, you will be charged penalties as follows:
- One day late: £100
- Three months late: a further £100
- Six months late: HMRC will estimate your Corporation Tax bill and add a penalty of 10% of the unpaid tax
- Twelve months late: a further 10% of any unpaid tax
If your tax return is late three times in a row, the £100 penalty increases to £500 each time. If your return is more than six months late, HMRC will issue a tax determination stating how much Corporation Tax it believes you owe. You cannot appeal against this determination. You must pay the tax and file the return, after which HMRC will recalculate interest and penalties accordingly.
Keeping Records
You must keep accurate accounting records to support the figures in your Company Tax Return. These records must be made available to HMRC on request. Limited companies are required to keep accounting records for six years from the end of the last company financial year to which they relate.
Conclusion
Corporation Tax applies to UK resident limited companies that are active and liable to the charge. When HMRC issues a notice to deliver a Company Tax Return, you must file one, even if your company has made no profit and has no tax to pay. Understanding how taxable profit is calculated, which expenses can be deducted, and when your return and payment are due is essential for staying compliant and avoiding penalties. If you are unsure how any of these rules apply to your company, speak to a qualified accountant.
