What Is Corporation Tax? A Beginner's Guide for UK Companies

Understanding Corporation Tax is an essential part of running a limited company in the United Kingdom. Whether you are starting a new business or already managing one, it is important to be aware of how it works, who needs to pay it, and what responsibilities you have as a company director. Unlike employees who have income tax deducted automatically through PAYE, companies must take responsibility for calculating, reporting, and paying their own tax on profits.

This article provides a beginner-friendly guide to Corporation Tax based on HMRC rules and expectations. It explains the key elements including registration, accounting periods, profit calculation, tax rates, and more to help you stay compliant.

What is Corporation Tax?

Corporation Tax is charged on any corporate body operating in the UK, including all limited companies. Whether a company is set up as a property Special Purpose Vehicle (SPV), engaged in property development, or trading in other goods or services, it falls under the scope of the tax.

This tax is payable on all the company’s taxable profits, including income from trading activities, investment income, and gains from the sale of assets. Unlike individual taxpayers, companies do not receive a personal allowance, all income and gains are subject to Corporation Tax.

Importantly, any property purchased under the name of a limited company is taxed under the rules, not under Income Tax or Capital Gains Tax. While different sources of income (such as rental income, trading profits, or capital gains) may have different methods of calculation, they are all ultimately taxed as part of the company’s tax liability.

Corporation Tax is administered by HM Revenue & Customs (HMRC), and it is the responsibility of the company to calculate how much is due, report it in a Company Tax Return(CT600), and pay it directly to HMRC.

Understanding Your Corporation Tax Accounting Period

A clear understanding of corporation tax accounting periods is fundamental for UK companies to ensure correct tax reporting and compliance. While this may seem like an administrative detail, it directly impacts how your profits are assessed and when your tax becomes due.

What is an Accounting Period?

For Corporation Tax purposes, an accounting period refers to the specific timeframe during which a company’s taxable profits are assessed by HMRC. It is the period for which a Corporation Tax charge is calculated and applied. This is distinct from the company’s period of account, the period covered by its financial statements although in most cases, the two are aligned.

An accounting period

Cannot exceed 12 months, or the length of time the company operates, whichever is shorter.
Usually matches the financial year of the company
Must be split if the company’s period of accounts exceeds 12 months
May begin or end early due to trading commencement, cessation, or other corporate events

When Does an Accounting Period Begin and End?

A company’s accounting period typically starts when:

It begins trading or receives income
It becomes liable to Corporation Tax
The previous accounting period ends

An accounting period ends on the earliest of the following:

12 months after the start date
The end of the company’s financial reporting period (accounting reference date)
When the company ceases trading, becomes non-resident, or exits the scope of Corporation Tax
When winding-up or administration proceedings begin

Understanding these triggers is crucial, especially for new companies or those undergoing structural changes.

Multiple Accounting Periods and Long Financial Statements

If a company prepares financial statements for a longer period than 12 months- common for newly incorporated companies or during the transitional changes, HMRC required the period to be split into two Corporation Tax Accounting Periods:

The first 12 months
The remaining period (shorter than 12 months)

Alternatively, companies may choose to file two separate sets of financial statements within that extended timeframe. In such cases, each set typically corresponds to a separate accounting period.

Corporation Tax Computation and Taxable Total Profits

Each accounting period requires a separate calculation of Corporation Tax liability. The computation includes:

Trading profits

Interest income

Property income

Miscellaneous income

Net chargeable gains

£X

Total profits

Less: Qualifying charitable donations (QCDs)

£X

(£X)

Taxable total profits (TTP)

£X

Corporation Tax at applicable rate

Less: Marginal Relief (if applicable)

£X

(£X)

Corporation Tax Liability

£X

The pro forma above outlines how a company calculates its Corporation Tax liability for a given accounting period.

Trading profits represent income from the company’s main business activities, after deducting allowable expenses.
Interest income, property income, and miscellaneous income cover other sources such as bank interest, rental income, and any other non-trading income.
Net chargeable gains refer to profits from selling assets like property or shares.

These figures are added together to arrive at total profits.

From total profits, Qualifying Charitable Donations (QCDs) are deducted—these must be gross amounts donated to UK-registered charities.

The resulting figure is the company’s Taxable Total Profits (TTP), on which Corporation Tax is calculated at the applicable rate. If profits fall within the marginal relief band, the tax is reduced accordingly.

The final result is the company’s Corporation Tax liability for that accounting period.

How Corporation Tax Rates Apply to Accounting Periods

Corporation Tax is charged based on financial years, which run from 1 April to 31 March. However, companies typically prepare their accounts for a period that may not align exactly with this financial year. In such cases, the tac liability must be calculated in proportion to the rates applicable during each part of the accounting period.

Understanding the Applicable Tax Rates

From 1 April 2023, a new system of tax bands was introduced:

19% small profits rate for companies with profits up to £50,000
25% main rate for companies with profits over £250,000
Marginal relief applies to profits between £50,001 and £250,000, which gradually increases the effective tax rate between the two thresholds.

These thresholds help determine the rate of tax a company will pay on its profits. But it’s not just about the taxable total profits. The rate is actually based on what HMRC calls “augmented profits.”

What Are Augmented Profits?

Augmented profits include:

The company’s taxable total profits (TTP), and
Any dividends received from non-group companies.

Although most dividends received by companies are exempt from tax, they are still factored into this calculation only to determine the correct tax rate or whether marginal relief applies. Dividends from associated or group companies are excluded for this purpose.

If a company receives dividends from overseas companies, they are included at their cash value, even if foreign withholding tax was deducted abroad. That foreign tax is not considered in this specific augmented profit calculation.

Adjustments to Tax Thresholds

The small profits and upper thresholds (£50,000 and £250,000 respectively) may need to be adjusted in two common situations:

Short Accounting Periods

If the company’s accounting period is less than 12 months, these limits are time apportioned. For example, if a company has a 6-month accounting period, the lower limit will become £25,000 (£50,000*6/12) and the upper limit £125,000 (£250,000*6/12).

Associated Companies

Where a company has associated companies, the thresholds are divided equally between all associated companies. For instance, if a company has two associated companies (three in total), the lower and upper limits would be divided by three.

These adjustments ensure the rate of Corporation Tax applied reflects the size and structure of the business.

Accounting Periods That Span More Than One Financial Year

When a company’s accounting period straddles 31 March, and either the Corporation Tax rate or profit thresholds change, a two-part computation is required.

Profits for the full accounting period must be apportioned on a time basis, and the applicable tax rates are applied separately to each portion. This ensures that any changes in tax legislation are correctly accounted for.

For example, a company with an accounting period from 1 January to 31 December 2023 would need to divide that period into:

1 January to 31 March 2023 (falling under Financial Year 2022)
1 April to 31 December 2023 (falling under Financial Year 2023)

Each segment would be taxed using the rates and rules that applied during that part of the financial year.

Marginal Relief Explained

For companies whose augmented profits fall between the lower and upper limits, marginal relief provides a gradual increase in tax rate from 19% up to 25%. This relief reduces the tax bill compared to being taxed entirely at the main rate.

Marginal relief is calculated using the following formula:

(Upper limit – Augmented profits) × Standard fraction × (Taxable Total Profits/Augmented Profits)

The standard fraction for marginal relief is 3/200.

Section 24 and Property Income in Companies

A common question from property investors is how property income is taxed when held within a limited company, especially in relation to Section 24 of the Finance Act 2015.

Section 24 restricts individual landlords from deducting full mortgage interest from rental income, replacing the deduction with a basic rate tax credit. However, this restriction does not apply to limited companies.

If a property is owned through a limited company:

Full mortgage interest can be deducted as a business expense
All rental income and capital gains are subject to Corporation Tax
The income is included as part of the company’s total taxable profits

This is a key reason some landlords choose to incorporate their property portfolios. However, this decision should be made with professional guidance, as other factors such as dividend taxation, extraction costs, and administrative burden must also be considered.

Example: Applying Corporation Tax (Step to Step guide)

Sam Property Ltd is a UK-registered limited company that owns and rents out residential properties. It prepares its first set of accounts for a 6-month accounting period from 1 January 2025 to 30 June 2025. The company has no associated companies.

Financial Information for the Period:

Rental income (gross): £80,000
Allowable expenses (repairs, maintenance, insurance): £10,000
Mortgage interest: £15,000
Net chargeable gain from the sale of one small property: £5,000
Qualifying charitable donations: £1,000

As a limited company, Sam Property Ltd is not affected by Section 24 restrictions. This means it can deduct the full £15,000 of mortgage interest when calculating taxable profits unlike individual landlords, who would only receive a basic rate tax credit of £3,000 (£15,000*20%) from the income tax liability.

Step 1: Calculate Taxable Total Profits (TTP)

Rental income

Less: Allowable expenses

Less: Mortgage interest

£80,000

(£10,000)

(£15,000)

Net trading profit

Add: Net chargeable gain

£55,000

£5,000

Total profits

Less: Charitable donations

£60,000

(£1,000)

Taxable Total Profits (TTP)

£59,000

Step 2: Adjust Profit Thresholds for the Short Accounting Period

The standard thresholds for marginal relief (for a 12-month accounting period) are:

Lower limit: £50,000
Upper limit: £250,000

Since, Sam Property Ltd’s accounting period is 6 months, the limits must be time-apportioned:

Lower limit: £50,000 × 6/12 = £25,000
Upper limit: £250,000 × 6/12 = £125,000

Sam’s augmented profits (same as TTP since no dividends received) of £59,000 fall between these adjusted thresholds, so marginal relief applies.

Step 3: Calculate Corporation Tax Using Marginal Relief

Corporation Tax is initially calculated at the main rate of 25%:

£59,000 × 25% = £14,750

Now, Calculate marginal relief:

(Upper limit – Augmented profits) × Standard fraction × (TTP/Augmented profits)
= (£125,000 – £59,000) × 3/200 × £59,000 ÷ £59,000
= £66,000 × 3/200
= £990

So, the final Corporation Tax liability is: £14,750 – £990 = £13,760

Conclusion

Corporation Tax plays a vital role in the financial responsibilities of every UK limited company. From understanding how accounting periods affect tax calculations to knowing when marginal relief applies, staying informed helps you remain compliant and make better business decisions. This is especially important for companies with property income, where corporate ownership can offer advantages over individual ownership, such as full mortgage interest deductibility.

Managing Corporation Tax can be complex, particularly for new businesses or companies with multiple income sources. At Sterling and Wells, our experienced team is here to guide you through each step—from accurate profit computation to timely tax filings—helping you stay compliant while maximizing tax efficiency.