Corporation Tax is a tax levied on the profits of limited companies. Accurate Corporation Tax calculation and payment are vital for business compliance and financial planning.
Before 1 April 2023, the rules were simple. There was just one flat Corporation Tax rate applied to all profits. Now, it’s tiered. A small profit rate of 19% kicks in for profits below £50,000, and a higher main rate of 25% applies to profits above £250,000. If your profits fall between these thresholds, you are taxed at the main rate but get marginal relief to ease the transition.
In this guide, we’ll walk you through the steps of a Corporation Tax computation and show you how it works with clear examples.
Step-by-Step: How to Calculate Corporation Tax
Calculating Corporation Tax involves several steps. Here’s a straightforward breakdown:
- Start with Accounting Profit: Begin with your company’s profit figure as reported in the profit and loss account before tax.
- Add Back Disallowable Expenses: Some expenses, like client entertainment or fines, aren’t tax-deductible. Add these back to your profit.
- Remove Depreciation, Add Capital Allowances: Depreciation is not tax-deductible and must be replaced by capital allowances. These are HMRC-approved deductions for assets like equipment, machinery, and vehicles.
- Apply Tax Reliefs (if Relevant): Reliefs like R&D credits or carried-forward losses can reduce your taxable profit. Check if your business qualifies.
- Arrive at Taxable Profits: Taxable profit is the amount to which you’ll apply the Corporation Tax rate.
- Calculate Augmented Profits: Add any exempt distributions (like dividends from non-group companies) to your taxable profit. This gives you augmented profits, which determine your tax band. For most small or standalone UK companies with straightforward operations, augmented profits often equal taxable profits — if there’s no additional exempt income, the two figures align.
Understand Which Tax Rate Applies
Since April 2023, the rate of Corporation Tax applied depends on your augmented profits and whether you have associated companies. Here’s the breakdown:
- Small Profits Rate 19%: If your augmented profits are £50,000 or less, you’ll pay 19%. Simple.
- Marginal Relief: For augmented profits between £50,001 and £250,000, you pay the main rate of 25%, reduced by marginal relief. The formula is:
- (U – A) x N/A x F
- Where:
- U = Upper limit (£250,000)
- A = Augmented profits
- N = Taxable total profits
- F = Standard marginal relief fraction (3/200)
- Main Rate 25%: If augmented profits exceed £250,000, it’s 25% across the board with no marginal relief.
- Associated Companies Adjustment: If a company has associated companies, the £50,000 and £250,000 thresholds are divided by the total number of companies. In the context of UK Corporation Tax, an associated company is linked to another company through control, ownership, or certain relationships, as defined by HMRC rules.
Worked Examples
Let’s explore how this calculation works through practical scenarios. The following examples assume a standard 12-month accounting period.
Example 1: Small Profits
Alpha Ltd makes a profit of £49,300, with no exempt distributions or associated companies. Alpha Ltd qualifies for the small profits rate since the augmented profits are below £50,000 and there are no associated companies.
- Taxable profits: £49,300
- Augmented profits: £49,300 (below £50,000)
- Tax due: £49,300 x 19% = £9,367
Example 2: Marginal Relief
Beta Ltd has an adjusted profit of £135,000 and augmented profits of £150,000. Beta Ltd’s augmented profits fall between £50,000 and £250,000, making it eligible for marginal relief.
- Taxable profits: £135,000
- Augmented profit: £150,000
- Base tax: £135,000 x 25% = £33,750
- Marginal relief: (£250,000 – £150,000) x (£135,000 / £150,000) x 3/200 = £1,350
- Tax due: £33,750 – £1,350 = £32,400
Example 3: Main Rate
Gamma Ltd reports £270,000 in taxable profit, with augmented profits of £280,000. With augmented profits exceeding £250,000, Gamma Ltd is subject to the main rate.
- Augmented profits exceed £250,000
- Tax due: £270,000 x 25% = £67,500
Example 4: Associated Companies
Delta Ltd earns £60,000 but has four associated companies (five in total). This adjusts the small profits limit to £10,000 and the main rate threshold to £50,000.
- Thresholds: £50,000 ÷ 5 = £10,000; £250,000 ÷ 5 = £50,000
- Augmented profits: £60,000 (above £50,000 adjusted limit)
- Tax due: £60,000 x 25% = £15,000
Corporation Tax Rates Table
| Corporation Tax Rates | Year ending 31 March 2024 | Year ending 31 March 2025 | Year ending 31 March 2026 |
|---|---|---|---|
| Main rate | 25% | 25% | 25% |
| Small profits rate | 19% | 19% | 19% |
If your company’s accounting period spans more than one of the above tax years (for example, a December year-end), you must apportion your profits to each financial year based on the number of days falling into each period. The relevant Corporation Tax rate is then applied to the apportioned profits for that period. This ensures that profits are taxed appropriately in line with HMRC rules for multi-period years.
Common Mistakes
- Confusing Depreciation with Capital Allowances: They’re not interchangeable! Depreciation is an accounting figure, while capital allowances are what HMRC allows for tax purposes.
- Overlooking Exempt Income: Don’t forget to include exempt dividends when calculating augmented profits.
- Ignoring Associated Companies: Forgetting to account for associated companies can mean you apply an incorrect tax rate.
Corporation Tax Calculator
Use our Corporation Tax calculator to experiment with different scenarios.
Final Tips
- Maintain Accurate Records: Well-kept books simplify calculating Corporation Tax and preparing your company tax return (CT600) without stress.
- Team Up with an Accountant: They’re experts at finding relief options, like R&D credits, that can cut your tax due.
- Plan Your Payment: Mark your calendar. Smaller companies usually need to pay Corporation Tax 9 months and 1 day after their accounting period ends.
- Submit on Schedule: Get your CT600 to HMRC within 12 months of your year-end to avoid penalties.
Conclusion
Understanding how to calculate Corporation Tax accurately is essential for every UK company. From adjusting your company profits correctly to applying the appropriate tax rate, each step ensures compliance and financial efficiency.
Changes since April 2023, including marginal relief and introducing the 25% main rate, add complexity but can be navigated successfully with proper guidance.
Further Resources:
- HMRC Corporation Tax Overview: Official UK government guidance on Corporation Tax, rates, and deadlines.
- HMRC Marginal Relief Calculator: Use this tool to calculate marginal relief.
