What is corporation tax in the UK?

17 Mar 2025 | 5 min read

Small business tips

If you’ve only ever been an employee or sole trader who pays income tax, corporation tax can feel daunting when you start your own limited company.

Who needs to pay corporation tax? How do you calculate it? What are the penalties for getting it wrong? A good accountant can answer these questions – but so can we.

In this guide, we explain what UK corporation tax is – so you know exactly what your responsibilities are as a limited company owner.

What is corporation tax?

Corporation tax is a tax your limited company pays on the profits it makes within any given ‘accounting period’.

An accounting period is usually 12 months long, and usually aligns with your financial year – though this might not be the case in your company’s first year.

For corporation tax purposes, profit is defined as any money your company makes from:

Trading (or ‘doing business’)
Investing
Selling assets for more than you paid for them.

Who needs to pay corporation tax?

All UK-resident limited companies must pay UK corporation tax on profits they make both here and abroad.

Overseas companies that have an office or branch in the UK must pay UK corporation tax on profits they make from their UK activities.

You must also pay corporation tax if you make a profit while running an ‘unincorporated association’, such as a voluntary group or sports club.

Who does NOT need to pay corporation tax?

Your company does not need to pay corporation tax if it made no profit in the accounting period – but it must still file a company tax return.

Similarly, if you’re not trading and you’ve told HMRC your company is ‘dormant’, you won’t owe any corporation tax – and you won’t need to file another company tax return (but you will still need to file accounts with Companies House).

Sole traders and those in a partnership do not pay corporation tax on their business earnings, which are treated as personal income and taxed via self-assessment instead.

How to register for corporation tax

When you set up a limited company online, you’re automatically registered for corporation tax and your unique taxpayer reference should arrive within 15 days.

However, to manage your tax affairs online, you might need to manually add and activate corporation tax services within your Government Gateway account.

How much is corporation tax?

The corporation tax ‘main rate’ is 25% on profits over £250,000. There’s also a ‘small profits rate’ of 19%, for profits of £50,000 or less.

If your profits are between £50,000 and £250,000, you can claim ‘marginal relief’ to effectively reduce your corporation tax from the 25% main rate.

Marginal relief can get complicated, but it’s important to know the basics so you can understand how your final bill is calculated.

How marginal relief works

Marginal relief uses a fraction (3/200, or 0.015 as a decimal) and a simple formula to calculate how much tax relief you’re entitled to.

Here’s the basic formula used to calculate marginal relief entitlement:

(the upper limit for marginal relief – your taxable profit) x 0.015

Let’s say your company makes £75,000 taxable profit in its accounting period. Here’s how you calculate your marginal relief entitlement:

(250,000 - 75,000) × 0.015 = 2,625

You’re entitled to £2,625 of marginal relief.

Then, to work out your corporation tax bill, you simply calculate your liability at the main rate (25%) and subtract your relief entitlement:

(75,000 × 0.25) - 2,625 = 16,125

Your corporation tax bill is £16,125 for this accounting period.

This is a simplified version of a formula that gets more complicated if your company makes distributions – such as dividends – or has associated companies.

You can use the GOV.UK corporation tax marginal relief calculator to work out what you owe, or consult an accountant for expert advice.

How is corporation tax calculated

The rate and amount of corporation tax you pay depends on how much profit your company makes within its accounting period.

It’s up to you (or your accountant) to calculate your corporation tax bill and pay it on time. Sadly, HMRC doesn’t just send you a bill.

To meet these obligations, it’s vital that you get robust accounting processes and a company bank account in place from day one.

When is corporation tax due?

For profits up to £1.5m, you must pay your corporation tax bill in full no later than 9 months and 1 day after the accounting period ends.

You have slightly longer to file your company tax return for the same accounting period (up to 12 months after the period ends).

If you make profits of more than £1.5m in your accounting period, you have to pay your tax bill in quarterly instalments over a longer period.

What happens if you miss the corporation tax deadline?

If you don’t pay your corporation tax bill in full by the deadline, HMRC will start to charge you daily interest on the amount you owe.

The late payment interest rate for corporation tax is 7%. That means your bill increases by 7% of the outstanding amount, every day.

There is a separate penalty system if you file your company tax return late (a £100 fine on day 1, increasing after 3, 6 and 12 months).

You can also receive a ‘failure to notify’ penalty if your company has corporation tax to pay but you don’t let HMRC know within 12 months.

Corporation tax allowances

In addition to the marginal relief mentioned above, a wide range of allowances and reliefs can reduce your company’s corporation tax bill further.

For example, capital allowances let you deduct the purchase cost of certain business equipment, machinery and assets from your taxable profits before you calculate your tax bill.

Corporation tax reliefs

There are also a number of corporation tax reliefs for certain industries and activities, which can reduce your corporation tax bill further still.

These corporation tax reliefs include:

Research and Development Relief: claim up to 186% tax relief on the costs associated with innovative science and technology projects.
The Patent Box: pay just 10% corporation tax on the profits you make from any inventions you’ve patented.
Creative industries reliefs: get tax relief and credit on profit from theatre, film, television, animation, video games and more.
Goodwill and other relevant assets: claim 6.5% tax relief on the value of the reputation and relationships of a business you buy.
Disincorporation Relief: claim relief on the transfer of company assets if you close your company or change it to an unincorporated form.
Trading, terminal, capital and property losses: offset these types of loss against other gains or profits in the same accounting period.

Wrapping up

While the tax itself is pretty easy to understand, the complex application of corporation tax in the UK can make it feel intimidating at first.

Here’s a quick recap of the key points:

Corporation tax is a tax on company profits made in a 12-month period
Profits over £250k are taxed at 25%; profits below £50k at 19%
Profits from £50k-£250k are taxed at 25% minus marginal relief
You’re responsible for calculating and paying your tax by the deadline
You’ll be charged daily interest if you don’t pay your tax in full on time
A range of allowances and reliefs can significantly reduce your tax bill

Ready to start up? Register your limited company with us for just £14.99 and we’ll open a business bank account for you at the same time – free of charge.