What is corporation tax and how much is it?

Corporation tax is the main business tax UK companies pay on their profits. If you run a limited company or other qualifying organisation, it's crucial to understand how this tax works, how much you owe, and when to pay it. 

Failing to make corporation tax payments on time can lead to penalties from HMRC, while there are reliefs and allowances you can claim to reduce your bill. 

This guide from Brearley & Co’s taxation experts covers everything you need to know about corporation tax, from how it is calculated to deadlines and making payments.

What is corporation tax?

Corporation tax is a tax that all limited companies are required to pay on their profits across an ‘accounting period’. 

An accounting period can’t be longer than 12 months and is normally the same as the financial year covered by your company or association’s annual accounts. 

The tax must also be paid on investments and on any gains from selling assets, such as land, property or shares. 

Foreign companies with a UK branch or office (overseas companies), clubs, co-operatives, and other unincorporated associations like sports clubs must also pay corporation tax. 

What is the difference between corporation tax and income tax?

Corporation tax is a charge on a company’s profits - the amount of money made after all expenses have been paid – and only applies to companies or associations. 

Income tax, on the other hand, is charged on income - money received from employment or investments - and is paid as a percentage of earnings. 

Do sole traders pay corporation tax?

Sole traders don’t pay corporation tax. Instead, they pay income tax on their business profits. 

You’ll need to file a tax return and pay the associated tax by 31st January each year.

How is corporation tax calculated?

The corporation tax rate can change, so it’s important that you pay the correct rate based on your accounting period. 

You can check your accounting period by signing into your business tax account on the HMRC website. 

You’ll pay a different corporation tax rate depending on how much profit your company or association makes. The current rates are: 

• 25% for profits of £250,000 or more (main rate)
• 19% for profits of £50,000 or less (small profit rate) 

These limits are proportionally reduced if: 

• Your accounting period is shorter than 12 months
• Your company has associated companies (one has control of the other, or both are under the control of the same person or persons) 

For example, the limits are divided by four if your company has three other associated companies. This means the lower limit becomes £12,500 and the upper limit becomes £62,500. 

What expenses can I claim against corporation tax?

When calculating the corporation tax you’ll pay, you deduct any expenses from the money your corporation or association makes to get your taxable profit. 

Expenses are any costs incurred ‘wholly and exclusively’ to run the business – not for personal use. 

There is an extensive list of expenses and benefits that qualify. This includes things like: 

• Bonuses
• Entertainment
• Homeworking
• Mobile phones
• Parking spaces
• Training payments 

What corporation tax relief and allowances can I claim?

Corporation tax relief and allowances allow you to lower your tax bill if you qualify for them. 

Capital allowances

Capital allowances are a tax relief that allows you to deduct some or all of the value of an item that you use in your business from your profits. 

You can claim capital allowances on what’s known as ‘plant and machinery’: 

• Equipment
• Machinery
• Business vehicles (such as vans, lorries or business cars) 

In most cases, the value of the item is what you paid for it. However, if you owned it before you started using it in your business or it was a gift, you’ll use the market value (the amount you’d expect to sell it for). 

The amount you can claim varies depending on which capital allowance you use: 

Annual investment allowance (AIA) - this allows you to claim up to £1million on certain plant and machinery 

100% first-year allowances – this allows you to claim the full amount for certain plant and machinery in the year that it was bought 

Super-deduction or 50% special rate first-year allowance - you can claim these for certain plant and machinery you bought from 1 April 2021 up to and including 31 March 2023 

Full expensing and 50% first-year allowance - you can claim these on qualifying plant and machinery investments from 1 April 2023 

Writing down allowances - you can claim these if your plant and machinery does not qualify for AIA or you’ve already claimed the maximum amount 

Find out which capital allowances you can claim on the government website.

Marginal Relief

For companies or associations with profits between £50,000 and £250,000, you may be able to claim Marginal Relief. This allows you to reduce your rate proportionally from the 25% main rate.

Other relief

There is other relief available that your company or association might qualify for, including for: 

• Research and Development (R&D)
• Profit from patented inventions
• Profit from theatre, film, television, animation or video games
• Terminal, capital and property income losses
• Trading losses 

You make a claim to HMRC if you think you’re entitled to corporation tax relief.

Can you pay corporation tax in installments?

If your company or association is unable to pay a corporation tax bill in full, you may be able to set up a payment plan to pay it in installments. 

This is called a ‘Time to Pay’ arrangement. You’ll only be able to set up this arrangement if HMRC thinks you’ll keep up with the repayments. 

If HMRC doesn’t agree to a payment plan, you’ll have to pay the amount you owe in full. 

It’s important to contact HMRC as soon as possible if you have missed a tax deadline or know you won't be able to pay a bill in time. 

When you need to pay your corporation tax in installments

For larger companies making bigger profits, you’ll be required to pay your corporation tax in installments. 

HMRC has different payment rules that apply to companies with: 

• Annual taxable profits between £1.5million and £20million
• Annual taxable profits above £20million 

You could face a penalty if you fail to make installment payments or your installment payments are too small.

When is the corporation tax filing deadline?

The deadlines for corporation tax and the filing of company accounts depend on your company's accounting period. 

A corporation tax return can only be for a maximum of 12 months – for longer periods (and in the year you set up your business) you would need to file two tax returns. 

• The corporation tax payment deadline is nine months and one day after the end of the accounting period.
• The deadline for your corporation tax return is 12 months after the end of the accounting period it covers. 

You will be charged with late filing penalties if you do not file your company tax return on time - even if there is no tax to pay. 

However, you can be paid interest if you pay your corporation tax early.

How to pay corporation tax

You can pay your corporation tax via the government website. You can’t make payments by post. 

It's important to choose a payment method that allows enough time for it to clear.

On the same day or next day

• Approve a payment through your online bank account
• Online or telephone banking by Faster Payments or CHAPS
• Online by debit or corporate credit card 

In three working days

• Direct Debit (if already set up with HMRC)
• Online or telephone banking by Bacs
• At your bank or building society 

In five working days

• Direct Debit (if not already set up with HMRC) 

How to find your corporation tax reference number

When making a payment, you’ll need to use your 17-character corporation tax payment reference number. 

This number changes with each accounting period, so you’ll need to update it to avoid payment delays. 

You can find your corporation tax reference number on your ‘notice to deliver your tax return’ and on any reminders from HMRC. 

It can also be found in your company’s HMRC online account. 

• Click ‘View Corporation Tax Statement’
• Click ‘Accounting Periods’
• Select the period you’re making a payment for 

What is a CT600?

A CT600 is a form that is filed as part of a company tax return after the end of a company’s accounting period. 

The form is split into several sections that detail the company’s activities. This includes tax calculations, capital allowances, and legal declarations. 

You can complete and file your company or association’s CT600 via the government's online service.  

HMRC also has a comprehensive guide on the CT600 form to help you prepare it.

Need help with corporation tax?

Even with the help of this guide, understanding and staying compliant with corporation tax can be a daunting prospect for businesses.  

Brearley & Co’s services include dedicated taxation support, relieving you of the pressure to file your returns comprehensively and on time. 

If you have any questions regarding corporation tax or need support with filing, get in touch with our friendly, expert team and arrange a free meeting - we’d be happy to help.