What is Corporation Tax, How is it Calculated Progressively, and What is the Payment Deadline?
Complete Guide for Limited Company Directors, Small Businesses, and Entrepreneurs in the UK
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For many UK Limited Company directors, Corporation Tax initially seems like a straightforward tax: the company makes a profit, and a portion of that profit must be paid to HMRC. In practice, things are more nuanced. The money in the bank account is not taxed, turnover is not taxed, and a single fixed rate does not always apply to all companies.
Since April 1, 2023, the Corporation Tax system for most UK companies has become more "progressive" with the reintroduction of the Small Profits Rate and Marginal Relief. This means that a company with small profits might pay 19%, a company with large profits might pay 25%, and companies falling between these two thresholds may have an effective rate that increases gradually.
GOV.UK confirms that, for financial years starting on or after April 1, 2026, the Small Profits Rate is 19% for companies with profits under £50,000, the Main Rate is 25% for companies with profits over £250,000, and Marginal Relief applies between £50,000 and £250,000.
For a Limited Company director, understanding Corporation Tax is crucial not just for knowing how much is owed, but also for managing cash flow, salary/dividend planning, investments, deductible expenses, capital allowances, and payment deadlines.
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Quick Answer
Corporation Tax is the tax paid by a company on its taxable profit.
For most UK companies, the current rules are:
19% Corporation Tax
If the taxable profit is £50,000 or less, the company typically pays this rate.
25% Corporation Tax
If the taxable profit is over £250,000, the company typically pays this rate.
Marginal Relief
If the taxable profit is between £50,000 and £250,000, the company can benefit from Marginal Relief, which creates a gradual increase in the effective tax rate.
For standard companies with taxable profits up to £1.5 million, Corporation Tax must usually be paid 9 months and 1 day after the end of the accounting period.
The Company Tax Return, also known as the CT600, is filed later, 12 months after the end of the accounting period.
Important: This is one of the most common points of confusion — the payment deadline is before the final filing deadline for the CT600. In other words, the company must know how much it owes before reaching the final filing deadline.
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What is Corporation Tax?
Corporation Tax is the tax paid by companies on their taxable profits. For a Limited Company, the company is a separate legal entity from the director and the shareholders. This means the company's profit is taxed separately from the director's personal taxes.
GOV.UK explains that profits subject to Corporation Tax include trading profits, meaning profit from business activities, investment profits, and chargeable gains, meaning profits obtained from selling assets for more than they cost.
This distinction is very important. If a company invoices £100,000, it does not mean it pays Corporation Tax on £100,000. The tax is calculated on the taxable profit, not on total receipts.
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Simple Example
A company invoices £100,000 in a year.
It has deductible expenses of £60,000.
The accounting profit before tax is £40,000.
Assuming no major tax adjustments, Corporation Tax will be calculated on approximately £40,000, not £100,000.
In reality, accounting profit and taxable profit can differ. For example, depreciation in the accounts is not always tax-deductible in the same way. Instead, capital allowances may apply.
GOV.UK explains that capital allowances allow you to deduct part or all of the value of certain assets, such as equipment, machinery, vans, lorries, or business vehicles, from your profit before tax.
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Corporation Tax is NOT Income Tax
A very common confusion lies between company taxes and the director's personal taxes.
Corporation Tax is the company's tax on the company's profit.
Income Tax and National Insurance can arise at a personal level, for example, if the director receives a salary.
Dividend Tax can arise at a personal level if the shareholder receives dividends.
VAT is a separate tax, applicable only if the business is VAT registered or required to register.
PAYE is the system through which the company declares and pays payroll taxes.
Therefore, a company can pay Corporation Tax on its profit, and the director can have separate personal taxes on their salary or dividends.
The fact that the company has paid Corporation Tax does not automatically mean the director can withdraw all the money without facing other personal taxes.
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What is Corporation Tax Calculated On?
Corporation Tax is calculated on taxable profits for the accounting period.
In a simplified format, the calculation looks like this:
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Company Income
minus
Deductible Expenses
plus/minus
Tax Adjustments
minus
Applicable Allowances and Reliefs
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Taxable Profits
Then, the relevant Corporation Tax rate is applied.
Deductible expenses can include, depending on the business:
materials, subcontractors, wages, employer pension contributions, insurance, accounting fees, software, telephone, rent, office costs, motor expenses, advertising, bank charges, and other costs incurred wholly and exclusively for the business.
However, not every payment from the company account is deductible. Personal payments, fines, dividends, the Corporation Tax itself, and certain entertainment costs may have different tax treatments.
For assets like vans, equipment, machinery, or tools, the company does not always deduct the cost simply through the profit and loss account. Often, capital allowances are used.
For companies, "full expensing" allows the deduction of 100% of the cost of certain new and unused plant and machinery, excluding cars, in the year they are bought.
GOV.UK confirms that only companies can claim full expensing and the 50% first-year allowance, allowing them to deduct 100% of the cost of qualifying plant and machinery from profits before tax.
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Corporation Tax Rates in 2026/27
For most non-ring fence companies, the current rates are structured as follows:
Taxable Profit: £0 – £50,000
Small Profits Rate of 19%
Taxable Profit: £50,001 – £250,000
Main Rate of 25%, reduced by Marginal Relief
Taxable Profit: Over £250,000
Main Rate of 25%
GOV.UK confirms that for 2026, the Small Profits Rate is 19%, the Main Rate is 25%, the lower limit is £50,000, the upper limit is £250,000, and the standard fraction for Marginal Relief is 3/200.
These thresholds do not always apply simply. They can be reduced if the accounting period is shorter than 12 months or if the company has associated companies.
GOV.UK specifies that the £50,000 and £250,000 limits are reduced proportionally for short accounting periods and based on the total number of associated companies.
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Is Corporation Tax "Progressive"?
In simple terms, yes, you could say the current system is more progressive than the old single-rate system.
But technically, it does not work exactly like Income Tax, where you have bands and different portions of income are taxed at different rates.
Since April 1, 2023, the system works like this:
Companies with small profits pay 19%.
Companies with large profits pay 25%.
Companies sitting between £50,000 and £250,000 can receive Marginal Relief, which reduces the tax initially calculated at 25% and creates a gradual increase in the effective rate.
GOV.UK states that Marginal Relief provides a gradual increase in the Corporation Tax rate between the Small Profits Rate and the Main Rate, allowing for a reduction in tax from the 25% Main Rate.
Therefore, it is more accurate to say:
Corporation Tax does not have simple bands like Income Tax. It has a small rate, a main rate, and a transition zone calculated through Marginal Relief.
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The Common Mistake: “The first £50,000 is taxed at 19%, the rest at 25%”
This is one of the most frequent errors.
Many directors believe that if the company has a profit of £100,000, the first £50,000 is taxed at 19%, and the next £50,000 at 25%.
That calculation would look like this:
£50,000 × 19% = £9,500
£50,000 × 25% = £12,500
Total = £22,000
But this is NOT the correct calculation for Corporation Tax Marginal Relief.
In the case of a simple company, with no associated companies and no other complications, the Corporation Tax on a £100,000 profit would be approximately £22,750, not £22,000.
The difference arises because Marginal Relief works as a deduction from the Main Rate, not as a simple banded system.
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How is Marginal Relief Calculated?
For a simple company, with no associated companies, no short accounting period, and augmented profits equal to taxable profits, the practical concept is this:
First, calculate Corporation Tax at the Main Rate of 25%.
Then, subtract the Marginal Relief.
The HMRC formula for marginal relief is:
(F × (U – A)) × (N ÷ A)
Where:
F is the standard marginal relief fraction.
U is the upper limit.
A is the augmented profits.
N is the taxable total profits.
The HMRC Company Taxation Manual outlines this formula for companies falling between the lower and upper limits.
In simple cases, where augmented profits equal taxable profits, the formula can be understood as:
Marginal Relief = (£250,000 – profit) × 3/200
Then:
Corporation Tax = (profit × 25%) – Marginal Relief
This is a useful simplification, but for situations involving associated companies, short accounting periods, distributions, or other complexities, the correct formula or the HMRC calculator must be used.
GOV.UK provides a Marginal Relief calculator and specifies that limits are reduced for associated companies and shorter accounting periods.
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Simple Corporation Tax Calculation Examples
Example 1: Profit of £40,000
The company has a taxable profit of £40,000.
Because the profit is under £50,000, the Small Profits Rate of 19% applies.
£40,000 × 19% = £7,600 Corporation Tax
Profit after Corporation Tax: £32,400
This is the simplest example: small profit, 19%, no Marginal Relief.
Example 2: Profit of £75,000
The profit is between £50,000 and £250,000, so the Main Rate of 25% applies, reduced by Marginal Relief.
Tax at 25%:
£75,000 × 25% = £18,750
Marginal Relief:
£250,000 – £75,000 = £175,000
£175,000 × 3/200 = £2,625
Corporation Tax:
£18,750 – £2,625 = £16,125
The effective rate is approximately 21.5%.
Example 3: Profit of £100,000
Tax at 25%:
£100,000 × 25% = £25,000
Marginal Relief:
£250,000 – £100,000 = £150,000
£150,000 × 3/200 = £2,250
Corporation Tax:
£25,000 – £2,250 = £22,750
The effective rate is 22.75%.
Important Note: This is why the "19% on the first threshold and 25% on the rest" calculation is wrong.
Example 4: Profit of £150,000
Tax at 25%:
£150,000 × 25% = £37,500
Marginal Relief:
£250,000 – £150,000 = £100,000
£100,000 × 3/200 = £1,500
Corporation Tax:
£37,500 – £1,500 = £36,000
The effective rate is 24%.
Example 5: Profit of £300,000
The profit is over £250,000, so the Main Rate of 25% applies.
£300,000 × 25% = £75,000 Corporation Tax
No Marginal Relief is applied because the profit is over the upper limit.
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Indicative Guide: How the Effective Rate Increases
Below is an indicative breakdown for a simple company, with no associated companies, standard 12-month accounting period, and no special adjustments.
For real cases, calculations must be verified using CT600/software.
Taxable Profit: £40,000
Approx. Corporation Tax: £7,600
Effective Rate: 19.00%
Taxable Profit: £50,000
Approx. Corporation Tax: £9,500
Effective Rate: 19.00%
Taxable Profit: £75,000
Approx. Corporation Tax: £16,125
Effective Rate: 21.50%
Taxable Profit: £100,000
Approx. Corporation Tax: £22,750
Effective Rate: 22.75%
Taxable Profit: £150,000
Approx. Corporation Tax: £36,000
Effective Rate: 24.00%
Taxable Profit: £200,000
Approx. Corporation Tax: £49,250
Effective Rate: 24.63%
Taxable Profit: £250,000
Approx. Corporation Tax: £62,500
Effective Rate: 25.00%
Taxable Profit: £300,000
Approx. Corporation Tax: £75,000
Effective Rate: 25.00%
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What are Associated Companies and Why Can They Change Everything?
Associated companies are very important following the reintroduction of the Small Profits Rate and Marginal Relief.
If a company has associated companies, the £50,000 and £250,000 thresholds are divided.
GOV.UK provides the example of a company that has 3 other associated companies: the limits are divided by 4, meaning the lower limit becomes £12,500 and the upper limit becomes £62,500.
Example
You have Company A and 3 other associated companies.
That makes a total of 4 associated companies in the calculation group.
The £50,000 threshold becomes:
£50,000 ÷ 4 = £12,500
The £250,000 threshold becomes:
£250,000 ÷ 4 = £62,500
This means that a company with a profit of £70,000, which would have been in the Marginal Relief zone if it stood alone, can instantly jump over the adjusted upper limit and pay the Main Rate of 25%.
This rule is extremely important for entrepreneurs who have multiple LTDs, property companies, construction firms, management companies, or companies owned by connected persons.
It is not enough to just look at the profit of a single firm.
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What Happens if the Accounting Period is Shorter Than 12 Months?
The thresholds are reduced proportionally.
If a company has a 6-month accounting period, the normal thresholds are cut in half:
Lower limit:
£50,000 × 6/12 = £25,000
Upper limit:
£250,000 × 6/12 = £125,000
This frequently occurs in a company's first year when accounts might cover a period other than 12 months, or when a company changes its accounting reference date.
GOV.UK confirms that Marginal Relief limits are reduced proportionally if the accounting period is less than 12 months.
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When is Corporation Tax Paid?
For most small companies, Corporation Tax is paid 9 months and 1 day after the end of the accounting period.
Example 1
Accounting period ends on 31 March 2026.
Corporation Tax payment deadline is 1 January 2027.
Example 2
Accounting period ends on 30 June 2026.
Corporation Tax payment deadline is 1 April 2027.
GOV.UK confirms that for taxable profits up to £1.5 million, Corporation Tax must be paid 9 months and 1 day after the accounting period ends.
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When is the CT600 / Company Tax Return Filed?
The Company Tax Return, known practically as the CT600, is usually filed 12 months after the end of the accounting period.
This is where a major confusion arises:
The CT600 is filed AFTER the payment deadline.
GOV.UK clearly outlines that a company must pay Corporation Tax, or inform HMRC that nothing is owed, 9 months and 1 day after the accounting period, but the Company Tax Return is filed 12 months after the accounting period.
Timeline Example
Accounting period ends on 31 March 2026.
Corporation Tax must be paid by 1 January 2027.
CT600 must be filed by 31 March 2027.
This means directors shouldn't wait until the CT600 deadline to figure out how much they owe.
Accounts and tax computations should be prepared early enough to pay accurately and on time.
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What Happens if the Company Has High Profits?
For companies with taxable profits over £1.5 million, the payment rules are different.
GOV.UK specifies that if taxable profits exceed £1.5 million, Corporation Tax must be paid in instalments, and rules for "large companies" apply to those with annual profits between £1.5 million and £20 million.
For very large companies, with profits at an annual rate over £20 million, Corporation Tax is also paid via instalments according to the rules for "very large companies".
However, for most small business clients, CIS companies, construction LTDs, and service companies, the practical rule remains:
9 months and 1 day after the end of the accounting period.
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Corporation Tax and Dividends: What Directors Need to Understand
A director-shareholder might think that if the company has £50,000 profit in the bank, that money can be immediately withdrawn as dividends.
In reality, dividends are paid from post-tax profits, meaning profits remaining after Corporation Tax.
Example
The company has a taxable profit of £50,000.
Corporation Tax at 19% is £9,500.
Available profit after tax is £40,500.
In principle, this is the profit that can support dividends, provided there are distributable reserves and the paperwork is correct.
If a director withdraws money without reserving the Corporation Tax, it can lead to an overdrawn Director’s Loan Account, cash flow problems, or incorrectly declared dividends.
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Corporation Tax and Director's Salary
A director's salary is generally a deductible expense for the company if it is processed correctly through PAYE and incurred for the business.
This can reduce the profit subject to Corporation Tax.
Dividends, on the other hand, are NOT a deductible expense for Corporation Tax. They are distributions of post-tax profit.
This is why salary/dividend planning is crucial.
It isn't enough to look solely at Corporation Tax. You must analyze the total picture:
Corporation Tax, PAYE, National Insurance, Dividend Tax, cash flow, pension contributions, and the director's personal circumstances.
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Corporation Tax and Company Losses
If a company makes a loss, it normally does not pay Corporation Tax for that accounting period, but it must still file a Company Tax Return if HMRC has requested one.
Losses can be highly valuable for tax purposes, as they can be used, under certain conditions, to reduce profits in other periods.
GOV.UK explains that trading profit or loss for Corporation Tax is calculated by making tax adjustments to the profit or loss shown in the financial accounts.
For directors, the practical takeaway is simple:
A loss should not be ignored. It must be calculated correctly, declared properly, and analyzed to see if there is an opportunity for carry-back or carry-forward relief.
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How to Pay Corporation Tax to HMRC
Corporation Tax is paid to HMRC using the correct reference for the accounting period.
This reference usually contains 17 characters and is specific to the period.
If the wrong reference is used, the payment might be allocated to the wrong period, triggering reminders or interest even if the money was sent.
Payment methods can include bank transfer, Direct Debit, online card, or other methods available via GOV.UK.
The key is that the payment must reach HMRC by the deadline, not just be initiated on the day of the deadline.
GOV.UK mentions that the payment deadline depends on taxable profits and that the payment reference number can be found in the online account or on the payslip from HMRC.
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What Happens if You Pay Late?
If Corporation Tax is paid late, HMRC can charge interest.
Separately, if the Company Tax Return is filed late, late filing penalties may apply, even if no tax is owed.
GOV.UK notes that late filing penalties apply if the Company Tax Return is not filed on time, regardless of whether there is any tax to pay.
This is a common mistake: some directors think that if the company owes no tax, it doesn't matter if the CT600 is delayed.
In reality, the filing obligation and the payment obligation are entirely separate.
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Most Common Corporation Tax Mistakes
Confusing turnover with profit
A company with £120,000 in sales does not pay tax on £120,000, but on the taxable profit after expenses and adjustments.
Miscalculating the progressive system
For profits between £50,000 and £250,000, you don't simply apply 19% to the first part and 25% to the rest. Marginal Relief must be calculated correctly.
Ignoring associated companies
If the director has multiple connected companies, the thresholds can be significantly reduced.
Waiting for the CT600 deadline
Corporation Tax must be paid before the CT600 filing deadline.
Withdrawing money without reserving tax
Money in the account is not automatically money available for the director to take.
Incorrect treatment of assets
Some assets, such as vans, equipment, tools, and machinery, can benefit from capital allowances, but they must be treated correctly in the accounts and tax computation.
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Practical Checklist for Directors
Before the end of the accounting period, the director should have a rough idea of the company's profit, the estimated level of Corporation Tax, whether the firm is approaching the £50,000 or £250,000 thresholds, if there are associated companies, and if any investments or expenses need to be tax-planned.
After the end of the accounting period, the company should prepare the accounts, tax computation, CT600, Companies House accounts, and prepare for the Corporation Tax payment.
Ideally, this should all be done well ahead of the 9 months and 1 day deadline, not in the final week.
For companies with variable cash flow, like many in construction, it is highly recommended to estimate Corporation Tax periodically and set aside money monthly or quarterly.
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Full Example: Construction Company
Let's assume a construction Limited Company has the following situation for a 12-month accounting period:
Sales: £180,000
Materials and subcontractors: £75,000
Wages and payroll costs: £25,000
Van, fuel, insurance, tools, software, accountancy, and other expenses: £30,000
Estimated profit before Corporation Tax: £50,000
If the taxable profit remains £50,000, the Corporation Tax could be 19%:
£50,000 × 19% = £9,500
Profit after tax = £40,500
But, if certain expenses are not deductible or if there are tax adjustments, the taxable profit might rise above £50,000, pushing the company into the Marginal Relief zone.
If the taxable profit becomes £60,000:
Tax at 25%:
£60,000 × 25% = £15,000
Marginal Relief:
£250,000 – £60,000 = £190,000
£190,000 × 3/200 = £2,850
Corporation Tax:
£15,000 – £2,850 = £12,150
The difference in tax between a £50,000 profit and a £60,000 profit isn't just a simple 19%.
In the marginal zone, the tax increases more rapidly, making planning highly important.
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How Can an Accountant Help?
An accountant can help a company understand the difference between accounting profit and taxable profit, calculate Corporation Tax correctly, apply Marginal Relief, check for associated companies, prepare the tax computation, CT600, accounts, capital allowances, and plan cash flow for timely payments.
For directors, the real value isn't just in filing the return.
It’s in knowing ahead of time how much the company owes, how much money can legally be extracted through salary or dividends, what profit remains in the company, and how to avoid surprises.
A good accountant shouldn't wait until the deadline to explain Corporation Tax.
They should help the director understand their tax position throughout the year.
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Conclusion
Corporation Tax is one of the most significant tax obligations for a UK Limited Company.
It is applied to the company's taxable profits, not on sales, not on the money in the bank account, and not on the director's dividends.
The current system has three main zones:
19% for companies with small profits.
25% for companies with large profits.
Marginal Relief for companies falling between the thresholds.
This system creates a gradual increase in the effective rate but does not function as a simple Income Tax band calculation.
For most small companies, the payment deadline is 9 months and 1 day after the end of the accounting period, and the CT600 is filed 12 months after the accounting period.
Understanding this difference is critical.
The golden rule is simple:
Do not wait for the CT600 deadline to calculate Corporation Tax. Calculate the profit, estimate the tax, and set the money aside early.
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Need Help with Corporation Tax?
At DCTaxAgent Ltd, based in Barnet, North London, we actively assist UK Limited Companies, directors, and small businesses with:
Corporation Tax calculations
CT600 returns
Limited Company Accounts
Companies House accounts
Tax planning
Salary and dividend planning
Bookkeeping
PAYE
VAT Returns
Capital allowances
Construction LTD accounts
Cash flow planning for Corporation Tax
Checking deadlines and payment references
WhatsApp: 07587 532646
Website: www.dctaxagent.co.uk
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Disclaimer
This article is for informational and educational purposes only and does not constitute personalized tax advice, legal advice, or a guarantee regarding the exact amount of Corporation Tax owed.
Rules concerning Corporation Tax, Marginal Relief, associated companies, capital allowances, CT600, Companies House accounts, salary/dividend planning, PAYE, VAT, and tax deadlines may depend on the exact circumstances of each company.
DCTaxAgent assumes no responsibility for decisions made solely on the basis of this article without personalized consultation.
For an accurate analysis, please speak with an accountant or tax adviser.