What Is Corporation Tax?

If you run a limited company in the UK, Corporation Tax is the bill that defines your tax year. It is the company equivalent of the Income Tax a self-employed person pays — except that a company is a separate legal person, so the tax falls on the business itself rather than on you. New directors are often caught out by two things: there is no tax-free allowance, and the deadline to pay arrives before the deadline to file the return. This guide explains what Corporation Tax is, how profit is worked out, and the obligations that come with it. This is general information, not tax or accountancy advice.

What Corporation Tax is

Corporation Tax is a tax charged on the taxable profits of limited companies and some other organisations. A company is its own legal entity, distinct from the people who own and run it, so it pays tax in its own right. That is one of the defining differences between trading through a company and trading as a sole trader, a contrast we cover in sole trader vs limited company.

The tax applies to more than just day-to-day trading profit. Broadly, a company pays Corporation Tax on:

• Trading profits — money made from doing business.
• Investment income — for example, interest the company earns.
• Chargeable gains — profits from selling assets such as property, equipment or shares for more than they cost.

Crucially, there is no personal allowance for Corporation Tax. An individual gets a slice of tax-free income each year, but a company is taxed on profit from the very first pound. The rate itself is set by the government and can change at each Budget, so the current figure should always be checked on GOV.UK — this guide deliberately avoids quoting a percentage that could date.

Who pays it

Corporation Tax is paid by:

• Limited companies registered at Companies House.
• Foreign companies with a UK branch or office.
• Members clubs, societies and associations that are not run for profit but still have taxable income.

It is not paid by sole traders or ordinary partnerships. They report profits through Self Assessment and pay Income Tax and National Insurance instead — see our guides to National Insurance and the Self Assessment tax return. The moment you incorporate a company, though, you step into the Corporation Tax system, which is one of the responsibilities to weigh up when you register a UK company.

A company pays Corporation Tax even in a year it makes no profit, in the sense that it must still file a return to show that. Having nothing to pay is not the same as having nothing to do.

How profit is calculated

The figure Corporation Tax is charged on is your taxable profit, and that is not always the same as the profit in your accounts. The process broadly runs:

1. Start with your accounting profit — income minus expenses for the period.
2. Add back costs that are not allowable for tax, such as client entertaining or depreciation.
3. Deduct capital allowances — a tax version of depreciation that lets you write down the cost of equipment, machinery and some other assets.
4. Apply any reliefs you qualify for.
5. The result is the taxable profit to which the rate is applied.

Two adjustments trip people up most. First, business entertaining is generally not deductible, even though it is a real cost. Second, depreciation in your accounts is replaced for tax purposes by capital allowances, which follow their own rules. Because these adjustments can materially change the bill, most companies use an accountant — and the cost is usually money well spent.

Registering and keeping records

You must register for Corporation Tax with HMRC, normally within three months of starting to trade. "Trading" includes activities like buying, selling, advertising or employing someone — not just making your first sale. When you set up a company through Companies House, you are often registered for Corporation Tax at the same time, but it is your responsibility to confirm it.

You also have to keep proper accounting records and prepare annual accounts. These records support the figures on your return and must generally be kept for at least six years. Good bookkeeping is not just a compliance chore; it is the backbone of running a solvent business, which is why we treat it alongside cash flow management for a small business. Registering for Corporation Tax is separate from VAT registration, which has its own thresholds and rules — a company can be registered for one and not the other.

Deadlines: pay first, file later

This is the part that catches new directors out. For Corporation Tax, the payment deadline comes before the filing deadline:

So if your accounting period ends on 31 March, payment is generally due by 1 January and the return by 31 March the following year. The logic is unusual — you effectively work out and pay the tax, then formally submit the paperwork shortly after — but missing either deadline triggers penalties and interest. Very large companies pay differently, in quarterly instalments, but most small businesses follow the timetable above.

Your accounting period for Corporation Tax usually matches the financial year covered by your annual accounts, and normally cannot be longer than 12 months. In a company's first year the period can be slightly awkward, sometimes requiring two returns, because the date you started trading rarely lines up neatly with your accounting reference date.

Reliefs and lowering the bill

The system offers legitimate ways to reduce taxable profit, including:

• Allowable expenses — costs incurred wholly and exclusively for the business.
• Capital allowances — relief on qualifying equipment and machinery.
• Trading losses — which can often be carried forward against future profits, or sometimes back against past ones.
• Specific reliefs — such as those for research and development, for companies that qualify.

The golden rule is that an expense must be incurred wholly and exclusively for the business to be deductible. Keeping personal and business spending separate makes this far easier, which is one practical reason many directors run a dedicated business bank account. For anything beyond the basics — losses, R&D claims, group structures — professional advice usually pays for itself.

The bottom line

Corporation Tax is the tax a UK limited company pays on its profits, charged from the first pound with no personal allowance. You must register with HMRC, keep proper records, file a company tax return and — unusually — pay the tax before you file. Work out taxable profit by adjusting your accounting profit for items like disallowed costs and capital allowances, use the reliefs you are entitled to, and keep an eye on the calendar. Because rates and rules change with each Budget, treat GOV.UK as the source of truth and consider an accountant to keep you compliant and efficient.