What corporation tax is charged on
Corporation tax is paid by UK limited companies on their taxable profits, which include trading profits, investment income such as interest, and gains on selling assets. Taxable profit starts from the profit in the company's accounts and is then adjusted. Some costs in the accounts are not allowed for tax, such as entertaining clients and the depreciation of equipment. Some reliefs that do not appear in the accounts are deducted, such as capital allowances on equipment and extra deductions for research and development.
A company that makes a loss pays no corporation tax for that period, but it still files a return, and the loss can reduce tax in another period. The rate a profitable company pays depends on the size of its profits and on how many other companies are under the same control.
This guide covers the rates and marginal relief with a worked example, associated companies, registration and the first accounting period, filing and payment deadlines, quarterly instalments, losses, capital allowances, research and development relief, costs incurred before trading starts, and legitimate ways to reduce the bill. The figures apply to the financial years starting 1 April 2026 and 1 April 2027.
What this guide covers
- Rates, marginal relief and associated companies
- Registering, filing, payment dates and instalments
- Losses, capital allowances and research and development relief
- Pre-trading costs and legitimate ways to reduce the bill
Corporation tax rates for 2026 and 2027
Corporation tax rates are set for financial years running from 1 April to 31 March. The rates for the financial years starting 1 April 2026 and 1 April 2027 are the same (HMRC rates and allowances, Finance Act 2026, section 11).
- Profits of £50,000 or less are taxed at the small profits rate of 19%.
- Profits above £250,000 are taxed at the main rate of 25% on the whole amount.
- Profits between £50,000 and £250,000 are taxed at 25%, reduced by marginal relief, so the average rate rises gradually from 19% to 25%.
The £50,000 and £250,000 limits are reduced in proportion for an accounting period shorter than 12 months, and they are divided between associated companies, which are explained below.
How marginal relief is calculated
Marginal relief is calculated with a formula set by law (HMRC Company Taxation Manual, CTM03925).
Marginal relief = 3/200 × (upper limit − augmented profits) × (taxable profits ÷ augmented profits)
Augmented profits are taxable profits plus most dividends the company receives from companies outside its own group. A startup that receives no dividends has augmented profits equal to its taxable profits, so the last part of the formula equals one.
Because the relief shrinks as profits grow, each extra pound of profit between the two limits is taxed at 26.5%. The tax on £250,000 is £62,500 and the tax on £50,000 is £9,500, so the £200,000 between them carries £53,000 of tax.
Worked example of marginal relief
The figures are illustrative. A software company with no associated companies has taxable profits of £120,000 for the year to 31 March 2027 and receives no dividends.
- Tax at the main rate: £120,000 × 25% = £30,000
- Marginal relief: 3/200 × (£250,000 − £120,000) = £1,950
- Corporation tax payable: £30,000 − £1,950 = £28,050, an average rate of 23.4%
If the company had made £10,000 more, its tax would be £130,000 × 25% = £32,500, less marginal relief of 3/200 × (£250,000 − £130,000) = £1,800, giving £30,700. The extra £10,000 of profit costs £2,650 in tax, which is 26.5%. The same arithmetic works in reverse, so a £10,000 deductible cost for a company with profits in this band saves £2,650.
Associated companies
If you control more than one company, the limits are shared between them. Two companies are associated if one controls the other, or both are controlled by the same person or group of people, at any time in the accounting period (Corporation Tax Act 2010, section 18E). Control usually means holding more than half of the shares or voting power, or rights to more than half of the income or assets. Companies count wherever in the world they are based.
The £50,000 and £250,000 limits are divided by the number of associated companies plus one. A company with three associated companies divides by four, giving limits of £12,500 and £62,500 (HMRC marginal relief guidance). A company that was associated for only part of the accounting period counts for the whole period.
A company that carried on no trade or business at any time in the period is left out of the count, and so is a passive holding company that only holds shares in its subsidiaries and passes on their dividends. Shares held by your spouse, relatives or business partners only count as yours when the companies are substantially interdependent, for example through financial support, common customers, or shared staff, premises or management (CTM03950). Our article on associated companies and the corporation tax limits has a worked example.
Registering and the first accounting period
A new company comes within the charge to corporation tax when it starts to do business (Corporation Tax Act 2009, section 9). Doing business includes trading and receiving income such as bank interest. Writing a business plan or negotiating contracts before opening for business does not count as trading, and a company that has not started to do business is dormant for corporation tax (HMRC guidance on trading and non-trading).
You must tell HMRC within three months of the start of the first accounting period, normally by adding Corporation Tax services to the company's business tax account. You give the date the company started to do business, which becomes the start of its first accounting period, and the date its first accounts will be made up to (HMRC registration guidance).
An accounting period ends 12 months after it starts, at the end of the period the accounts cover, or when the company starts or stops trading, whichever comes first (section 10). First accounts usually cover more than 12 months, which can mean two tax returns for the first period. Our guide to your company's first year end works through the dates.
Filing and payment deadlines
A company that does not pay in instalments pays its corporation tax nine months and one day after the end of the accounting period. The company tax return, form CT600, is due 12 months after the end of the accounting period, so the tax is due three months before the return (HMRC guidance on company tax returns). A return must be filed even when there is a loss or no tax to pay. Since 1 April 2026 it has to be filed with commercial software, together with the accounts and the tax computation.
For returns due on or after 1 April 2026, the penalty is £200 for a return one day late and another £200 at three months. At six months HMRC estimates the tax and adds 10% of the unpaid amount, and at 12 months it adds another 10%. Each £200 penalty becomes £1,000 when a return is late three times in a row (HMRC late filing penalties). Tax paid late carries interest at the Bank of England base rate plus 4%.
Quarterly instalments for large companies
A company whose taxable profits are more than £1.5 million a year pays corporation tax in four instalments, based on an estimate of the year's tax (HMRC instalment guidance). For a 12-month accounting period the instalments fall 6 months and 13 days after the period starts, 3 months after that, 14 days after the period ends, and 3 months and 14 days after it ends. For the calendar year 2026 the dates are 14 July 2026, 14 October 2026, 14 January 2027 and 14 April 2027.
The £1.5 million threshold is divided by the number of associated companies plus one and reduced for short periods. A company does not pay by instalments if its tax bill is less than £10,000, or if its profits are no more than £10 million and it was not large in the previous 12 months, which gives a growing company one year's grace. Above £20 million of profits, instalments start in the third month of the accounting period (HMRC guidance for very large companies).
Using trading losses
A trading loss is worked out after capital allowances, so equipment purchases can create or increase a loss (HMRC guidance on trading losses).
Setting a loss against other profits and carrying it back
The loss can be set against the company's other profits of the same period, such as interest, and then carried back against profits of the previous 12 months, provided the company carried on the same trade then. Tax already paid for the earlier period is refunded. The claim must be made within two years of the end of the loss-making period (Corporation Tax Act 2010, section 37).
Carrying a loss forward
A loss that is not used in these ways is carried forward. Losses from accounting periods beginning on or after 1 April 2017 can be set against total profits of later periods, in the amounts the company chooses, by a claim made within two years of the end of the period in which the loss is used (section 45A). Above £5 million of profits a year, only half of the excess can be covered.
Group relief
Where one company owns at least 75% of another, or both are at least 75% owned by a third company, a trading loss can be surrendered to another UK company in the group and set against its profits for the same period (section 152).
Worked example of a first-year loss
The figures are illustrative. A company with no associated companies makes a tax loss of £60,000 in its first 12-month accounting period and taxable profits of £90,000 before losses in its second.
- Tax in year 2 without the loss: £90,000 × 25% = £22,500, less marginal relief of 3/200 × (£250,000 − £90,000) = £2,400, giving £20,100
- Tax in year 2 with the loss carried forward: (£90,000 − £60,000) × 19% = £5,700
- Tax saved: £20,100 − £5,700 = £14,400
The first £40,000 of the loss removes profit taxed at the marginal rate of 26.5%, saving £10,600. The remaining £20,000 removes profit taxed at 19%, saving £3,800.
Capital allowances
Depreciation in the accounts is not normally deductible for corporation tax. Capital allowances take its place and give tax relief for equipment, which the rules call plant and machinery (HMRC Capital Allowances Manual, CA10020). If an item qualifies for more than one allowance, the company chooses which to claim.
| Allowance | Relief | What qualifies | Limit |
|---|
| Annual investment allowance | 100% | New or second-hand plant and machinery | £1 million a year, reduced for short periods |
| Full expensing | 100% | New and unused main rate items, not bought to lease out | None |
| 50% first-year allowance | 50% | New and unused special rate items, not bought to lease out | None |
| 40% first-year allowance | 40% | New and unused main rate items bought from 1 January 2026, including most bought to lease out | None |
| Writing down allowance | 14% a year on the main pool | Cost not relieved by another allowance | None |
Main rate items are ordinary plant and machinery such as computers, servers and laboratory equipment. Special rate items include integral features of a building, such as electrical, lighting, heating and cooling systems (HMRC guidance on integral features). For a company, the 40% allowance mainly helps with items bought to lease out, which full expensing does not cover. The main pool rate fell from 18% to 14% for accounting periods beginning on or after 1 April 2026 (Finance Act 2026, section 28). Cars only get the writing down allowance, apart from a 100% first-year allowance for new zero-emission cars bought before April 2027.
A loss-making company can claim less than the full allowance and leave the rest of the cost in the pool for later years.
Research and development relief
For accounting periods beginning on or after 1 April 2024, a company claims research and development relief under one of two schemes, which qualify the same costs but work through the tax computation differently (HMRC guidance on the two schemes).
The merged scheme gives an expenditure credit of 20% of qualifying costs. The credit is taxable trading income and is used first to pay the company's corporation tax. Any remainder can be paid out, subject to a cap linked to the company's PAYE and National Insurance bill, after a deduction for notional tax at 19% for a loss-making company. A loss-making company therefore receives up to 16.2p for each £1 of qualifying costs (CIRD112100).
Enhanced R&D intensive support is for loss-making small and medium-sized companies whose qualifying R&D costs are at least 30% of their total relevant spending. It adds an extra deduction of 86% of qualifying costs, and the company can give up the enlarged loss, up to 186% of those costs, for a payable credit of 14.5%, worth up to 26.97p for each £1 of qualifying costs. A loss given up for cash can no longer be carried forward against future profits.
A company claiming for the first time, or whose last claim was more than three years earlier, must send HMRC a claim notification within six months of the end of the period its accounts cover. Our R&D tax relief guide explains what qualifies and how to claim.
Costs incurred before trading starts
Revenue costs a company incurs for its trade in the seven years before the trade starts are treated as if they were incurred on the first day of trading, provided they would have been deductible then (Corporation Tax Act 2009, section 61). Examples include professional fees, software subscriptions and market research. Equipment bought before trading starts is treated in the same way for capital allowances, so it qualifies in the first trading period (Capital Allowances Act 2001, section 12).
Our article on pre-trading expenses covers which costs qualify and the separate VAT rules.
Legitimate ways to reduce the bill
- A day-to-day cost is deductible if it has only a business purpose and is not specifically disallowed. Entertaining clients is one of the costs that is disallowed (HMRC guidance on company expenses).
- Salary paid through payroll is deductible for corporation tax. Dividends are paid out of profits after corporation tax.
- Company contributions to a registered pension scheme are deductible in the period they are paid, provided the overall pay package is reasonable for the work done, and they are free of National Insurance (BIM46035).
- A bonus charged in the accounts is deductible for that period if it is paid within nine months of the period end, and otherwise in the period it is paid (Corporation Tax Act 2009, section 1288).
- Capital allowances are given for the period in which equipment is bought, so the timing of a planned purchase decides which year gets the deduction. A deduction is worth 26.5p in the pound when profits are between £50,000 and £250,000.
- Research and development relief is available on qualifying work. A company that owns or exclusively licenses patents it helped develop can also elect into the Patent Box, which applies a 10% rate to profits from the patented inventions (HMRC Patent Box guidance).
