Corporation Tax for Limited Companies — Rates, Reliefs & Worked Examples

£1,500. That's how much marginal relief saved a client of ours a few years back on a single year's profit of £150,000 — a relief most of her competitors down the road had never even heard of, let alone claimed properly. Corporation tax has a habit of doing that. It looks like a simple two-rate system from a distance. Get up close, and it's full of thresholds, fractions and traps that quietly cost — or save — thousands of pounds a year.

I've sat across the table from directors who assumed their company paid a flat 25% on everything, and directors who assumed the opposite — that a small company always pays 19%, full stop. Neither is quite right. The real answer sits somewhere in between, and where exactly depends on your profit, your associated companies, and how well your capital spending is timed. This guide walks through all of it, with the worked examples I wish someone had shown me the first time I tried to explain marginal relief on a napkin.

By the end, you'll know exactly which rate your company falls into for 2026/27, how to calculate your bill from scratch, and — more usefully — how to legally bring that bill down.

What Is Corporation Tax?

Corporation tax is the tax a UK limited company pays on its profits. Not your profits, personally — the company's. It's a distinct legal entity from you, which is precisely the point of incorporating in the first place, and its tax return is entirely separate from your own Self Assessment.

It applies to trading profits, but it doesn't stop there. Investment income sitting in the business, rental profits if your company owns property, and capital gains on assets the company sells are all pulled into the same calculation. A lot of directors are surprised the first time a gain on selling an old company van shows up on their corporation tax bill. It shouldn't be a surprise — it's just rarely explained.

Who Has to Pay Corporation Tax?

Any UK-resident limited company, and any foreign company with a UK branch or permanent establishment, is within the scope of corporation tax. It doesn't matter whether the company is trading actively, dormant, or sitting on investment income alone — if there's taxable profit, corporation tax is due on it.

Corporation Tax vs Income Tax – What's the Difference?

Income tax is charged on you, the individual, on your salary, dividends and other personal income. Corporation tax is charged on the company. The two sit side by side rather than replacing one another — your company pays corporation tax on its profits first, and then you pay income tax personally on whatever you draw out of what's left. That's the layering that makes profit extraction planning worth doing properly, and it's something we'll come back to later in this guide.

When Do You Register for Corporation Tax?

Within three months of starting to trade. Miss it, and HMRC can charge a penalty even if you haven't actually underpaid any tax — it's a registration deadline, not a payment one, and it's one of the easiest compliance steps to overlook in the scramble of getting a new company off the ground.

How Much Corporation Tax Does a Limited Company Pay?

For the 2026/27 tax year, there are two headline rates, and a band in between where neither quite applies on its own.

The Small Profits Rate – 19%

Companies with taxable profits of £50,000 or less pay corporation tax at 19%. This is the rate most genuinely small companies — sole-director consultancies, small trading businesses, early-stage startups — will fall into.

The Main Rate – 25%

Companies with taxable profits above £250,000 pay 25% on the whole amount. There's no tapering above that threshold; once you're over £250,000, the main rate simply applies.

Effective Rates Across the Profit Spectrum

Between £50,000 and £250,000, marginal relief tapers the rate smoothly from 19% up to 25%. We'll unpack exactly how that works in a moment, but the headline point worth remembering now is this: a company with profits comfortably inside that band isn't paying a clean 19% or a clean 25% — it's paying somewhere in between, and the rate on the last pound of profit earned is actually higher than 25%.

What Counts as "Profit" for Corporation Tax?

Not the number on your management accounts. Taxable profit is your accounting profit, adjusted — certain costs added back because they're not tax-deductible, certain reliefs deducted because they are. It's entirely normal for a company with a healthy-looking accounting profit to have a noticeably different taxable profit once those adjustments are made.

How Is Corporation Tax Calculated?

Here's the process, step by step, the way we actually run it for clients.

Step 1: Start With Your Accounting Profit

Take the profit figure from your statutory accounts — revenue less expenses, prepared under normal accounting rules.

Step 2: Add Back Disallowable Expenses

Some costs are perfectly legitimate business expenses that HMRC simply won't allow as a tax deduction. Client entertaining is the classic example — you can spend the money, your accounts will show it, but for tax purposes it gets added straight back onto your profit. Fines, certain legal costs, and depreciation (which is replaced by capital allowances, covered below) all get treated the same way.

Step 3: Deduct Capital Allowances and Reliefs

This is where accounting depreciation gets swapped out for capital allowances — HMRC's own system for relieving the cost of business assets — along with any other reliefs your company qualifies for, such as R&D relief.

Step 4: Apply the Right Rate

Once you've reached your final taxable profit figure, the 19% small profits rate, 25% main rate, or marginal relief taper is applied, depending on where that figure lands.

Filing the CT600

The result gets reported to HMRC on a Company Tax Return, form CT600, alongside a set of accounts and full corporation tax computations. It sounds like a formality. In practice, the computations are where most of the value — and most of the errors — actually live.

What Is Marginal Relief?

This is the part of corporation tax that trips up more directors than anything else on this page, so it's worth slowing down here.

The Marginal Relief Formula Explained

For 2026/27, the formula uses a fraction of 3/200. In its simplest form — where your company has no other income complicating the calculation — it works like this:

Marginal Relief = (£250,000 − Taxable Profit) × 3/200

You work out your tax at the full 25% main rate first, then subtract this relief figure to arrive at what you actually owe.

Worked Example: Marginal Relief in Action

Let's take a company with taxable profits of £150,000 for the year.

Tax at the main rate: £150,000 × 25% = £37,500.

Marginal relief: (£250,000 − £150,000) × 3/200 = £100,000 × 0.015 = £1,500.

Tax actually due: £37,500 − £1,500 = £36,000.

That's an effective rate of 24% — noticeably below the 25% headline rate, but still well above the 19% small profits rate. Now compare a company with profits of £75,000. Tax at the main rate is £18,750, marginal relief is (£250,000 − £75,000) × 3/200 = £2,625, leaving tax due of £16,125 — an effective rate of 21.5%. The closer your profit sits to £50,000, the closer your effective rate gets to 19%. The closer it sits to £250,000, the closer it gets to 25%.

The 26.5% Trap – Why the Marginal Rate Matters More Than the Headline Rate

Here's the number that genuinely changes planning decisions: within the £50,000 to £250,000 band, every additional pound of profit is taxed at an effective marginal rate of 26.5%. Not 25%. Higher than the main rate itself.

I explain it to clients this way: imagine your profit for the year is sitting at £180,000, and you're deciding whether to take on one more piece of work before your year end that would add another £10,000 of profit. That extra £10,000 doesn't cost you £2,500 in corporation tax — it costs you £2,650. It's a small difference on paper, but across a growing company making these decisions repeatedly through the year, it adds up to a genuinely material sum, and very few directors are aware of it until it's pointed out.

How to Plan Around the Marginal Relief Band

Once you know you're likely to land inside the band, the planning options are straightforward, even if they're underused: bring forward qualifying capital expenditure to reduce taxable profit before the year end, consider an employer pension contribution instead of drawing every last pound out as profit, and review the timing of invoicing where you genuinely have discretion over which accounting period income falls into. None of this is aggressive tax avoidance — it's simply making sure profit lands where it's taxed most efficiently, using reliefs Parliament built into the system on purpose.

What Are Associated Companies?

If you own — or are connected to — more than one company, this section matters a great deal, because it changes your thresholds even if the two companies have nothing to do with each other operationally.

How Associated Companies Are Defined

Two companies are associated if one controls the other, or if both are under common control — generally meaning the same person, or the same group of people acting together, holds more than 50% of each. It isn't about whether the businesses share customers, staff or a name. It's purely about who controls them.

How Associated Companies Affect Your Thresholds

The £50,000 small profits threshold and the £250,000 main rate threshold are both divided by the total number of associated companies, including the company you're calculating tax for. This catches out a lot of directors who set up a second company — a property investment vehicle, say, alongside their trading company — without realising it changes the tax position of the original business entirely.

Worked Example: Two Associated Companies

A director runs a consultancy through Company A, and sets up Company B to hold a buy-to-let property, with the same 100% ownership in both. Because they're associated, the thresholds for each company are halved: £25,000 instead of £50,000, and £125,000 instead of £250,000. If Company A's profit is £60,000 — comfortably under the standard £50,000 threshold on its own — it's now sitting inside the marginal relief band rather than qualifying for the small profits rate, purely because of a second company that, on the face of it, has nothing to do with the first.

Common Associated Company Mistakes

The mistake I see most often is directors forgetting about a dormant company they set up years ago and never got round to closing, or a spouse's separate business that technically counts as associated because of shared control. Both still count. HMRC will count them too, and back-dated corrections after the fact are considerably more painful than getting it right from the start.

Can Corporation Tax Be Reduced Legally?

Yes — and this is where the real value of proper planning shows up. None of what follows is a loophole. It's reliefs Parliament has deliberately built into the system, most of which sit unused in far too many small company tax returns.

Capital Allowances and Full Expensing

The Annual Investment Allowance lets you deduct the full cost of qualifying plant and machinery — up to £1 million — in the year you buy it, rather than spreading the relief over several years. Full expensing goes further for larger, qualifying purchases, giving a 100% first-year deduction, and from January 2026 there's also a new 40% first-year allowance available on main-rate assets. For a company planning a significant equipment purchase, the timing of that purchase relative to your year end can materially change your tax bill for the year.

Pension Contributions

An employer pension contribution is one of the most generous reliefs available and one of the least used by owner-managed companies. It's fully deductible against corporation tax, provided it meets the "wholly and exclusively" test, and it avoids employer and employee National Insurance entirely — unlike salary, and unlike a dividend, which has already had corporation tax taken off before it even reaches you personally.

R&D Tax Relief

If your company is genuinely resolving a technical uncertainty — and that bar is lower than most directors assume — R&D relief can meaningfully reduce your corporation tax bill, or generate a cash credit if you're loss-making. We cover this in full in our dedicated R&D guide, but it's worth flagging here because it's so often overlooked by companies who don't think of themselves as "doing research" in the traditional sense.

Timing Income and Expenditure Around Your Year End

If you have genuine discretion over when income is invoiced or expenditure is committed, the accounting period it falls into can shift your effective tax rate, particularly if it means the difference between sitting just inside or just outside the marginal relief band. This isn't about manufacturing artificial timing — it's about being deliberate rather than accidental about decisions you were going to make anyway.

Group Relief and Loss Planning

Where associated companies exist within a genuine group structure, losses in one company can sometimes be surrendered to offset profits in another, reducing the group's overall tax bill. It's a more advanced area, and it needs proper structuring to work — but for groups running more than one active trading company, it's worth a proper conversation rather than leaving each company to file in isolation.

What HMRC Will and Won't Accept

Every relief above has to be genuinely earned, not engineered. Legitimate planning is about using the rules as they're written — claiming the allowances you're entitled to, making contributions you can properly justify, and timing decisions sensibly. It is not about dressing up personal spending as a business cost, or manufacturing transactions purely to shift profit between periods. HMRC's investigations into small company corporation tax returns have become noticeably more targeted in recent years, and the companies that get caught out are almost always the ones that crossed that line, not the ones that simply claimed what they were owed.

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Corporation tax rewards attention to detail. The headline rates are simple enough to remember; the value sits in the marginal relief band, the associated company rules, and the reliefs that are easy to miss if nobody's looking for them on your behalf. If you'd like us to review your own corporation tax position — whether you're comfortably under £50,000, uncomfortably inside the marginal relief band, or managing more than one associated company — get in touch with the team at Cannon Accountants. It's exactly the kind of conversation that pays for itself.

Corporation tax is just one piece of the picture, of course. How you draw money out of the company, what counts as an allowable expense, whether a director's loan is quietly building up a tax charge, pensions, benefits in kind, R&D, VAT — they all interact with the numbers covered here. For the full, joined-up view of what running a limited company means for your tax position in 2026/27, head back to our complete Limited Company Tax Guide 2026/27: Corporation Tax, Dividends & Director Tax →.

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