What is corporation tax? | Sage Advice UK

Running a business in the UK comes with its fair share of responsibilities, and one of the most important is paying corporation tax.

If you’re a business owner or an accountant managing corporation finances, understanding corporation tax is essential for keeping your company compliant and financially healthy.

Corporation tax is a tax on business profits and capital gains, meaning companies must pay a percentage of their earnings to HMRC.

This article simplifies everything you need to know, from who needs to pay corporation tax to how and when to pay it, helping you stay on top of your company’s tax obligations.

Here’s what we cover:

Who pays corporation tax?

Corporation tax is a mandatory tax on profits for registered businesses operating in the UK. It applies to a range of organisations, not just limited companies.

Here’s a quick rundown to see if your company is required to pay:

• UK-based limited companies: all limited companies registered in the UK must pay corporation tax on their profits.
• Foreign companies with UK branches: if your company is based outside the UK but has a branch or office in the country, it must pay tax on the profits generated within the UK.
• Clubs, co-operatives, and some associations: if you manage the accounting of specific organisations such as clubs or trade associations, you may also be liable for corporation tax.

Are there any exemptions?

Not all businesses have to pay corporation tax.

For example, if you are part of a charity or a community amateur sports club (CASC), you are usually exempt from corporation tax on certain types of income, such as that used for charitable purposes, if they meet specific conditions set by HMRC guidelines.

However, they may be liable for corporation tax on non-primary purpose trading income.

How much is corporation tax?

The corporation tax rate depends on the amount of profit your business makes.

Here’s what you need to know about the current rates:

• Small profits rate (19%): if your company’s profits are below £50,000, you’ll pay 19% in corporation tax.
• Main rate (25%): if your profits exceed £250,000, you’ll be taxed at the full 25% rate.
• Marginal relief (between 19% and 25%): if your profits fall between £50,000 and £250,000, you may qualify for marginal relief. This means your tax rate gradually increases from 19% to 25%, rather than jumping straight to the higher rate.

If your company earns £100,000 in profit, for example, you won’t pay the full 25%. Marginal relief will reduce your effective tax rate.

It’s also worth noting that some industries, such as banking, oil, and gas, have specific tax rules.

For example, banks and building societies face an 8% surcharge on taxable profits, though the first £25 million is exempt.

Additionally, since January 2011, banks have been subject to the bank levy, an annual charge on certain balance-sheet liabilities and equity, including specific customer deposits.

If your corporation operates in multiple countries, different tax rules apply. The general principle is that profits are taxed where the value is created.

If you work in your company’s UK office, this means corporation tax applies to profits from UK-based assets and production activities.

However, for intangible assets such as patents or trademarks, taxation is typically based on where the company’s ownership is registered.

For example, if a UK-based company manufactures products in the UK but holds a patent registered in another country, the profits from manufacturing will be taxed in the UK, while profits from the patent may be taxed where the ownership is based.

Corporate tax reliefs and deductions

You may be able to reduce your corporation tax bill by claiming tax reliefs and deductions.

Some of the most common include:

• R&D tax credits: if your business spends money on innovation, such as developing new products or improving existing processes, you can reclaim a portion of your research and development (R&D) costs. This strategy is especially valuable for startups and tech-driven companies.
• Annual investment allowance (AIA): if you buy new equipment, machinery, or business vehicles, you can deduct the full cost (up to £1 million per year) from your taxable profits. For example, if your business invests £50,000 in new machinery, you could reduce your taxable profit by the same amount.
• Patent box: if your company profits from patented inventions, you can benefit from a lower 10% tax rate on those profits instead of the standard rate. This is particularly useful for businesses in technology, engineering, and pharmaceuticals that hold patents on their innovations.
• Relief for losses: if your company makes a loss, you can offset it against previous, current, or future profits to reduce your tax bill. This is particularly useful in difficult financial periods, allowing your business to carry losses forward or backward depending on HMRC rules.
• Reliefs for creative industries (CITR): this set of sector-specific tax reliefs applies to businesses in film, TV, animation, video games, theatre, orchestras, and museums exhibitions. If your business is eligible, you can claim a higher deduction on production costs or receive a cash rebate if your company makes a loss.
• Relief on goodwill and other relevant assets: if your company purchases another business, you may be able to claim relief on goodwill (the intangible value of the acquired business) and other related assets, such as intellectual property rights. However, eligibility depends on the nature of the acquisition.
• Disincorporation relief: if your company decides to transition from a limited company to a sole trader or partnership, this relief allows you to transfer assets to shareholders without immediate tax consequences. This system helps businesses that no longer benefit from a corporate structure avoid large tax liabilities during the transition.

By understanding these tax rates and reliefs, you can plan and find legal ways to reduce your corporation tax bill.

If you’re unsure which reliefs apply to you, consider speaking to an accountant to maximise your tax savings.

How to pay corporation tax

Paying corporation tax involves three key steps:

1. Register for corporation tax

When you start a limited company, you must register for corporation tax with HMRC within three months of starting to trade.

To complete the registration, you’ll need to provide:

• Your company’s registration number
• The start date of your business activities
• Your contact details.

You can register online via HMRC’s website. You’ll need your company’s 10-digit Unique Taxpayer Reference (UTR), which HMRC sends by post shortly after incorporation.

2. Prepare and file a company tax return

At the end of your company’s financial year, you’ll need to file a company tax return (CT600) with HMRC, detailing your:

• Business income and expenses
• Taxable profit
• Deductions and reliefs claimed.

Once registered for corporation tax, HMRC will send a “notice to deliver a company tax return”, reminding you of your obligation to file.

Even if your company makes a loss or has no corporation tax to pay, you must still prepare and submit a tax return.

This process must be submitted online within 12 months of the end of your accounting period.

3. Pay corporation tax

You must pay your corporation tax within nine months and one day after the end of your accounting period.

HMRC accepts payments through various methods, including:

• Online banking: same-day or next-day processing
• BACS (Bankers automated clearing services): usually takes three working days
• Direct debit: must be set up in advance
• Corporate credit or debit cards: may have processing fees.

You’ll need your 17-character payment reference, unique to your accounting period, which can be found in your HMRC online account.

When to pay corporation tax

Corporation tax deadlines are linked to your company’s financial year, so keeping track of them is crucial.

Missing a deadline could mean penalties and interest charges, so staying organised can save you both stress and money.

Key deadlines to remember:

• Tax return deadline: you must file your company’s tax return within 12 months after the end of your accounting period.
• Corporation tax payment deadlines: you need to pay your corporation tax nine months and one day after the end of your accounting period.

For example, if your company’s financial year ends on 31 March 2025, your corporation tax payment would be due by 1 January 2026, and your tax return would need to be filed by 31 March 2026.

Why paying on time matters

Paying your corporation tax late isn’t just an inconvenience. It can lead to serious consequences.

HMRC may issue fines for overdue tax, and any unpaid amount will start accruing interest, increasing your overall tax bill.

Repeated late payments can also draw unwanted attention from HMRC, potentially triggering an investigation into your business finances.

Staying on top of deadlines helps you avoid unnecessary costs and keeps your company in good stead.

Common mistakes (and how to avoid them)

Even experienced business owners can slip up when it comes to corporation tax.

Here are a few pitfalls to watch out for:

1. Forgetting to register with HMRC: even if your company isn’t making a profit, you still need to notify HMRC and file a tax return.
2. Miscalculating your tax bill: errors in reporting profits or expenses can lead to underpayment penalties.
3. Missing the payment deadline: the simplest way to avoid this? Set up calendar reminders or automate payments so you never miss a due date.

Using accounting software can help you skip these challenges altogether. With features like automated tax calculations, built-in deadline reminders, and direct filing with HMRC, you ensure accuracy and can stay compliant without the hassle.

Instead of manually tracking deadlines or worrying about calculation errors, an intuitive software solution keeps your finances organised and your business running smoothly.

Missed a corporation tax deadline? Here’s what to do next

HMRC charges interest on overdue corporation tax from the due date until payment is made. The current late payment interest rate is 7.75% (as of 2025).

Interest applies even if you’re just a day late and can’t be appealed.

Filing penalties for late tax returns

• 1 day late: £100 fine
• 3 months late: additional £100 fine
• 6 months late: HMRC estimates your tax bill and adds a penalty of 10% of unpaid tax
• 12 months late: another 10% penalty on unpaid tax.

If your return is late three times in a row, the £100 penalties increase to £500 each.

How to appeal a late payment penalty

If you have a reasonable excuse for missing a deadline (such as a serious illness, system failures, or unexpected technical problems when using HMRC’s online services), you can appeal the penalty through HMRC’s online service or in writing within 30 days of the penalty notice date.

How to efficiently manage corporation tax

Corporation tax might seem overwhelming, but with proper planning and the right tools, you can stay on top of it without stress.

Here’s how to make the process easier:

Plan for tax bills

The best way to avoid a last-minute rush is to plan.

Keep accurate financial records throughout the year, so you always have a clear picture of your business’s finances.

Setting aside a portion of your monthly budget for your corporation tax bill can help prevent cash flow issues when the payment deadline arrives.

Use accounting software

Cutting-edge accounting software takes the hassle out of tax management by:

• Automatically calculating your corporation tax, so you know exactly what you owe
• Generating tax reports and deadline reminders to keep you organised
• Integrating with HMRC, which makes filing your returns easy and without the hassle of paperwork.

Final thoughts

Understanding corporation tax is essential for every UK business owner, but managing it doesn’t have to be stressful.

With the right approach—and the help of tax accounting software—you can automate, streamline, and optimise your tax preparation.

Instead of worrying about deadlines and calculations, you can focus on confidently growing your business.