How is Corporation Tax Calculated in the UK? A Complete Small Business Guide

Corporation Tax is the tax that UK limited companies must pay on their annual trading profits, investment income, and capital gains from selling business assets. Unlike personal Income Tax, which features a tax-free Personal Allowance (£12,570), limited companies do not receive a tax-free allowance. Every single pound of taxable profit your company generates is subject to Corporation Tax. In this comprehensive guide, we explain how Corporation Tax is calculated, outline the tax rates and bands for the 2026/27 tax year, examine the associated company rules, and show step-by-step mathematical examples for small and large businesses.

1. UK Corporation Tax Rates and Bands for 2026/27

The UK uses a tiered Corporation Tax system based on the level of taxable profits. For the 2026/27 tax year, the rates are structured as follows:

To run corporate calculations instantly for your company, use our free Corporation Tax Calculator or check your personal extraction rates with the Optimal Director Split Calculator.

2. Associated Companies: The Threshold Slicing Rule

To prevent business owners from splitting one large business into multiple smaller companies to exploit the lower 19% Small Profits Rate, HMRC enforces strict **associated company rules**.

Under the Companies Act and HMRC guidelines, a company is associated with another if one controls the other, or both are under the control of the same person or group of persons. If you have associated companies, your company’s lower (£50,000) and upper (£250,000) tax thresholds are divided equally among them.

For example, if you own three associated companies, the thresholds for each company are adjusted as follows:

• New Lower Threshold (19% Limit): £50,000 ÷ 3 = £16,666.67
• New Upper Threshold (25% Limit): £250,000 ÷ 3 = £83,333.33

This means if any of your three companies earns over £16,666.67 in profits, it will start paying tax above the 19% rate, making corporate structuring a vital planning consideration.

3. Step-by-Step Mathematical Calculations

Let’s calculate the exact Corporation Tax due for three different limited companies with varying profit levels, assuming no associated companies:

Case A: Small Company (Profits of £40,000)

Since the profits (£40,000) are below the £50,000 lower threshold, the company pays the Small Profits Rate (19%):

• Tax Due: £40,000 × 19% = £7,600.00
• Effective Tax Rate: 19.00%

Case B: Large Company (Profits of £300,000)

Since the profits (£300,000) exceed the £250,000 upper threshold, the company pays the Main Rate (25%) on its entire profits:

• Tax Due: £300,000 × 25% = £75,000.00
• Effective Tax Rate: 25.00%

Case C: Marginal Company (Profits of £120,000)

Since the profits (£120,000) fall in the middle band, the company is taxed at the Main Rate (25%), but can subtract Marginal Relief. The standard fraction is 3/200 (0.015):

• Main Rate Tax: £120,000 × 25% = £30,000.00
• Marginal Relief Deduction:
  • Formula: (Upper Limit − Taxable Profit) × Marginal Fraction
  • Calculation: (£250,000 − £120,000) × (3/200) = £130,000 × 0.015 = £1,950.00
• Net Tax Due: £30,000.00 − £1,950.00 = £28,050.00
• Effective Tax Rate: £28,050.00 ÷ £120,000 = 23.375%

4. Frequently Asked Questions

When is the Corporation Tax return due?

You must file your Company Tax Return (Form CT600) with HMRC within 12 months of the end of your company’s accounting period.

When do I have to pay my Corporation Tax bill?

Unlike personal taxes, the payment deadline is earlier than the filing deadline. Standard companies must pay within 9 months and 1 day after the end of their accounting period.

What are the Corporation Tax rates for 2026/27?

The Small Profits Rate is 19% (up to £50,000 profit), the Main Rate is 25% (over £250,000 profit), and a sliding scale operates between £50,000 and £250,000.

Do associated companies change my tax rates?

No, but they divide your profit thresholds. If you have two associated companies, each company starts paying the higher 25% tax rate at £125,000 profit instead of £250,000.

Are dividends tax-deductible for Corporation Tax?

No. Dividends are paid out of post-tax profits. They are not an expense and do not reduce your company’s Corporation Tax liability.

Can I pay zero Corporation Tax by paying a high salary?

While directors’ salaries are tax-deductible business expenses, paying a high salary will trigger personal income tax (up to 45%) and National Insurance, which is often more expensive than paying Corporation Tax.

What is the penalty for filing a CT600 late?

HMRC applies an automatic £100 penalty for filing late by even one day, which increases to £200 after 3 months, plus 10% of any unpaid tax after 6 months.

Can I offset losses against Corporation Tax?

Yes. If your company makes a trading loss, you can carry it back 1 year to claim a refund on previous tax paid, or carry it forward indefinitely to offset against future profits.

Statutory & Legislative References

• Corporation Tax Act 2010 – Section 18: Establishes the Small Profits Rate and the calculation rules for Marginal Relief.
• Taxes Management Act 1970 – Section 59D: Governs Corporation Tax payment deadlines and interest on unpaid liabilities.
• HMRC Business Income Manual (BIM): Statutory guidance on deductible trading expenses and capital allowances.