Corporation tax explained: what small businesses need to know

Corporation tax is one of the most vital taxes paid by UK limited companies when filing a tax return.

In the 2024/25 financial year, corporation tax receipts amounted to approximately £91.6bn, compared to £80.3bn the previous year.

But corporation tax isn’t taken just for the sake of it. Its purpose is to generate revenue for the government to fund public services and programmes.

Still, no one wants to pay more tax than they have to. That’s why this guide will tell you everything you need to know about corporation tax, including how much to pay, when to pay it, and how to cut down your tax bill.

What is corporation tax?

Corporation tax is the main tax paid by a UK limited company, which is paid on the profits it earns from trading, investments, and selling assets.

The amount of corporation tax a business pays depends on how much profit it makes. Right now, the current threshold is between £50,000 and £250,000.

Following the UK’s 2021 Spring Budget, the main rate for corporation tax was increased from 19% to 25%, which took effect in April 2023. However, this only applies to companies that generate over £250,000.

At the same time, the “small profits rate” was introduced for smaller businesses, or those earning less than £50,000, which is currently at 19%. The corporation tax rate for non-ring fence profits has also been scrapped.

What businesses pay corporation tax?

All UK limited companies that generate profits between £50,000 and £250,000 annually must pay corporation tax.

Payment for corporation tax is due nine months and one day after the end of the accounting period. For example, if a company’s financial year-end is March 31st, the corporation tax for that period is due on January 1st the following year. The corporation tax return is due 12 months after the accounting period.

Do foreign businesses have to pay corporation tax?

Corporation tax applies to organisations that are based overseas, but operate in the UK. These companies only need to pay tax on their UK profits. However, if your company is based in the UK but operates in multiple countries, you need to pay tax on all profits generated (not just those from UK activities).

Which businesses are exempt from corporation tax?

Businesses like charities and non-profit organisations are generally exempt from corporation tax. However, this only applies to income that is used for charitable purposes.

For example, if a charity earns money from donations or fundraising events and uses it entirely to support its charitable activities, it won’t generally pay corporation tax. However, if it engages in activities outside of charitable purposes, such as running a cafe or renting out a property, the profits from that part of the business may be taxable.

What happens to my corporation tax if I don’t make a profit?

If your business is operating at a loss and hasn’t made any profits during the last accounting period, you must notify HMRC as soon as possible. That way, you won’t have to face penalties or any other legal troubles for failing to pay your corporation tax.

You’ll still have to file a tax return, even if you’re unable to pay corporation tax. Simply complete the “NIL to pay form” or mark the payslip on any HMRC reminders as “NIL due” before you send it back.

How much corporation tax do companies pay?

The amount of corporation tax you have to pay depends on how much profit you earn. Here is a rundown of the current rates for 2025:

• Small profits rate (under £50,000): 19%
• Main rate (over £250,000): 25%

You can also get corporation tax relief in the form of “Marginal Relief”, where businesses with taxable profits between a lower (£50,000) and upper limit (£250,000) pay tax at a gradual rate. It’s designed to smooth the transition from the small profits rate to the main rate of corporation tax.

How and when do I pay corporation tax?

Paying corporation tax isn’t just a matter of handing money over to HMRC, as there’s a process you need to follow. As a company, you are responsible for working out how much tax you owe, filing the correct paperwork, and paying the bill on time.

Here’s how you pay corporation tax, step by step:

1. Register for corporation tax

You’ll first need to register for a business tax account through the Government Gateway. If you already have an account, simply sign in using your user ID and password.

From there, select “services you can add”, go to the “Corporation Tax service” section, and select “Enrol for service”. Once this is complete, HMRC will send you an activation code within 10 days (21 if you live abroad) to your registered office address, as well as instructions on activating the corporation tax service and the deadline for paying it.

2. Prepare and file your tax return

You can file your tax return through HMRC’s online system or with an approved accounting software that links to HMRC. You will need to submit a Company Tax Return (form CT600), which sets out the details of your finances for the accounting period. Your tax return should show your total income, expenses, allowances, and how much tax you owe.

You’ll have 12 months after the end of the accounting period to file the return, but the payment itself is due earlier.

3. Pay the corporation tax

After working out your company’s tax bill and filing the return, you must pay the amount owed to HMRC.

Remember, the standard deadline is nine months and one day after the end of your company’s accounting period. Larger companies with annual profits above £1.5m usually have to pay their corporation tax in quarterly instalments, instead of one lump sum.

HMRC accepts several payment methods, including online banking transfers, corporate debit or credit cards, and setting up a direct debit.

When paying, you should keep a note of your company’s 17-character corporation tax reference number, which HMRC uses to match your payment to your account.

What are the penalties for not paying corporation tax?

As you’d expect, you will be subject to financial penalties if you don’t pay your corporation tax on time. These penalties will only add up the longer you delay, so it’s vital that you make your payment ASAP.

How to reduce your corporation tax bill

There are a number of ways to reduce the amount of corporation tax you pay, as long as they fall within the rules set by HMRC. Below are some of the most common examples.

Expenses

You can claim any legitimate expense that is necessary for the business.

This means keeping track of every pack of paperclips, bus fare, and train ticket, as they’re all deductible. You can also claim on your phone bill, mileage for any business vehicles, and the cost of any professional insurance.

If you have employees, then make sure you also factor in the cost of their salaries and employer National Insurance Contributions (NICs).

Salaries and dividends

Paying yourself a salary is a tax-deductible expense for your business, which can reduce corporation tax. However, the salary is then subject to your own personal income tax, so whether this is the right choice for you will depend on whether you have other sources of income.

What’s more, you should carefully consider what level of salary to give yourself. An effective way could be to take a combination of a low salary and dividends. A lower salary can keep you below higher tax brackets, while dividends — which have a separate tax-free allowance and a different tax rate — can be used to take out additional funds.

Pension contributions

This one is a win-win, as you’ll be able to deduct this amount from corporation tax and put cash aside for your retirement. This is much more tax-efficient than withdrawing the money from your company and then paying into your personal pension, as you’d have to pay tax on the money withdrawn.

Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) is designed to encourage investment in new equipment. If you purchase equipment for your business (anything from diggers to a new office printer), you can deduct this cost from your corporation tax profit, thereby reducing the amount of corporation tax you pay.

Currently, the maximum amount deductible through the AIA is £1m. However, you cannot claim it on business cars, items owned before using them for business, or items given to you or your business.

Tax reliefs

Tax reliefs work in a very similar way to the AIA by allowing certain expenses to be deductible for tax. Depending on which industry you operate in, a variety of reliefs are available, including:

• Research and Development (R&D) Relief: for companies that are developing innovative projects in science and technology
• The Patent Box: for companies that make profits from patented inventions
• Creative Industry Tax Reliefs: for companies that make profits from theatre, film, television, animation, or video games
• Relief on goodwill and other relevant assets: for intangible assets like customer relationships and unregistered trademarks
• Disincorporation Relief: for those who want to close a company and become a sole trader, ordinary business partnership or limited partnership
• Relief on trading losses

Paying early

HMRC will pay you 0.5% interest on the amount of corporation tax paid by your company if you pay before the deadline.

This is paid from the date you pay to your corporation tax deadline, with the earliest date HMRC are willing to accept being six months and 13 days after the start of your accounting period. It also gives you one less thing to worry about and helps you focus on your future investment plans.

Common mistakes to avoid

Corporation tax is a routine part of running a business, but mistakes and delays can be costly, as even small errors can lead to penalties. Here are some of the most common pitfalls to be aware of.

• Late filing/payments: Not paying corporation tax or filing your tax return by the deadline will cost your business.
• Late registration: You should register for corporation tax as soon as you meet the £50,000 threshold, or you’ll face financial penalties.
• Not telling HMRC about no profits: Unless you inform HMRC about no profits, they will continue to send reminders, and you’ll face penalties for failure to pay.
• Claiming the wrong business expenses: This includes confusing business with personal usage, overlooking software subscriptions, or not including office expenses.
• Filing inaccuracies: Estimating figures or using outdated spreadsheets can easily lead to inaccuracies. Good accounting software like QuickBooks and Xero can help keep your financial records accurate and avoid costly mistakes.

Conclusion

It pays to be organised with corporation tax. The tax rate may be straightforward, but to ensure you don’t pay more than necessary, keep track of your expenses and claim any applicable reliefs.

Getting everything in on time will help you avoid harsh penalties and interest charges. Even if your company isn’t making a profit or you’re struggling to pay, contacting HMRC can prevent small issues from becoming bigger problems.

In short, being organised, proactive, and informed is the best way to keep your corporation tax under control. It protects your business, maximises the reliefs you’re entitled to, and gives you peace of mind that your finances are in order.