Understanding your Corporation Tax bill

How Corporation Tax is Calculated

Corporation Tax is a tax on the taxable profits of your limited company. It's not simply a percentage of your sales; instead, it's calculated on your company's profits after deducting allowable expenses and capital allowances.

The calculation generally follows these steps:

1. Calculate your company's total profit: This includes trading profits, investment income (like interest from bank accounts), and chargeable gains (from selling assets).
2. Deduct allowable expenses: These are costs incurred wholly and exclusively for business purposes, such as salaries, rent, utility bills, and professional fees.
3. Apply capital allowances: Instead of deducting the full cost of assets like machinery or vehicles in the year you buy them, you claim capital allowances over time. These reduce your taxable profits.
4. Arrive at taxable profits: This is the figure on which your Corporation Tax is calculated.
5. Apply the correct Corporation Tax rate: The rate depends on your company's taxable profits.

Corporation Tax Rates for 2026/27

For the Financial Year 2026 (1 April 2026 to 31 March 2027), the Corporation Tax rates are as follows:

• Small Profits Rate: 19% on profits up to £50,000.
• Main Rate: 25% on profits over £250,000.
• Marginal Relief: For profits between £50,001 and £250,000, a system of marginal relief applies. This means your effective tax rate gradually increases from 19% to 25% within this band, rather than a sudden jump. The effective marginal rate on profits within this band is 26.5%.

It's important to note that these profit thresholds are divided by the number of "associated companies" your business has. If your company has associated companies, the thresholds for the small profits rate and main rate are reduced, potentially pushing your company into a higher tax band sooner. Also, for accounting periods shorter than 12 months, these thresholds are proportionally reduced.

Why Your Corporation Tax Bill Might Change

Several factors can cause your Corporation Tax bill to fluctuate from one accounting period to the next:

• Changes in Profit Levels: The most direct impact comes from your company's profitability. Higher profits generally lead to a higher tax bill, and vice-versa. Even if sales are low, other income or gains could result in a tax liability.
• Capital Allowances:
• Annual Investment Allowance (AIA): This allows you to deduct the full value of qualifying plant and machinery (up to a certain limit) from your profits before tax. For 2026/27, the AIA remains at £1 million. If you make significant asset purchases in one year, your tax bill could be lower due to this relief.
• Writing Down Allowances (WDAs): For assets not covered by AIA or full expensing, you claim WDAs over several years. From April 2026, the main rate WDA for plant and machinery reduces from 18% to 14%. This change could mean slower tax relief on some assets, potentially increasing your taxable profits in the short term.
• Full Expensing: Limited companies can continue to claim full expensing, providing 100% relief on main rate assets and 50% on special rate assets.
• New First-Year Allowances: A new 40% first-year allowance is available for qualifying expenditure incurred from 1 January 2026, which can be useful if AIA is exhausted or unavailable.
• Losses: If your company makes a loss, you may be able to carry it back to previous accounting periods to reduce past Corporation Tax bills or carry it forward to offset against future profits, thereby reducing future tax liabilities.
• Changes in Tax Rates and Thresholds: Government budgets can introduce changes to Corporation Tax rates or the profit thresholds at which different rates apply. While the rates for FY2026 are unchanged from FY2025, it's crucial to stay updated.
• Associated Companies: If your company gains or loses associated companies, the profit thresholds for Corporation Tax rates will be adjusted, which can impact your tax liability.
• Accounting Period Length: If your accounting period is shorter than 12 months (e.g., for a new company or a change of year-end), the profit thresholds for Corporation Tax rates are proportionally reduced.