Corporation tax is a fundamental part of running a limited company in the UK. It is the tax that companies pay on their profits – the income left over after deducting all allowable business expenses and costs.
Every limited company in the UK has to register and pay corporation tax on its profits, whether it’s a small start-up or a large corporation. The tax applies to profits from trading (trading profits), investments and selling assets for more than they cost (capital gains).
A company based in the UK must pay corporation tax on all the money it makes, whether it is from activities in the UK or elsewhere. However, if your company is based overseas and only has an office or branch in the UK, you will only pay tax on the profits you make from your UK activities.
The system operates on a self-assessment basis, meaning that businesses are responsible for calculating their own tax liability, reporting it to HMRC and ensuring that they pay the correct amount on time. It is therefore essential that business owners understand their obligations and keep accurate financial records throughout the year.
When you first start your company or begin making money, you’ll need to let HMRC know you’re here. They give you three months to register for Corporation Tax, so there’s no need to rush on day one. Most business owners do this right when they set up their company, and it’s pretty straightforward.
Now let’s talk about timing, because this is where people often get confused. Your company has what’s called a ‘year end’ – think of it as your company’s birthday.From this date you have two important deadlines to remember.You’ve got 9 months and a day to pay your tax bill and 12 months to file your tax return.
For example, if your company’s year ends on 31 March 2024, you’ll have to pay your tax by 1 January 2025 and file your return by 31 March 2025. It may seem like a long time, but it’s good to keep these dates in mind.
Large (annual taxable profits in excess of £1.5 million) and very large (annual taxable profits in excess of £20 million) companies in the UK are required to pay their corporation tax in quarterly installments rather than in a single annual payment. This system is known as Quarterly Instalment Payments (QIPs).
Corporation tax in the UK is not a simple flat rate for all companies. Instead, it depends on the level of profits and whether your company qualifies for marginal relief.
Corporation Tax Rates (2023/24 onward)
If your company makes profits between £50,000 and £250,000, something special happens. Instead of jumping straight from the lower rate (19%) to the higher rate (25%), there’s a smooth transition.
Imagine your tax rate as walking up a staircase. When your profits are at £50,000, you’re standing on the bottom step, paying 19% tax. As your profits increase, you gradually walk up the stairs. Finally, when you reach £250,000 in profits, you’re at the top step, paying 25%. The journey between these two points isn’t a sudden jump – it’s a smooth walk up, with your tax rate increasing a little bit with each step you take. This gradual increase is what we call Marginal Relief. It ensures your tax burden grows steadily with your profits, rather than jumping suddenly from one rate to another.
To calculate the amount of marginal relief, we need another figure called the Standard marginal relief fraction. The standard marginal relief fraction is the difference between the main rate and the marginal rate expressed as a fraction.
Let’s take a look at the explanation on gov.uk
First we calculate the corporation tax (CT) payable on the upper and lower limits:
£250,000 x 25% = £62,500
£50,000 x 19% = £9,500
The tax payable on the gap between the upper and lower limits of £200,000 (£250,000 – £50,000) is:
£62,500 – £9,500 = £53,000
so the marginal rate on the gap of £200,000 is 26.5%:
£53,000 / £200,000 * 100%= 26.5%
So, the difference between the marginal rate of 26.5% and the basic rate of 25% is 1.5%, which is then expressed as a fraction of 3/200 (0.015).
Not the best explanation), but with these two magic numbers at our disposal –
standard marginal relief fraction – 3/200 and marginal rate – 26.5%,
We can easily calculate the corporate tax. Let’s go!
Here is a simplified method to calculate your tax with Marginal Relief (example for £200,000 profit before tax). Our input data are:
Upper Limit Rate – £250,000
Lower Limit Rate – £50,000
Fraction 3/200 (or 0.015) – the standard marginal relief fraction
Profit before tax – £200,000 (between Upper and Lower Limit Rate, must be Marginal Relief applied)
Calculate 19% from Lower Limit Rate
£50,000*0.19 = £9,500
Subtract from the Profit Lower Limit Rate
£200,000 – £50,000 = £150,000
Take 26,5% from the £150,000
£150000 * 0.265 = £39,750
Corporation Tax to pay:
£9.500 + £39,750 = £49,250
Calculate the difference between Upper Limit Rate and Profit
£250,000 – £200,000 = £50,000
Calculate Marginal Relief: multiply difference on the fraction 3/200 (0.015)
Marginal Relief = £50,000 * 0,015 = £750
Calculate 25% from the profit
£200,000 * 0,25 = £50,000
Tax to pay – Subtract Marginal Relief from £50,000
£50,000 – £750 = £49,250
How to calculate the upper and lower limits, if your tax return covers two HMRC financial years or your limited company works only part of the year? You need to reduce the values proportionally to the number of days in the period. The same for profit.
Look at the example for limited company (without associated companies – we’ll talk about this later):
Input Data:
Upper Limit Rate – £250,000
Lower Limit Rate – £50,000
Fraction 3/200 (or 0.015) – the standard marginal relief fraction
Profit before tax – £200,000 (between Upper і Lower Limit Rate, Marginal Relief applied)
Let’s make calculations of the Corporation Tax for the accounting period 01/01/2024 – 31/12/2024 (366 days) for the same profit as in the previous example – £200,000. We should receive the same result Tax to Pay = £49,250. Let’s check it together.
91 days – 2023 to 2024: 1 January 2024 to 31 March 2024
275 days – 2024 to 2025: 1 April 2024 to 31 December 2024
taxable yearly profit the same £200,000
Taxable Profit for 91 days = £200,000 / 366 * 91 = £49,726.78
Lower Limit for 91 days = £50,000 / 366 * 91 = £12,431.69
Upper Limit for 91 days = £250,000 / 366 * 91 = £62,158.47
Marginal Relief for 91 days = (£62,158.47 – £49,726.78)*0.015 = £186.48
Tax to Pay = £49,726.78 * 0.25 – 186.48 = £12,245.22
Effective tax rate = 12245.22 / 49726.78 = 24.63%
Lower Limit for 275 days = £50,000 / 366 * 275 = £37,568.31
Upper Limit for 275 days = £250,000 / 366 * 275 = £187,841.53
Profit taxable for 275 days = £200,000 / 366 * 275 = £150,273.22
Marginal Relief for 275 days = (£187,841.53 – £150,273.22)*0.015 = £563.52
Tax to Pay = £150,273.22 * 0.25 – £563.52 = £37,004.78
Effective Tax rate = £37,004.78 / £150,273.22 = 24.63
In the UK, each limited company is treated as a separate legal entity for tax purposes. This means that each company must file its own Corporation Tax return and pay tax on its individual profits.
However, the concept of associated companies affects the thresholds for Corporation Tax rates and the availability of Marginal Relief. Associated companies are those under common control, typically by the same person or group. The number of associated companies influences the profit limits that determine which tax rates apply.
When determining Margin Relief thresholds, you must adjust them based on the number of your associated companies. The standard thresholds are divided by the total number of associated companies, including your own.
If you have 2 associated companies:
You should file separate tax returns and make separate calculations for companies. In both declarations you need to put the number of associated companies in the box 326 CT600.
For the first company profit more than upper limit (125000) – tax 25%
Tax to Pay = £180000 * 25% = £45000
For the second company:
25% from profit = 25% * £80000 = £20000
Marginal Relief = ( £125000 – £80000) * 0.015 = £45000 * 0.015 = £675
Tax to Pay 20000 – £675 = £19325
Total tax from both companies = £45000 + £19325 = £64325
Exempt distributions primarily include dividends or similar income that your company receives from other entities. These are generally exempt from Corporation Tax to prevent double taxation, as the distributing company has already paid tax on these profits.
However, for the purpose of calculating augmented profits, these exempt distributions are added back to taxable total profits.
Here are brief explanations for each type of exempted distribution that can be included in augmented profit:
Example: Company Z repays some of its share capital and then issues bonus shares to its shareholders. The value of these bonus shares may be considered a distribution and included in the shareholders’ augmented profit calculation.
It’s important to note that not all exempt distributions are included in the augmented profits calculation. Specifically, dividends received from companies in which your company holds a 51% or greater shareholding (i.e., subsidiary companies) are excluded from augmented profits. This exclusion prevents internal group dividends from artificially inflating the augmented profits figure.
When estimating your company’s Corporation Tax liability, it’s essential to:
By accurately identifying and including the appropriate exempt distributions in your augmented profits calculation, you can ensure compliance with UK tax regulations and optimize your company’s tax position.
Let your company’s taxable total profits of £150,000 (no associated companies) and exempt distributions of £40,000.
The augmented profits amount is £190,000 (150000 + 40000).
Since this figure falls between the lower limit (£50,000) and upper limit (£250,000), Marginal Relief applies.
The formula to calculate Marginal Relief from gov.uk is:
Marginal Relief=(F * (U−A)) * ( N / A)
Where:
Step-by-Step Calculation:
£150,000×25%=£37,500
(3/200 * (250000 – 190000)) * (150000 / 190000) = 710,53
37500 – 710,55 = 36789,47
Conclusion:
With this calculation, your company’s Corporation Tax liability is approximately £36,789.47.
To check your calculation use Marginal Relief Calculator on the gov.uk site
