How to Calculate Corporation Tax (Step-by-Step Guide for UK Directors)
Short version. Learn how to calculate corporation tax for your UK limited company. Step-by-step guide covering taxable profit, tax bands, marginal relief, and worked examples.
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Many directors assume corporation tax is simply "profit x tax rate" — but it's rarely that straightforward. This guide breaks down exactly how corporation tax is calculated, with real examples you can follow.
The Basic Formula
At its simplest:
Corporation Tax = Taxable Profit x Tax Rate
But there are two important nuances:
- Taxable profit is not the same as accounting profit
- Tax rate depends on which band your profits fall into
Let's break down each part.
Step 1: Calculate Your Accounting Profit
Your accounting profit is what most directors think of as "profit" — the number at the bottom of your profit and loss statement.
Accounting Profit = Total Income - Total Expenses
For example:
- Turnover: £120,000
- Cost of sales: £40,000
- Operating expenses: £30,000
- Accounting profit: £50,000
But this isn't the number you pay tax on.
Step 2: Adjust for Tax Purposes (Taxable Profit)
HMRC requires certain adjustments to convert accounting profit into taxable profit. The most common adjustments are:
Add Back (Disallowable Expenses)
These are expenses you've deducted in your accounts but HMRC doesn't allow for tax purposes:
- Depreciation — you claimed £5,000 depreciation in your accounts, but HMRC uses capital allowances instead
- Entertaining clients — business entertaining is not tax-deductible
- Personal expenses — anything not "wholly and exclusively" for business
- Fines and penalties — parking tickets, HMRC penalties, etc.
Deduct (Tax Reliefs)
- Capital allowances — HMRC's version of depreciation (often more generous)
- R&D tax credits — if you qualify
- Patent box relief — for qualifying patent income
Worked Example
| Item | Amount |
|---|---|
| Accounting profit | £50,000 |
| Add back: Depreciation | +£5,000 |
| Add back: Client entertaining | +£2,000 |
| Deduct: Capital allowances | -£8,000 |
| Taxable profit | £49,000 |
Income in the accounts that is not taxable
A computation can also remove income from the accounting result. Suppose operating profit is £20,000, including £4,000 of other income. Your adopted treatment excludes £3,000 and taxes £1,000 separately in box 205. With no other adjustments, the reconciliation is:
| Computation row | Amount |
|---|---|
| Operating profit from the accounts | £20,000 |
| Less: taxable other income dealt with separately | -£1,000 |
| Less: Other income not taxable | -£3,000 |
| Trading result | £16,000 |
| Add: taxable other income (box 205) | +£1,000 |
| Total profits before other reliefs | £17,000 |
The two deductions remove the full £4,000 from the trade. Only £1,000 returns to total profits. The accounts income stays £4,000. HMRC describes the adjustment in its Corporation Tax computations format. Our other income not taxable guide explains how to record the amount and optional description.
Step 3: Apply the Correct Tax Rate
Since 1 April 2023, the ordinary rates below apply to a full 12-month period with no other associated companies. Short periods and associated companies reduce the limits.
| Profit Band | Rate | Description |
|---|---|---|
| £0 - £50,000 | 19% | Small profits rate |
| Above £50,000 and below £250,000 | 25% less marginal relief | Average rate between 19% and 25% |
| Over £250,000 | 25% | Main rate |
If Your Taxable Profit Is Under £50,000
Simple calculation:
Tax = Taxable Profit x 19%
Example: £49,000 x 19% = £9,310
If Your Taxable Profit Is Between £50,001 and £250,000
This is where marginal relief applies. You don't suddenly jump from 19% to 25% — instead, there's a gradual increase.
The formula is:
Tax = (Profit x 25%) - Marginal Relief
Where Marginal Relief = 3/200 x (£250,000 - Profit)
Example for £100,000 profit:
- Tax at 25%: £100,000 x 25% = £25,000
- Marginal relief: 3/200 x (£250,000 - £100,000) = £2,250
- Final tax: £25,000 - £2,250 = £22,750
- Effective rate: 22.75%
If Your Taxable Profit Is Over £250,000
Simple calculation:
Tax = Taxable Profit x 25%
Example: £300,000 x 25% = £75,000
Step 4: Account for Associated Companies
Divide the limits by the number of other associated companies plus this company. HMRC's marginal relief guidance explains the conditions and exclusions.
Example: With one other associated company, the divisor is 2:
- Small profits threshold: £50,000 / 2 = £25,000
- Upper threshold: £250,000 / 2 = £125,000
This means you hit the higher tax bands sooner.
26.5% describes the marginal tax on an extra pound within the ordinary marginal band, not the effective rate on all profits. With taxable and augmented profits both £100,000, a full 12-month period and no other associated companies, tax is £22,750, an average 22.75%.
Complete Worked Example
Company ABC Ltd has:
- Turnover: £200,000
- Expenses: £140,000
- Depreciation charged: £10,000
- Capital allowances available: £15,000
- No associated companies
Step 1: Accounting profit
£200,000 - £140,000 = £60,000
Step 2: Taxable profit
£60,000 + £10,000 (add back depreciation) - £15,000 (capital allowances) = £55,000
Step 3: Calculate tax
Since £55,000 is in the marginal relief band:
| Item | Amount |
|---|---|
| Tax at 25% | £55,000 x 25% = £13,750 |
| Marginal relief | 3/200 x (£250,000 - £55,000) = £2,925 |
| Corporation tax due | £13,750 - £2,925 = £10,825 |
| Effective rate | 19.68% |
Common Mistakes to Avoid
- Using accounting profit instead of taxable profit — always make the required adjustments
- Forgetting capital allowances — these can significantly reduce your tax bill
- Ignoring marginal relief — don't assume you pay 25% on all profits over £50,000
- Not considering associated companies — this affects your thresholds
What's Next?
Once you've calculated your corporation tax, you need to:
- Report it on your CT600 return
- Submit the CT600 to HMRC within 12 months of your accounting period end
- Pay the tax within 9 months and 1 day of your accounting period end