Corporation Tax for Small Businesses: Rates and How It Works

Corporation tax is the tax your limited company pays on its profits — and it’s one of the least understood costs in small business. I’ve met directors who didn’t realise it was separate from their personal tax, and others who were setting aside far too much (or dangerously too little). Here’s how it actually works for small UK businesses.

How Much Corporation Tax Do Small Businesses Pay in the UK?

UK corporation tax is 25% on profits over £250,000, 19% on profits up to £50,000 (the “small profits rate”), with marginal relief tapering between £50,000 and £250,000. Most small businesses with profits under £50,000 pay a flat 19%. So a company making £40,000 profit pays £7,600 in corporation tax.

The Rates in Detail

• Profits up to £50,000: 19% (small profits rate). This covers the vast majority of small businesses.
• Profits £50,001–£250,000: marginal relief applies — the effective rate slides from 19% toward 25%. HMRC’s calculator handles the maths; you don’t need to work it out by hand.
• Profits over £250,000: 25% flat.

These thresholds are per company, and they’re reduced if you have associated companies (e.g., two companies under common control split the £50k/£250k bands). Anti-avoidance rules, but they catch legitimate small groups too — worth knowing if you run more than one company.

What Counts as “Profit”?

Corporation tax is charged on taxable profit — broadly, your income minus allowable business expenses. Allowable expenses include salaries, rent, stock, marketing, professional fees, and equipment (via capital allowances). Not allowable: entertaining clients, fines, and — the one that catches people — your own dividends (dividends come out of after-tax profit).

This is why record-keeping matters so much: every legitimate expense you forget to claim is profit you’re taxed on unnecessarily. Our guide to claimable business expenses covers the principles (the limited-company version is similar, with a few extra wrinkles your accountant will know).

When and How You Pay

• Your company’s accounting period is usually 12 months from incorporation (or your chosen year-end).
• You must file a Company Tax Return (CT600) with HMRC within 12 months of the period end.
• You must pay the tax within 9 months and 1 day of the period end. (Yes — payment is due before the filing deadline. This trips up first-year directors constantly.)
• File and pay online through HMRC or your accounting software.

Penalties for late filing start at £100 and escalate; late payment accrues interest. Set reminders for both dates — they’re different, and the earlier one (payment) is the one people miss.

Corporation Tax vs Personal Tax: The Full Picture

Here’s what confuses everyone: corporation tax isn’t the end of the story. After the company pays 19–25% on its profit, you pay personal tax when you extract the money — via salary (Income Tax + NICs) or dividends (dividend tax at 8.75%/33.75%/39.35%, with a £500 dividend allowance).

The standard tax-efficient approach for owner-directors: pay yourself a small salary up to the NIC threshold (~£12,570, aligned with the personal allowance), take the rest as dividends. The combined effective rate on £50k of profit extracted this way is roughly 25–30% — noticeably less than the 40%+ a sole trader or employee would pay at higher earnings. This is the main financial reason people incorporate, and our sole trader vs limited company comparison puts it in context.

Reducing the Bill Legitimately

• Claim everything allowable. Home office costs, phone, travel, professional subscriptions, training — the boring stuff adds up.
• Capital allowances. Equipment purchases (computers, machinery, vans) can often be deducted in full in year one via the Annual Investment Allowance.
• Pension contributions. Employer contributions to your pension reduce taxable profit and aren’t subject to NICs — one of the most tax-efficient things a company can do.
• R&D tax relief. If your company does genuine technical innovation, R&D credits can be worth tens of thousands. Under-claimed by small businesses.
• Time your year-end. Bringing forward expenses or deferring income around year-end shifts profit between periods — legitimate tax planning, not evasion.

What not to do: invent expenses, pay family members for no work, or “forget” income. HMRC’s Connect computer system cross-references bank data, and the penalties for evasion dwarf any saving.

The Bottom Line

Most small companies pay 19% on profits under £50k, due 9 months after year-end — separate from your personal tax on what you take out. Keep immaculate records, claim everything legitimate, pay yourself efficiently, and get an accountant for at least the first year (see what accountants cost — it’s deductible too). The authoritative detail is on gov.uk’s corporation tax pages.

Corporation Tax: Questions, Answered

When is corporation tax actually due?

Nine months and one day after your accounting period ends — before the 12-month filing deadline for the return itself. Example: year-end 31 March → tax due 1 January, return due the following 31 March. New directors constantly miss this because it feels backwards. Set two separate reminders; the payment one is the one that costs you interest if missed.

Do I pay corporation tax if the company made no profit?

No tax on zero profit — but you still must file a Company Tax Return (even a nil return) to tell HMRC. “No profit, no return” is a common and expensive misconception; the £100 late-filing penalty applies whether you owed tax or not. File every year the company exists, profitable or not, until it’s formally dissolved.

Can I reduce corporation tax with pension contributions?

Yes — and it’s one of the most tax-efficient moves available. Employer pension contributions reduce taxable profit (saving corporation tax) and aren’t subject to employer or employee NICs. A £10,000 employer contribution by a company paying 19% corporation tax effectively costs £8,100 after the tax relief. For owner-directors, it’s usually better than taking the same money as dividends.

What if I can’t pay the corporation tax bill?

Contact HMRC before the deadline — their Time to Pay arrangements let struggling businesses spread payments, and proactive contact gets far better treatment than silence followed by missed payment. Interest accrues from the due date regardless. Don’t ignore it: HMRC has strong collection powers and uses them. If the company genuinely can’t pay its tax, that’s a signal to get professional advice promptly.