Corporation tax is calculated on a company's taxable profit for its accounting period, which is the accounts profit adjusted for what HMRC does and does not allow, at a rate that depends on the size of the profit: 19 percent at or below £50,000, 25 percent at or above £250,000, and the main rate less marginal relief between, per gov.uk. That is the whole method, and the rest of this page is the detail: what goes into the profit for tax, how the two limits are adjusted, how the marginal relief fraction works, and the computation as it appears on the CT600. It is written for the director doing the sum before the accountant does, and the free UK corporation tax calculator on this site works it on your own figures.
What do you pay corporation tax on
Trading profit, plus investment income and chargeable gains, less allowable deductions and losses brought forward: that is the profit chargeable to corporation tax. It starts from the accounts profit and is adjusted. Depreciation is added back and capital allowances deducted instead. Client entertaining, fines and penalties, and the non-business part of any cost come out. Salary and employer's National Insurance paid to the director are deductible; dividends are not, because they are paid out of the profit after the tax. The figure that results is rarely the accounts profit, and it is the one that goes into the calculation.
Calculating corporation tax: the rate and the two limits
Per gov.uk, profits of £50,000 or less are taxed at the small profits rate of 19 percent and profits over £250,000 at the main rate of 25 percent. Both limits belong to a twelve month period and a company with no associates: a shorter period reduces them in proportion, and each associated company divides them, so a company with one associate has limits of £25,000 and £125,000. The band is found against the reduced limits, which is the step most first attempts at how to work out corporation tax miss.
Marginal relief between the limits
Between the limits, tax is the main rate on the whole profit less marginal relief, which is three two-hundredths of the difference between the upper limit and the profit. On £120,000 of profit that is 25 percent, £30,000, less £1,950 of relief, giving £28,050 and an effective rate of 23.375%. The relief tapers to nothing at the upper limit, which is why the marginal rate on each extra pound in the band is 26.5 percent, per the arithmetic in gov.uk's guidance on marginal relief, and why a deductible cost timed into a marginal year is worth more than the headline rate.
The corporation tax computation, as the return shows it
The CT600 computation runs in that order: accounts profit, add-backs, deductions, capital allowances, losses, profit chargeable, then the rate, the relief and the tax. Two rates can apply where an accounting period straddles 1 April, apportioned by days. The tax is due nine months and one day after the period end and the return twelve months after it, per gov.uk. The free UK corporation tax calculator prints the reduced limits, the relief and the effective rate, so the computation can be checked line by line against the accountant's before it is filed.
Questions people ask about how is corporation tax calculated
Is corporation tax calculated on turnover or profit?
Profit. Turnover less allowable costs, adjusted for tax, is what the rate applies to. A company with £200,000 of turnover and £160,000 of allowable costs pays corporation tax on £40,000, at the small profits rate.
Does a loss mean no corporation tax?
For that period, yes, and the loss can be carried forward against later profits or, in some cases, back against the previous year. A return still has to be filed if HMRC has sent a notice to deliver one.
What is an associated company?
Broadly, another company under common control, whether or not it trades with yours. Two companies owned by the same person are associated, and each halves the other's limits for the small profits rate and marginal relief, per gov.uk. Dormant companies do not count.