Full Breakdown of Corporation Tax in 2025: Rules & Laws Explained

Understanding how corporation tax is applied in practice can help companies plan and manage their finances more effectively. 

Many business owners find it useful to see a basic calculation to clarify their obligations and avoid errors. Corporation tax rates and thresholds can affect how much tax is owed each year. 

In this article, we’ll explain corporation tax and walk through a simple example of corporation tax calculation for a UK company.

What Is Corporation Tax?

Corporation tax is a direct tax that companies and certain organisations pay on their profits.

The UK government collects this tax from limited companies, foreign companies with a UK branch, and some clubs and associations.

Profits subject to corporation tax include trading income, investments, and chargeable gains from selling assets.

The tax is applied to the company’s annual accounting period, not the calendar year.

Key points of corporation tax include:

• It applies to company profits (not personal income)
• Tax rates can vary by profit level and year
• Companies must calculate and pay it themselves

The main rates and allowances are subject to change each year, as announced in the UK budget.

From April 2024, for example, the main corporation tax rate is 25%.

Corporation tax rules differ from those for income tax faced by sole traders and partnerships.

Only registered companies and certain organisations are liable.

Every company must file a corporation tax return with HMRC, even if no tax is due. Failure to submit can result in financial penalties.

Which Businesses Need to Pay Corporation Tax?

Corporation tax primarily applies to businesses registered in the UK as limited liability companies. These companies pay limited company corporation tax on the profits they earn after deducting allowable expenses and overheads.

Foreign companies that operate through a UK branch or office must also pay corporation tax on any profits made from business activities in the UK. This includes income generated from sales or services within the country.

Certain clubs, co-operatives, and other unincorporated associations are also liable for corporation tax. These might include sports clubs, trade associations, housing associations, and friendly societies.

The tax is applied to their taxable profits, even though they’re not limited companies.

Sole traders and ordinary partnerships don’t pay corporation tax. Instead, they are taxed through income tax on their profits.

They may still be liable for corporation tax on certain types of income that are unrelated to charitable activities.

What Are the Corporate Tax Rates?

The UK currently has two main corporation tax rates that depend on the level of company profits.

These rates have been in effect since 1 April 2023.

Main Rate

For companies with profits over £250,000, the main corporation tax rate is 25%.

Small Profits Rate

Companies with profits of £50,000 or less qualify for the small profits rate, which is set at 19%.

For companies with profits between £50,001 and £250,000, a process called marginal relief applies.

This means the effective rate increases gradually from 19% up to 25% as profits rise.

Below is a quick reference table:

These thresholds are adjusted if a company has associated companies.

Companies should check if they fall into this category, as it may reduce the thresholds for both rates.

Tax rates apply to accounting periods that begin after the effective date. Businesses should align their reporting accordingly.

How Does a Company Register to Pay Corporation Tax?

A company must register for corporation tax with HM Revenue & Customs (HMRC) when it begins business activities.

This applies to limited companies, as well as clubs, co-operatives, and some unincorporated associations.

Registration is required within three months of starting any business activity, such as selling, buying, or advertising goods or services.

Failure to register on time may lead to penalties.

The process begins by creating a Government Gateway user ID and password if the company doesn’t already have one. This is done on the HMRC website.

Companies need to provide key details, including:

• Company name and registration number
• Start date of business activity
• Main business address
• Nature of business (description of activities)

Once registered, HMRC will issue a unique taxpayer reference (UTR) for managing corporation tax obligations.

The company can then sign in to its business tax account online.

They must file their corporation tax return and pay any tax due by the relevant deadlines.

What Records Must Be Kept?

Limited companies must maintain detailed and accurate records to comply with corporation tax rules.

The types of records required cover both company-specific and financial matters.

Essential financial and accounting records include:

• Invoices and receipts
• Bank statements
• Petty cash books
• Orders and delivery notes
• Details of all money spent and received

Companies are also required to keep statutory company records such as:

• Registers of directors, shareholders, and secretaries
• Records of share allocations and transfers
• Minutes of meetings and decisions

Records relating to employment and payroll, including PAYE, expenses, and benefits, must be maintained if the company employs staff.

All these documents must typically be retained for at least six years from the end of the financial year to which they relate. They may need to be kept longer if they involve transactions spanning multiple years.

Failure to maintain adequate records can result in penalties and difficulties if HMRC requests information.

A robust record-keeping system helps ensure accurate tax calculations and supports statutory compliance.

What Profits Must Corporation Tax Be Paid On?

Corporation tax is calculated on a company’s taxable profits. These profits include money generated from trading activities, such as the sale of goods or services.

Companies must also pay tax on investment income. This covers interest, dividends, and most other income from investments.

Chargeable gains, also called capital gains, are included. These are profits made when a company sells assets like property, shares, or equipment for more than it paid for them.

Everyday business expenses can be deducted before corporation tax is worked out, but certain costs are not allowable. This can affect the final amount of corporation tax liability.

Typical taxable profits for corporation tax liabilities include:

• Trading profits (sales minus allowable expenses)
• Investment income (interest, dividends, etc.)
• Chargeable gains (profit on selling assets)

A company’s total corporation tax liability will be based on these combined profits, after deducting allowable costs and applying any reliefs.

If a company operates in more than one area, all these sources are added together to determine the final liable amount.

What Are the Deadlines?

Companies are required to pay and file corporation tax by specific deadlines each year.

The key dates depend on a company’s accounting period and financial year.

Corporation tax must be paid no later than nine months and one day after the end of a company’s accounting period.

For example, if the accounting period ends on December 31, payment must be made by October 1 of the following year.

Filing the corporation tax return (CT600) is due within twelve months after the end of the accounting period. The payment deadline usually comes before the filing deadline.

For newly incorporated companies, the deadline to file the first set of statutory accounts with Companies House is usually 21 months from the date of incorporation.

Missing the deadlines can result in penalties and interest charges.

Companies should ensure that they maintain accurate records and are aware of their relevant dates.

What Are the Reliefs and Allowances?

Companies can claim a range of reliefs and allowances to reduce their corporation tax liability.

These provisions help businesses offset certain costs and investments against their profits.

Common allowable expenses include:

• Staff salaries and wages
• Employer’s National Insurance contributions
• Purchase of raw materials
• Business premises costs (such as rent and utilities)
• Professional fees and business insurance

Capital allowances are available for investments in assets like machinery, equipment, and vehicles.

The annual investment allowance (AIA) allows businesses to deduct the cost of qualifying purchases up to a certain limit from their profits.

Trading losses may be set against other income or carried forward to reduce future corporation tax bills.

Marginal relief applies to companies with profits between £50,000 and £250,000, easing the transition between the small profits rate and the main rate of tax.

Other reliefs include research and development (R&D) relief, which supports companies investing in innovative projects.

The Patent Box offers a lower rate of corporation tax on profits made from patented inventions.

A company must keep accurate records and only claim expenses that are wholly and exclusively for business purposes.

HMRC guidelines specify what can and cannot be claimed.

Key Takeaways

Corporation tax is a key obligation for UK companies, applying to profits from trading, investments, and asset sales. 

In 2025, companies are taxed at rates ranging from 19% to 25%, depending on their profit levels, with marginal relief available for mid-range profits. 

To stay compliant and minimise liabilities, businesses must register with HMRC, meet strict filing and payment deadlines, and maintain accurate financial records. 

Using available reliefs and allowances can significantly reduce corporation tax bills, making strategic financial planning essential.