UK Corporation Tax: Rates, Marginal Relief and Who Pays It (2025/26)

Who pays Corporation Tax?

Corporation Tax is the corporate-profits tax in the UK. It is charged on the worldwide profits of UK-resident companies and on the UK-source profits of certain non-resident entities. You pay Corporation Tax if you are:

• A UK-resident limited company (Ltd or PLC) — incorporated in the UK or centrally managed and controlled here.
• A foreign company with a UK permanent establishment (PE) — typically a branch or fixed place of business through which it trades.
• Members' clubs and associations — sports clubs, social clubs, trade associations.
• Co-operatives and unincorporated associations carrying on a trade or business.
• Housing associations and certain other corporate bodies.

You do not pay Corporation Tax if you are:

• A sole trader — you pay Income Tax via Self Assessment.
• A traditional partnership or LLP — partners are individually taxable on their share of profits.
• A charity — generally exempt on income applied for charitable purposes, though trading subsidiaries pay CT in the normal way.

The three-tier rate system

From 1 April 2023, the single 19% rate that applied for years was replaced by a three-tier structure. Profits are placed in one of three bands and taxed differently in each:

Marginal relief eases the transition. Without it, a company with £50,001 of profit would jump from 19% to 25% on the entire profit at the stroke of a single pound. With marginal relief, the extra tax is phased in smoothly.

The marginal relief formula

Worked examples

Notice the "marginal" in "marginal relief" refers to the band — not the marginal rate of tax on the next pound earned. Inside the relief band, the marginal rate on each extra pound of profit is actually 26.5% (25% + 1.5%), even though the average effective rate is lower. This means earning a pound more in the marginal band costs more in tax than a pound earned at the main rate — a counter-intuitive but real planning consideration.

Associated companies — the limits get divided

One of the most frequently missed rules: the £50,000 and £250,000 thresholds are divided by the number of associated companies, including the company itself. Two companies under common control → each company's limits are halved. Five associated companies → each company gets one-fifth.

Two companies are "associated" if one controls the other, or if both are under the control of the same person or group of persons. Control means direct or indirect ownership of 51% or more of the share capital, voting rights, or rights to distributable profits. Dormant companies are excluded, as are passive holding companies meeting certain conditions.

This rule matters most to one-person Ltd structures that hold multiple companies — for example, a personal services company plus a property SPV plus an investment company. Even though each is small, the limits divide by three, potentially pushing each into marginal relief at profits of just £16,666.667. The pre-2023 regime ignored this completely; from April 2023 it is a real planning trap.

Accounting period prorating

The £50,000 and £250,000 limits assume a full 12-month accounting period. Shorter periods get proportionally smaller limits. A new company with a first accounting period of, say, 8 months would have a lower limit of £33,333.333 and an upper limit of £166,666.667.

Periods longer than 12 months cannot be a single accounting period for tax — they must be split into a 12-month period and a separate short period. This is unlike Companies House, which permits an 18-month first period: tax-wise that becomes two accounting periods with two CT600 returns.

What is a deductible expense?

The bedrock rule is set out in the Corporation Tax Act 2009: an expense is deductible if it is incurred wholly and exclusively for the purposes of the trade. Common deductible items:

• Salaries, wages and employer NI — including director's remuneration paid via PAYE.
• Employer pension contributions (subject to the annual allowance for the recipient).
• Office rent, business rates, utilities, business broadband.
• Professional fees — accountancy, legal (revenue, not capital), bookkeeping software.
• Marketing, advertising, website hosting.
• Plant and machinery, vehicles and IT equipment via capital allowances (not as a straight expense).
• Travel and subsistence for business trips (not home-to-permanent-workplace commuting).
• R&D expenditure (with enhanced relief on top — see below).
• Loan interest on business borrowing (subject to the corporate interest restriction at scale).

The most common items not deductible:

• Client entertaining — bluntly disallowed by statute.
• Dividends and director's drawings — these are a distribution of profit, not a cost of earning it.
• Personal-use proportions of mixed-use assets (phone, car).
• Fines, penalties and HMRC interest — but ordinary commercial late-payment charges are allowable.
• Capital expenditure as such — relief comes through capital allowances over time, not a one-shot deduction (except where full expensing applies — see below).

Capital allowances at a glance

Capital allowances are the mechanism for getting tax relief on assets used in the business. The current regime is generous for companies:

• Annual Investment Allowance (AIA): £1 million of qualifying plant & machinery expenditure each year deducted at 100%.
• Full expensing: 100% first-year allowance on most new (not second-hand) plant & machinery — permanent from April 2023. Companies only; AIA still covers second-hand and partnership/sole-trader purchases.
• Zero-emission cars and EV charging points: 100% first-year allowance.
• Integral features (electrical, lighting, heating, plumbing systems): 6% per year on a reducing-balance "special rate" pool.
• Main rate pool (general plant & machinery beyond AIA): 18% per year reducing balance.
• Structures and Buildings Allowance (SBA): 3% straight-line on qualifying construction costs of non-residential buildings.

Buildings themselves and most cars (other than EVs) do not qualify for AIA or full expensing. Cars with CO₂ emissions above 50 g/km go in the special-rate pool.

R&D relief — briefly

The R&D regime was overhauled in April 2024. For accounting periods beginning on or after 1 April 2024, most companies use a single merged scheme based on the old RDEC structure:

• Merged scheme RDEC: 20% above-the-line credit on qualifying R&D expenditure.
• Enhanced R&D-intensive support (ERIS): for loss-making SMEs where qualifying R&D ≥ 30% of total expenditure — 86% additional deduction, plus a 14.5% repayable credit.
• For periods before 1 April 2024 the old SME and RDEC schemes still apply when claims are made or amended.

Qualifying R&D must seek an advance in science or technology by resolving scientific or technological uncertainty. Marketing innovations, business-process change and routine software development typically do not qualify. Contemporary documentation is essential — HMRC compliance activity in this area has increased sharply.

Quarterly Instalment Payments (QIPs)

Most companies pay Corporation Tax in a single payment 9 months and 1 day after year-end. Larger companies instead pay in four quarterly instalments:

• "Large" companies: profits over £1.5 million (proportionately reduced for associates and short periods). Pay in months 7, 10, 13 and 16 from the start of the period.
• "Very large" companies: profits over £20 million. Pay 4 months earlier — months 3, 6, 9 and 12 (so the final instalment is paid before year-end).
• First-time large companies get a one-year deferral, so the QIP regime kicks in only if the company is large for two consecutive years.

Group and consortium relief

Where companies form a 75%+ group (broadly, parent owns ≥75% of subsidiary, or both are 75%+ owned by a common parent), trading losses can be surrendered between group members to offset profits elsewhere in the group. This reduces the total group CT bill without needing to consolidate profits formally.

Capital losses generally cannot be surrendered, but assets can be transferred between group members on a no-gain-no-loss basis, allowing gains to be matched with losses by transferring assets to the loss-making company before disposal.

Important admin dates

Dividends vs salary for director-shareholders

For a one-person Ltd, the choice between salary and dividends interacts directly with Corporation Tax. A salary is a deductible expense — every £1,000 of director salary saves at least £190 (small profits rate) and up to £250 (main rate) of Corporation Tax. A dividend, by contrast, is a distribution of post-tax profit — the company has already paid CT on it.

However, dividends escape National Insurance entirely, while salary triggers employer NI (15% above the secondary threshold) and employee NI. Most accountants recommend a tax-efficient salary at or near the secondary NI threshold (high enough to qualify for a State Pension qualifying year, low enough to avoid NI), then dividends on top. The optimum changes each tax year — see our dedicated comparison: Dividend vs salary for directors.

Bringing it together

Corporation Tax in 2025/26 is more sophisticated than it was before April 2023. A standalone small company with profits below £50,000 pays a flat 19% — easy. A company with profits between £50,000 and £250,000 needs to apply the marginal relief formula and watch the associated-company trap. A larger company also needs to think about quarterly instalments, group relief and full expensing planning around capital purchases. The payment-before-filing rule — CT due at 9 months and 1 day, return due at 12 months — means a working estimate of taxable profit is usually needed before the accounts are finalised.