Corporation Tax

The term "corporation tax" describes the income tax paid by businesses for general corporate taxation. The rate for the years 2017/18, 2018/19, 2019/20 is 19% except for except ring-fence companies.

The tax rates tend to change when the Chancellor announces the budget, and corporation tax is different from capital gains tax and VAT.

Who Pays Corporation Tax?

All limited companies in the UK will pay taxes on yearly profits at a pre-determined rate expressed as a percentage. Other organisations such as clubs and associations also have to pay this type of tax.

Companies usually express profits as Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). Accountants help businesses understand what type of deductions can legally be made against earnings to reduce any tax liability.

The following types of organisations must pay corporation tax in the UK:

  • Limited companies incorporated in the UK.
  • Foreign-based companies with a permanent place of business in the UK.
  • Members' clubs, such as social clubs, sports clubs and holiday clubs.
  • Societies, such as friendly societies and provident societies.
  • Associations, such as housing associations and trade associations.
  • Co-operatives.
  • Other unincorporated associations.
  • Groups of individuals carrying on a business that is not a partnership.
  • Charities, or companies that are subsidiaries of, or wholly owned by a charity.
  • NHS foundation trusts if they are carrying out significant commercial activities that are not part of core health care delivery, such as running a commercial laundry.

Historical Corporation Tax Rates

These are the corporation tax rates for financial years starting on 1st April.

Corporate Tax From 2006 to 2010

Year 2006/7 2007/8 2008/9 2009/10 2010/11
Small Companies Rate (1) 19% 20% 21% 21% 21%
Marginal Relief Fraction 11/400 1/40 7/400 7/400 7/400
Main rate of Corporation Tax 30% 30% 28% 28% 28%
Special rate for unit trusts and open-ended investment companies 20% 20% 20% 20% 20%

Corporate Tax From 2011 to 2015

Year 2011/12 2012/13 2013/14 2014/15 2015/16
Small Companies Rate (1) 20% 20% 20% 20% 20%
Marginal Relief Fraction 3/200 1/100 3/400 1/400 n/a
Main rate of Corporation Tax 26% 24% 23% 21% 20%
Special rate for unit trusts and open-ended investment companies 20% 20% 20% 20% 20%

Corporate Tax From 2016 to 2018

Year 2016/17 2017/18 2018/19 2019/20 2020/21
Main rate of Corporation Tax 20% 19% 19% 19% 17%
Special rate for unit trusts and open-ended investment companies 20% 20% 20% 20% 20%

For the years 2006 to 2016 the following limits have been the same:

  • Small companies corporation tax limit = £300,000
  • Marginal relief lower limit = £300,000
  • Marginal relief upper limit = £300,000

As the small profits rate merged with the main tax charge from 2015/16, this calculation no longer applies.

Note On Small Companies Rate

(1) Small businesses are those classed with profits of less than £300,000 which has been the same figure since 1994. The main rate of corporation tax gets charged on profits over £300,000. For those companies with profits between £300,000 and £1,500,000, a marginal tax relief is provided by a predetermined fraction.

Calculating Marginal Relief

If your profits are between £300,000 and £1,500,000, then you receive a small tax credit based upon the fraction noted above on the difference between your profits and the upper marginal relief limit.

Example For 2011/12 With Profits of £1,000,000

  • Step 1: Calculate total taxable profits = £1,000,000
  • Step 2: Calculate Corporation Tax due at the main rate of 25% = £250,000
  • Step 3: Subtract taxable profits from upper limit for Marginal Small Companies' Relief £1,500,000 - £1,000,000 = £500,000
  • Step 4: Multiply by the MSCR fraction 7/400 to calculate the relief you can claim = £500,000 x 3 divided by 200 = £7,500
  • Step 5: Deduct the relief from the Corporation Tax due = £250,000 - £7,500 = £242,500

The main rate of Corporation Tax applies when profits (including ring fence profits) are at a rate exceeding £1,500,000, or where there is no claim to another rate, or where another rate does not apply.

Profits Exempt From Corporate Tax

Some organisations are exempt from corporation tax under certain HMRC rules.

Charities are exempt from paying corporation tax so long as they can satisfy HMRC that income only applies to charitable purposes. For example, net income from any fundraising events provided that those profits when used apply to charitable purposes.

When To Inform HMRC You Are Trading

If you start a new limited company and you begin to carry on business or trade, you must tell HMRC within three months. You should register for HMRC taxes on the online portal.

Updated from the 2017 budget