How to Calculate Corporation Tax (Step-by-Step Guide for UK Directors)

Many directors assume corporation tax is simply "profit x tax rate" — but it's rarely that straightforward. This guide breaks down exactly how corporation tax is calculated, with real examples you can follow.

The Basic Formula

At its simplest:

Corporation Tax = Taxable Profit x Tax Rate

But there are two important nuances:

1. Taxable profit is not the same as accounting profit
2. Tax rate depends on which band your profits fall into

Let's break down each part.

Step 1: Calculate Your Accounting Profit

Your accounting profit is what most directors think of as "profit" — the number at the bottom of your profit and loss statement.

Accounting Profit = Total Income - Total Expenses

For example:

• Turnover: £120,000
• Cost of sales: £40,000
• Operating expenses: £30,000
• Accounting profit: £50,000

But this isn't the number you pay tax on.

Step 2: Adjust for Tax Purposes (Taxable Profit)

HMRC requires certain adjustments to convert accounting profit into taxable profit. The most common adjustments are:

Add Back (Disallowable Expenses)

These are expenses you've deducted in your accounts but HMRC doesn't allow for tax purposes:

• Depreciation — you claimed £5,000 depreciation in your accounts, but HMRC uses capital allowances instead
• Entertaining clients — business entertaining is not tax-deductible
• Personal expenses — anything not "wholly and exclusively" for business
• Fines and penalties — parking tickets, HMRC penalties, etc.

Deduct (Tax Reliefs)

• Capital allowances — HMRC's version of depreciation (often more generous)
• R&D tax credits — if you qualify
• Patent box relief — for qualifying patent income

Worked Example

Step 3: Apply the Correct Tax Rate

For the 2024/25 tax year onwards, there are three corporation tax bands:

If Your Taxable Profit Is Under £50,000

Simple calculation:

Tax = Taxable Profit x 19%

Example: £49,000 x 19% = £9,310

If Your Taxable Profit Is Between £50,001 and £250,000

This is where marginal relief applies. You don't suddenly jump from 19% to 25% — instead, there's a gradual increase.

The formula is:

Tax = (Profit x 25%) - Marginal Relief

Where Marginal Relief = 3/200 x (£250,000 - Profit)

Example for £100,000 profit:

• Tax at 25%: £100,000 x 25% = £25,000
• Marginal relief: 3/200 x (£250,000 - £100,000) = £2,250
• Final tax: £25,000 - £2,250 = £22,750
• Effective rate: 22.75%

If Your Taxable Profit Is Over £250,000

Simple calculation:

Tax = Taxable Profit x 25%

Example: £300,000 x 25% = £75,000

Step 4: Account for Associated Companies

If your company has associated companies (companies under common control), the profit thresholds are divided by the number of associated companies.

Example: If you have 2 associated companies:

• Small profits threshold: £50,000 / 2 = £25,000
• Upper threshold: £250,000 / 2 = £125,000

This means you hit the higher tax bands sooner.

Complete Worked Example

Company ABC Ltd has:

• Turnover: £200,000
• Expenses: £140,000
• Depreciation charged: £10,000
• Capital allowances available: £15,000
• No associated companies

Step 1: Accounting profit

£200,000 - £140,000 = £60,000

Step 2: Taxable profit

£60,000 + £10,000 (add back depreciation) - £15,000 (capital allowances) = £55,000

Step 3: Calculate tax

Since £55,000 is in the marginal relief band:

Common Mistakes to Avoid

1. Using accounting profit instead of taxable profit — always make the required adjustments
2. Forgetting capital allowances — these can significantly reduce your tax bill
3. Ignoring marginal relief — don't assume you pay 25% on all profits over £50,000
4. Not considering associated companies — this affects your thresholds

What's Next?

Once you've calculated your corporation tax, you need to:

1. Report it on your CT600 return
2. Submit the CT600 to HMRC within 12 months of your accounting period end
3. Pay the tax within 9 months and 1 day of your accounting period end