Understanding the Varied Corporation Tax Rates Across the UK

Corporation tax is a key consideration for any business owner in the UK. Knowing how different rates apply depending on your company’s profits can help you plan finances and reduce your corporation tax liability effectively. This post breaks down the current corporation tax rates, explains the marginal rate, and clarifies the role of upper and lower profit limits in determining your tax bill.

What Is Corporation Tax and Why Does It Matter?

Corporation tax is the tax companies pay on their profits. Unlike income tax for individuals, corporation tax applies to the net profit a company makes after allowable expenses. The rate you pay depends on how much profit your company earns, which means understanding the thresholds and rates is essential for accurate tax planning.

For many businesses, corporation tax liability is one of the largest expenses. Getting familiar with the tax structure helps you forecast costs and make informed decisions about investments, hiring, or expansion.

The Current Corporation Tax Rates in the UK

The UK uses a tiered system for corporation tax, which means different rates apply depending on your company’s profit level. This system includes:

• Main rate: The standard rate applied to profits above the upper profit limit.

• Small profits rate: A lower rate for companies with profits below the lower profit limit.

• Marginal relief: A gradual increase in tax rate for profits between the lower and upper profit limits.

  
  

Small Profits Rate

For companies with profits up to £50,000, the small profits rate applies. This rate is currently set at 19%. It benefits smaller businesses by reducing their corporation tax liability compared to larger companies.

Main Rate

Companies with profits over £250,000 pay the main rate, which is currently 25%. This higher rate reflects the government’s approach to taxing more profitable companies at a greater rate.

Marginal Relief and Profit Limits

If your company’s profits fall between £50,000 and £250,000, you don’t pay the full 25% rate. Instead, marginal relief applies, which gradually increases your corporation tax liability from the small profits rate to the main rate.

This system uses upper and lower profit limits to calculate the exact amount of tax due. Marginal relief ensures a smooth transition between the two rates, preventing a sudden jump in tax liability as profits increase.

How Marginal Relief Works in Practice

Marginal relief reduces the corporation tax liability for companies earning profits between the lower and upper limits. The relief amount is calculated using a formula based on the difference between your profits and the thresholds.

For example, if your company makes £150,000 in profit:

• The lower profit limit is £50,000.

• The upper profit limit is £250,000.

• Your profits fall in the marginal relief band.

  
  

You pay 19% on the first £50,000 and 25% on profits above £250,000, but for profits between these limits, marginal relief reduces the effective tax rate. This means your corporation tax liability increases gradually rather than jumping sharply from 19% to 25%.

Why Understanding These Rates Matters for Business Owners

Knowing how corporation tax rates apply helps you:

• Plan cash flow: Anticipate tax payments and avoid surprises.

• Make investment decisions: Understand how profits from new projects affect your tax bill.

• Manage growth: Recognize when your company moves into a higher tax bracket.

• Use tax reliefs effectively: Combine marginal relief with other allowances to reduce overall tax.

  
  

For example, a company earning £45,000 will pay 19% corporation tax, but if profits rise to £60,000, marginal relief means the tax rate on the extra £10,000 is less than 25%, softening the impact of growth on tax liability.

Corporation tax form highlighting profit thresholds and rates

Special Considerations for Different Types of Companies

Some companies may face different rules or additional considerations:

• Group companies: When companies are part of a group, profits and losses can sometimes be shared, affecting overall corporation tax liability.

• Loss-making companies: Losses can be carried forward or back to offset profits in other years, reducing tax bills.

• Investment companies: Certain investment profits may be taxed differently.

• Non-resident companies: Tax rules vary for companies not resident in the UK but trading here.

  
  

Understanding how these factors interact with the marginal rate and profit limits can help you avoid costly mistakes.

Practical Tips for Managing Corporation Tax Liability

• Keep accurate records: Track profits carefully to know when you cross profit limits.

• Plan timing of income and expenses: Shifting income or expenses between accounting periods can affect which tax rate applies.

• Consult a tax advisor: Complex cases, especially involving marginal relief, benefit from professional advice.

• Use available reliefs: Research allowances like R&D tax credits or capital allowances to reduce taxable profits.

• Review tax position regularly: Changes in profit levels or tax law can affect your corporation tax liability.

  
  

Summary

Corporation tax rates in the UK vary depending on your company’s profit level, with a small profits rate of 19%, a main rate of 25%, and marginal relief smoothing the transition between these rates. The upper and lower profit limits define where these rates apply, and understanding the marginal rate helps you calculate your exact corporation tax liability.