“How much tax will I pay?” It’s the question every business owner asks, and the answer for corporation tax in 2026/27 is: it depends. Not a helpful answer on its own, so let’s break it down properly.
Since April 2023, the UK has operated a two-rate corporation tax system. Smaller companies pay less; larger ones pay more. And there’s a band in the middle where things get complicated. This guide explains exactly how it works, what allowances can reduce your bill, and how to plan ahead.
The two rates: small profits and main rate
For the financial year starting 1 April 2026, the rates are:
| Taxable profit | Rate | Effective rate |
|---|---|---|
| £0 to £50,000 | 19% (small profits rate) | 19% |
| £50,001 to £250,000 | Marginal relief applies | 19% to 25% (sliding scale) |
| Over £250,000 | 25% (main rate) | 25% |
If your company’s taxable profits are £50,000 or less, you pay the small profits rate of 19%. If profits are over £250,000, you pay the main rate of 25%. Simple enough.
The complexity lives in the middle. Between £50,000 and £250,000, you pay the main rate of 25%, but then receive marginal relief that brings the effective rate down. The result is a sliding scale where the effective rate climbs from 19% at £50,000 to 25% at £250,000.
Understanding marginal relief
Marginal relief uses a formula. You don’t need to calculate it yourself (your accountant or accounting software will do it), but it helps to understand what’s happening.
The formula is:
Marginal relief = (Upper limit - Profits) x Profits/Profits x Marginal relief fraction (3/200)
In practice, this creates an effective marginal rate of 26.5% on profits between £50,000 and £250,000. That’s right: for every additional pound of profit in this band, you’re paying more than the main rate. This is because the marginal relief is being tapered away.
Here’s what the effective rate looks like at different profit levels:
| Taxable profit | Tax payable | Effective rate |
|---|---|---|
| £50,000 | £9,500 | 19.0% |
| £75,000 | £16,125 | 21.5% |
| £100,000 | £22,750 | 22.8% |
| £150,000 | £35,750 | 23.8% |
| £200,000 | £49,000 | 24.5% |
| £250,000 | £62,500 | 25.0% |
The 26.5% marginal rate matters for planning. If your profits are in the marginal relief band, the tax saving from an additional deduction (such as a capital allowance or pension contribution) is worth 26.5p in the pound, not 25p. This can make the timing of expenditure particularly valuable.
Associated companies: the threshold trap
There’s an important catch. The £50,000 and £250,000 thresholds are divided by the number of “associated companies” you have. Two associated companies? The thresholds halve to £25,000 and £125,000. Three? They drop to £16,667 and £83,333.
Companies are associated if one controls the other, or both are controlled by the same person or group of persons. This includes:
- Multiple trading companies owned by the same individual
- A holding company and its subsidiaries
- Companies controlled by the same family members (in most cases)
Dormant companies are generally excluded, but if a company holds assets or investments, HMRC may not consider it dormant.
Example: You own two active limited companies, each making £80,000 profit. Without the associated companies rule, both would benefit from the small profits rate (19%). With the rule, the thresholds halve. Each company’s £80,000 profit falls into the marginal relief band (£25,001 to £125,000), and the effective rate rises to around 23.5%.
Allowances that reduce your taxable profit
Corporation tax is charged on taxable profit, not turnover. The following allowances can significantly reduce your taxable profit and, therefore, your bill.
Annual Investment Allowance (AIA)
The AIA gives you a 100% deduction in the year of purchase for qualifying plant and machinery, up to £1,000,000 per year. This covers most tangible business assets: vehicles (with restrictions for cars), equipment, fixtures, tools, computers, and machinery.
If you’re planning a significant capital purchase, timing it to fall within the right accounting period can accelerate your tax relief.
Full expensing (for companies)
From April 2023 onwards, companies can claim 100% first-year allowances on qualifying new plant and machinery with no upper limit. This is separate from the AIA and applies specifically to new (not second-hand) assets. A 50% first-year allowance applies to special rate assets (long-life assets, integral features, thermal insulation).
Research and Development (R&D) relief
If your company is innovating, whether that’s developing new products, improving processes, or solving technical problems, you may qualify for R&D tax relief. Under the merged scheme (from April 2024), companies can claim an above-the-line credit of 20% of qualifying R&D expenditure. For loss-making R&D-intensive SMEs, an enhanced rate applies.
We’ve written a separate guide to R&D relief for manufacturers if you’d like more detail.
Trading losses
If your company makes a loss, it can be set against profits in the same period, carried back to the previous 12 months, or carried forward indefinitely against future profits. Loss relief planning is particularly relevant for companies in the marginal relief band, where the interaction between losses and thresholds can be complex.
Patent Box
Companies that earn profits from patented inventions can elect into the Patent Box regime, which applies an effective corporation tax rate of 10% to qualifying profits. This is a valuable but underused relief, particularly for manufacturing and technology businesses.
Worked example: company with £150,000 profit
Let’s walk through a straightforward example. Your company has:
- Turnover: £600,000
- Operating expenses (excluding capital items): £420,000
- Capital expenditure on new equipment: £30,000 (qualifies for AIA)
- No R&D activity
- No associated companies
Step 1: Calculate taxable profit
| Item | Amount |
|---|---|
| Turnover | £600,000 |
| Less: operating expenses | -£420,000 |
| Less: AIA on equipment | -£30,000 |
| Taxable profit | £150,000 |
Step 2: Calculate corporation tax
The profit of £150,000 falls in the marginal relief band (£50,001 to £250,000).
| Calculation | Amount |
|---|---|
| Tax at main rate (25% x £150,000) | £37,500 |
| Less: marginal relief | -£1,750 |
| Corporation tax payable | £35,750 |
The effective rate is 23.8%. Without the AIA claim on the equipment, the taxable profit would have been £180,000, and the tax bill would have been £43,750. The AIA saved the company £8,000 in corporation tax.
Step 3: Payment deadline
If the accounting period ends on 31 March 2027, the corporation tax of £35,750 is due by 1 January 2028.
Payment deadlines
For most companies, corporation tax is due in a single instalment:
| Event | Deadline |
|---|---|
| Payment due | 9 months and 1 day after accounting period end |
| CT600 return due | 12 months after accounting period end |
Large companies (profits over £1.5 million, divided by associated companies) must pay in quarterly instalments:
| Instalment | Due date |
|---|---|
| 1st | 6 months and 13 days after start of accounting period |
| 2nd | 9 months and 13 days after start of accounting period |
| 3rd | 13 days after end of accounting period |
| 4th | 3 months and 13 days after end of accounting period |
Late payment interest runs from the due date. HMRC charges interest on late corporation tax payments from the day after the deadline, currently at a rate that tracks the Bank of England base rate plus 2.5%. Pay on time.
The Northern Ireland angle
Corporation tax rates are set at the UK level. Despite periodic discussion about devolving corporation tax powers to the Northern Ireland Assembly (enabled by the Corporation Tax (Northern Ireland) Act 2015), this has never been implemented. NI businesses pay the same rates as those in England, Scotland, and Wales.
That said, there are NI-specific supports that can reduce the effective tax burden:
Invest NI R&D support. Invest NI offers grants and advisory services for businesses investing in research and development. These can be combined with R&D tax relief (though you must reduce your R&D claim by the amount of any grant received for the same expenditure).
Enterprise Zones and City Deals. The Belfast Region City Deal and Derry/Londonderry City Deal include provisions for innovation and business support. While these don’t directly change corporation tax rates, they can provide capital allowance enhancements and other incentives for businesses locating in designated areas.
Cross-border considerations. If your NI company trades with the Republic of Ireland (where the corporation tax rate is 15% for most companies), you may face transfer pricing considerations if transactions occur between connected parties on either side of the border. This is an area where specialist advice is essential.
Capital allowances on NI property. Industrial buildings allowances were abolished in 2011, but if you’re acquiring commercial property in NI, look at the fixtures and fittings element. Capital allowances on integral features (heating, electrical systems, lifts) and plant and machinery within buildings can provide significant tax deductions. Many NI property transactions undervalue or miss these claims entirely.
Common mistakes
1. Not claiming all available allowances. The most expensive mistake is leaving deductions on the table. Every business should review its capital expenditure, R&D activity, and loss position each year.
2. Ignoring the associated companies rule. Running multiple companies without considering how they affect each other’s tax thresholds can cost thousands.
3. Late payment. Corporation tax interest is not deductible against profits. It’s a pure cost. Set up a reminder for the payment date and put the money aside monthly.
4. Confusing accounting profit with taxable profit. Your management accounts show accounting profit. Taxable profit is different: it adds back disallowable expenses (entertaining, some depreciation) and includes capital allowances instead of accounting depreciation. Your tax return reconciles the two.
5. Missing the filing deadline. A CT600 filed late triggers an automatic £100 penalty, rising to £200 if it’s more than three months late. Continued lateness results in HMRC estimating your tax (usually generously in their favour) and potentially issuing a 10% tax-geared penalty.
How Arro can help
We prepare corporation tax returns for hundreds of NI businesses every year, and we don’t just file the numbers. We review every client’s position for allowances, reliefs, and planning opportunities before the return goes in. If you think your company might be paying more corporation tax than it needs to, let’s have a conversation.