Corporation tax is a key component of the UK tax system, levied on the profits of UK-resident companies and foreign companies that trade within the UK. It represents one of the government’s primary sources of revenue and applies to taxable business profits after deductions and allowances.
Like many aspects of taxation, corporation tax is subject to regular review and adjustment by the government. Understanding current rates, planned changes, and available reliefs is crucial for businesses looking to remain compliant while also managing their tax liabilities effectively.
Current and Upcoming Corporation Tax Rates
As of April 2021, the UK corporation tax rate stood at 19%, which was the lowest among the G7 nations. However, the government announced significant changes to address rising public expenditure and the budget deficit caused by the COVID-19 pandemic.
- From April 2023, the main corporation tax rate increased to 25%.
- Companies with profits below £50,000 continue to pay the 19% rate.
- A tapered rate applies to profits between £50,000 and £250,000.
- Companies with profits above £250,000 now fall under the new 25% rate.
This tiered approach means smaller businesses continue to benefit from a lower tax rate, while larger, more profitable companies contribute more.
Impact of Corporation Tax on Businesses
The increase has received mixed responses:
- Supporters argue the rise is necessary to fund public services and stabilize the economy.
- Critics warn it could discourage foreign investment and reduce the UK’s competitiveness as a business hub.
Regardless of opinion, businesses must now adapt to the new structure and explore opportunities to manage their tax exposure responsibly.
Deductions, Allowances, and Reliefs
When calculating taxable profits, businesses can claim several deductions and allowances that significantly reduce their liability:
- Capital Allowances – For investment in plant, machinery, and equipment.
- R&D Tax Credits – Designed to encourage innovation by reducing the tax burden for companies undertaking qualifying research and development projects.
- Loss Relief – Allowing companies to offset current losses against previous or future profits.
These reliefs are vital for companies to optimize their financial planning and reinvest in growth.
The Importance of R&D Tax Credits
One of the most valuable reliefs available is R&D tax relief. The UK government offers generous incentives for businesses investing in innovation, technology, or scientific advancements.
Qualifying companies can claim back a portion of their R&D expenditure, effectively reducing their corporation tax bill and freeing up capital for further research, development, and expansion.
Corporation Tax Planning Strategies
Effective tax planning helps businesses not only stay compliant with HMRC regulations but also minimize unnecessary liabilities. Common strategies include:
- Transfer Pricing – Allocating profits across jurisdictions to take advantage of lower tax rates (must comply strictly with HMRC rules).
- Capital Investment Timing – Scheduling major purchases or investments to maximize capital allowances.
- Loss Utilisation – Strategically applying current or past losses to offset profits.
However, all tax planning must be carried out within the framework of UK tax law to avoid penalties or reputational damage.
Other Business Taxes in the UK
Corporation tax is not the only levy businesses face. Companies must also consider:
- VAT (Value Added Tax) – Charged on goods and services.
- Employment Taxes – Covering PAYE, National Insurance contributions, and employee benefits.
- Business Rates – Tax on non-domestic properties such as offices, factories, and retail premises.
Together, these form the broader picture of business taxation in the UK, and they must all be managed carefully.
FAQs on Corporation Tax in the UK
1. What is corporation tax?
Corporation tax is a tax on the profits of UK-based companies and foreign companies that operate in the UK. It is calculated after deducting allowable expenses, allowances, and reliefs.
2. Who has to pay corporation tax?
All UK-resident companies and certain non-UK companies with trading activity in the UK must pay corporation tax on their taxable profits.
3. What is the current corporation tax rate?
As of April 2023, the corporation tax rate is:
- 19% for profits up to £50,000.
- 25% for profits above £250,000.
- A tapered rate for profits between £50,000 and £250,000.
4. What expenses can reduce corporation tax liability?
Businesses can reduce their tax bill with allowances such as capital allowances, R&D tax credits, and relief for trading losses.
5. What are R&D tax credits?
R&D tax credits allow companies investing in research and development to claim back a portion of their costs, reducing their overall corporation tax bill.
6. When is corporation tax due?
Corporation tax must typically be paid nine months and one day after the end of your company’s accounting period.
7. How can I reduce my corporation tax legally?
You can manage liabilities by:
- Claiming all available allowances and reliefs.
- Planning capital investments strategically.
- Making use of R&D tax credits.
- Seeking professional tax planning advice.
Final Thoughts
Corporation tax remains one of the most significant obligations for UK businesses. With the rate increase from April 2023, it’s more important than ever for companies to understand the thresholds, reliefs, and planning opportunities available.
By leveraging allowances such as capital allowances and R&D tax credits, businesses can reduce their liabilities while continuing to innovate and grow. Effective planning ensures compliance with HMRC rules while making the most of available opportunities.
At S&B Accountants, we specialize in helping businesses navigate the complexities of corporation tax. From compliance and planning to claiming R&D tax credits, our team ensures your company remains tax-efficient and future-ready.
👉 Need expert advice on managing your corporation tax liabilities? Contact us today
