Corporation Tax Small Profits Rate Explained

Not every UK company pays the same rate of corporation tax. Smaller companies pay a lower rate, larger ones pay the main rate, and those in between are taxed on a sliding scale. This guide explains the small profits rate, who qualifies, and how to work out where your company sits.

Key takeaways

• The small profits rate is a lower rate for companies with smaller profits.
• The main rate applies once profits pass the upper limit, with marginal relief in between.
• At the time of writing the rates are 19% and 25%, with profit limits of GBP 50,000 and GBP 250,000. Confirm them on GOV.UK.
• The limits are reduced for short accounting periods and shared between associated companies.
• Your rate depends on profits for the accounting period, not the tax year.

What is the small profits rate?

Corporation tax is charged on a company's taxable profits. Since April 2023 the rate depends on how large those profits are. Companies with profits at or below the lower limit pay the small profits rate, which at the time of writing is 19%. Companies with profits above the upper limit pay the main rate, currently 25%. The figures can be changed by Government, so always check the latest on GOV.UK's corporation tax rates page.

The three bands

Figures are those in force at the time of writing. Confirm them on GOV.UK before you make decisions.

What counts as profits for these limits?

The profits used for the limits are your taxable profits plus certain distributions received from non group companies. Taxable profits are your accounting profit adjusted for tax rules, for example by adding back disallowable expenses and deducting capital allowances. This is why two companies with the same accounting profit can pay different tax. For a deeper look at the middle band, see our guide to corporation tax marginal relief.

Associated companies and short periods

Two things can shrink the limits. If your company has associated companies, broadly those under common control, the limits are divided by the number of companies in the group. And if your accounting period is shorter than 12 months, for example in the first year of trading, the limits are reduced in proportion. Both can mean a company reaches the higher rate at a lower profit than expected. HMRC's guidance on associated companies is on GOV.UK, and your accountant can confirm how it applies to your situation.

Worked example (illustrative)

"Nadia", an illustrative example, runs a consultancy company with taxable profits of GBP 40,000 for the year. That is below the lower limit, so the small profits rate applies to all of it. At 19%, the corporation tax bill would be GBP 7,600. If her profits had been GBP 40,000 in a company that has one associated company, the lower limit would be halved, so part of the profit could fall into the marginal relief band and the effective rate would be higher. The same profit can produce a different bill depending on the structure around it. These figures are for illustration only and use the rates at the time of writing.

Planning around the bands

You cannot choose your rate, but you can plan around it. Timing of income and spending, pension contributions by the company and decisions about salary and dividends all affect profit. Our guide to director salary versus dividends explains how pay decisions interact with company profits. Planning should be done before the year end, not after, because the options narrow once the period closes. Remember that tax payment is normally due nine months and one day after the end of your accounting period, as explained in our company accounts deadlines guide. You can read the official rules on GOV.UK's marginal relief guidance.

Why the rate matters for decisions

The rate your company pays affects more than the tax bill. It shapes whether it makes sense to leave profit in the company or take it out, how valuable a deductible expense is, and how much cash you need to hold for the payment date. A deductible cost saves tax at your marginal rate, which in the marginal relief band can be higher than the headline rates suggest. That is one reason profit forecasting during the year is worth doing, not just at the end.

Paying and filing

Most small companies pay corporation tax nine months and one day after the end of the accounting period and file the Company Tax Return within 12 months. Large companies pay earlier in instalments, but that does not affect most readers of this guide. Interest runs on late payments and penalties can apply to late returns, so put both dates in your calendar as soon as your year end is known. Keeping your bookkeeping up to date through the year makes the return quicker and cheaper to prepare.

Finally, keep an eye on announcements. Governments change rates, thresholds and reliefs, usually in a Budget, and the changes can apply from the start of a financial year. Check the current position on GOV.UK each year, or ask your accountant to confirm it as part of your year end planning.

Common mistakes

• Assuming the rate is always 19%. It only applies at lower profit levels.
• Forgetting associated companies. They reduce the limits.
• Ignoring short accounting periods. The limits scale down.
• Confusing accounting and taxable profit. The tax computation adjusts the accounts.
• Leaving planning until after year end. Many options have closed by then.

Want to know which rate your company will pay and how to plan for it? Our corporation tax service covers the calculation, the return and forward planning. Get in touch for a no obligation conversation.