Corporation Tax and SMEs

As with all areas of tax legislation, most people who don’t have to deal with corporation tax have a rough idea of the basics, but specific details of opportunities and liabilities aren’t nearly as well known. In addition, that ‘rough idea’ can often be a couple of years out of date, or if you pick it up in conversation from a non-professional, it might be misremembered in a way that can create real problems later. We call this the bloke-down-the-pub effect, but for business owners dealing with corporation tax it’s more likely to be a mentor or a former colleague who was talking in very general terms. It’s always vital to ensure that you are paying all the tax you are liable for, and it’s important to know what tax you shouldn’t be paying. So here’s a guide to corporation tax for SME owners, covering some of the most common points of confusion. This guide is written in 2026; if you’re reading it in the 2027/28 financial year or later, we recommend you double-check with us in case things have changed.

Do You Need to Register for Corporation Tax?

When a limited company is formed, it is automatically registered for corporation tax. (Sole traders and partnerships are not liable for corporation tax). Limited companies set up in recent years almost certainly have all relevant services connected to their business tax account. However, if you’re not sure this has been done, talk to your accountants or follow this government guidance.

What is Corporation Tax Payable On?

Taxable profits for the purpose of corporation tax includes:

• Trading profits from doing business
• Chargeable gains from selling business assets at profit
• Returns on any investments

The amount of tax owed is calculated after the payment of salaries and other deductible business expenses, but before the withdrawal of dividends. Capital allowances can be claimed on the purchase of machinery, other equipment, or business vehicles bought for your business. You can also claim for the ongoing costs of running your business. However, you cannot claim for anything for which you or your employees use personally; these must be treated as a benefit. Other tax reliefs include marginal relief (of which more below), profits received for patented inventions, spending on R&D, reliefs for creative industries, and several others. Depending on your business you may or may not qualify for some of these more obscure reliefs, but the full list is beyond the scope of this blog; if you think you may be covered we recommend discussing specifics with your tax accountant.

When Does Marginal Relief Apply?

The main rate of corporation tax is 25%, but this is only when your taxable profit is £250,000 or higher. The small profit rate for corporation tax is 19%, but this is only when your taxable profit is £49,999 or lower. In between £50,000 and £250,000, marginal relief applies. Please note here: If your limited company is one of a group of associated companies, the calculation for marginal relief is different than it would be for a single limited company. This is a result of legislation against a single business being broken into smaller sections that might all qualify for small profit rates or marginal relief. The simplest way to look at marginal relief is that that 6% increase in tax is applied on a sliding scale between the two. However, calculating the level of marginal relief itself is a complex process; rather than something that’s easily calculated by rule of thumb, there is an official government marginal relief calculator.

What is Credit Interest?

If your corporation tax is paid early, HMRC will pay interest on the payment. This is called credit interest, and it is always set to be 1% lower than the current Bank of England base rate. Credit interest is paid between the date you pay and the payment deadline, with the earliest date to be paid being 6 months and 13 days after the beginning of your accounting period. Interest is allocated on the day of the payment deadline. It is treated as taxable income. If you overpay your corporation tax early, interest is only paid on the due sum, and small sums would usually be carried forward to be offset against future tax liabilities rather than being repaid. Of course, any payments made in this manner take money from your account, where you might otherwise use it in the business. As you can imagine, while there are circumstances where there’s particular value to paying corporation tax early, whether or not it’s a better option than something else is very dependent on your circumstances. We would always advise decisions of this sort be taken only after expert advice. One thing, however, we do recommend against. Payments should not be made late!