Your company made £62,000 last year. You expect to pay 19% on it, because that is the small profits rate and £62,000 sounds like small profits. The bill comes back higher, and higher again when your accountant asks whether you also own a share of the property company your brother-in-law set up.
Corporation tax stopped being a single rate in April 2023. Since then there have been three things to understand: two rates, a band between them, and a rule about how many companies you control.
Three rates, and only one of them is simple
For companies with profits of £50,000 or less, the small profits rate applies. It has been 19% since April 2023.
For companies with profits above £250,000, the main rate applies to the whole of the profit. It has been 25% since April 2023.
Between £50,000 and £250,000 the company pays the main rate and then claims marginal relief, which tapers the effective rate up from 19% to 25% across the band. The arithmetic matters because of what it does to the money at the top of that band. Every extra pound of profit between the two thresholds is effectively taxed at 26.5%, higher than the main rate itself.
That produces a specific planning point. If your profit is £255,000, the last £5,000 cost you 26.5p in the pound. If you can move £5,000 of expenditure into that year, you save tax at a higher rate than you would in almost any other position. Pension contributions, a piece of equipment you were going to buy anyway, a bonus actually paid: the timing is worth more than usual.
These rates are set by Parliament and reviewed at each fiscal event, so treat them as current rather than permanent. The structure has now been in place for several years, which is longer than some of its predecessors lasted.
The thresholds divide by the number of companies you control
This is where people get caught. The £50,000 and £250,000 limits are not per company in isolation. They are divided by the number of associated companies, counting the company itself.
Two associated companies mean the small profits limit is £25,000 each and the upper limit £125,000 each. Three means £16,667 and £83,333. A company making £62,000 with one associate is well into the marginal band rather than sitting in the small profits rate, which is why the bill came back wrong.
A company is associated with another if one controls the other, or if both are under the control of the same person or the same group of persons. Control is about more than shareholding: voting power, rights to income and rights on a winding-up all come into it. There is an exclusion for genuinely dormant companies, and a relaxation where the only link is between people who are relatives with no substantial commercial interdependence between the businesses. That last test is about real trading connections, such as financial support, shared premises, shared customers or shared staff.
The practical effect is that a personal property company, a consultancy and a dormant company held for a name are three companies, not one, and the tax bill on the trading one changes because of it. If you are setting up a second company, work out the tax cost before you incorporate it rather than after.
Capital allowances decide when, not whether
Depreciation in your accounts is not deductible for tax. Instead you claim capital allowances, and the rules on those are unusually generous at the moment.
The Annual Investment Allowance gives 100% relief on qualifying plant and machinery up to £1m a year. It was set permanently at that level in 2022, having moved around repeatedly before. It covers most equipment, vans, fixtures and integral features, and it is available to companies, sole traders and partnerships.
Full expensing, introduced for companies from April 2023, gives 100% relief on new and unused main-rate plant and machinery with no annual cap, and a 50% first-year allowance on new special-rate assets such as integral features. It applies to companies paying corporation tax, not to unincorporated businesses, and it does not cover second-hand assets or most cars.
Things that are usually not covered: cars, which have their own writing-down rates based on emissions, and buildings, which may qualify for the structures and buildings allowance at a much slower rate.
The thing to remember about allowances is that they change the timing of the relief, not the total. Claiming everything in the year you buy is usually right, but not always. If a company has a loss and no profits to shelter, accelerating relief can waste it.
Losses and pensions are the levers that survive scrutiny
A trading loss can be set against other profits of the same period, carried back twelve months against the previous period's profits, or carried forward. Carried-forward losses from April 2017 onwards are more flexible than the older ones, but relief above £5m a year is restricted. For a small company the useful point is the carry-back: a bad year after a good one can generate a repayment of tax already paid.
Employer pension contributions are deductible in the period paid, provided they meet the wholly and exclusively test. For an owner-managed company they are often the most efficient way of taking value out, because there is no National Insurance on them and no income tax at the point of contribution, subject to the annual allowance and the rules on carrying forward unused allowance from the previous three years.
Salary and dividends are a different calculation, involving income tax, National Insurance and the fact that dividends are paid from taxed profits. The balance between them shifts every time the rates move, which is why the answer your accountant gave you three years ago may not be the answer now.
Two things to avoid: paying yourself a salary that is not commercially justifiable for the work done, and putting personal expenditure through the company. HMRC does not need a sophisticated enquiry to find either.
Getting the dates right is free money
Corporation tax for a small company is due nine months and one day after the end of the accounting period. The return itself is due twelve months after the end of the period, which means the payment comes before the filing deadline. People plan around the wrong date and end up paying late interest on a bill they could have paid.
HMRC charges interest on late payment and, less well known, pays interest on tax paid early. The rates track the Bank of England base rate under a published formula and are reviewed as base rate moves, so the numbers change, but the direction is consistent: late costs more than early earns.
Companies with profits above £1.5m go into quarterly instalment payments, and those above £20m into a more aggressive version. Those thresholds are also divided by associated companies, so a group can find itself in instalments earlier than expected.
Where this shows up in the game
Business Baron calculates corporation tax properly, including the marginal band and the effect of associated companies on the thresholds. Start a second company to hold the freehold and you will see the thresholds split. The tax rules move with the calendar as the game runs through the decades, so the right structure in 1988 is not the right structure in 2028.