Knowing how to calculate how much Corporation Tax your Limited Company will pay is essential for planning your cash flow and avoiding nasty surprises. The good news is that the calculation is simpler than it looks. This guide shows you how to estimate it step by step, with examples.
The basic formula
Corporation Tax is calculated on the company’s profit, which is the difference between income and deductible expenses. The formula is: (Income − Deductible expenses) × tax rate. The rate is 19% for profits of up to £50,000.
Step 1: calculate your income
Add up all of the company’s invoicing for the financial year. This is your total sales before deducting anything.
Step 2: subtract deductible expenses
Subtract all the expenses necessary for the business: the director’s salary, registered address, software, marketing, advisory services, business travel, training. The result is your profit before tax.
Step 3: apply the rate
Multiply the profit by 19% (if you are below £50,000). That is your Corporation Tax.
A practical example
| Item | Amount |
|---|---|
| Income for the year | £80,000 |
| Director’s salary | −£20,000 |
| Expenses (software, advisory services, etc.) | −£10,000 |
| Profit before tax | £50,000 |
| Corporation Tax (19%) | £9,500 |
| Profit after tax | £40,500 |
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The middle band: Marginal Relief
If your profit is between £50,000 and £250,000, you do not pay 25% straight away: Marginal Relief applies, a mechanism that gradually raises the effective rate from 19% to 25%. This avoids a sudden jump and makes the system progressive. For most small businesses that do not reach £50,000, the calculation stays at a clean 19%.
Don’t forget to set money aside
A common mistake is spending all the profit and not having the money to pay Corporation Tax when it falls due (9 months and 1 day after the end of the accounting period). Work out your estimated tax throughout the year and set that money aside. That way you reach the payment date without stress.
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Frequently asked questions
You subtract deductible expenses from income to get the profit, and apply 19% (on profits of up to £50,000). The formula is (Income − Expenses) × 19%.
The director’s salary, registered address, software, marketing, advisory services, business travel and training, among other expenses necessary for the business.
It is the mechanism that applies a gradual effective rate between 19% and 25% to profits of £50,000 to £250,000, avoiding a sudden jump in taxation.
9 months and 1 day after the end of the financial year. It is advisable to set the estimated amount aside throughout the year so that you reach that date without cash-flow problems.
Photo by Towfiqu barbhuiya on Unsplash
