Corporation tax is not charged on the profit in your accounts. It is charged on a different number — taxable total profits — that you build by adjusting the accounting profit for tax purposes.
Four steps get you there:
- Start with accounting profit before tax
- Add back costs that are not deductible for tax
- Deduct capital allowances on qualifying capital spend
- Apply the rate and any Marginal Relief
Get step two or three wrong and the answer is wrong, regardless of how carefully you applied the rate. Below are the rules and two full worked examples with the arithmetic shown.
Step 1: accounting profit before tax
This is the profit figure in your statutory accounts, before any corporation tax charge. Not turnover. Not profit after tax. Not the balance in your bank account.
Everything that follows is an adjustment to this number.
Step 2: add back the disallowables
A cost is deductible only if it is a revenue expense (not capital) incurred wholly and exclusively for the purposes of the trade, and is not specifically disallowed by statute.
Anything failing that test gets added back:
| Add back | Why |
|---|---|
| Depreciation and amortisation | Accounting estimates, not tax deductions. Capital allowances replace them |
| Client entertaining | Specifically disallowed. Entertaining staff is treated differently |
| Fines and penalties | Parking fines, HMRC penalties, Companies House late filing penalties, regulatory fines |
| Legal and professional fees on capital items | Buying property, acquiring a business, taking a long lease, share issues |
| Profit or loss on disposal of fixed assets | Dealt with through balancing charges and allowances instead |
| General (non-specific) bad debt provisions | Only specific provisions are allowable |
| Non-business proportion of any cost | If an expense has a mixed purpose, only the separately identifiable business part is deductible |
| Charitable donations in excess of trading profit | Relief is capped at the profit available |
Staff entertaining is not client entertaining. An annual staff function open to all employees is exempt from an employee benefit-in-kind charge if the cost is no more than £150 a head across the year, including VAT, transport and accommodation. Trivial benefits costing £50 or less each are also exempt, subject to a £300 annual cap for directors of close companies.
Step 3: deduct capital allowances
Capital spend is not deductible as an expense, but most plant and machinery attracts capital allowances instead. The rules changed materially at the start of 2026, and a lot of published guidance has not caught up.
| Allowance | Rate | Who and what |
|---|---|---|
| Annual Investment Allowance (AIA) | 100% on the first £1,000,000 a year | All businesses. Most plant and machinery, new or second-hand. Not cars |
| Full expensing | 100% | Companies only. New and unused main-rate plant and machinery. Not cars |
| 50% first-year allowance | 50% | Companies only. New and unused special rate plant and machinery |
| 40% first-year allowance | 40% | New. Expenditure incurred on or after 1 January 2026. New and unused main-rate plant, available to unincorporated businesses and to assets bought for leasing, where full expensing does not reach. Second-hand assets and cars excluded |
| Writing-down allowance — main pool | 14% reducing balance | Reduced from 18% on 1 April 2026 for corporation tax. Everything not fully relieved up front |
| Writing-down allowance — special rate pool | 6% reducing balance | Integral features, long-life assets, solar panels, thermal insulation, higher-emission cars. Unchanged |
The 18% figure is out of date. The main pool writing-down allowance fell from 18% to 14% on 1 April 2026 for companies (6 April 2026 for income tax). If your accounting period straddles 1 April 2026 you must apply a hybrid rate, weighted by the proportion of the period falling either side of the change. The special rate pool stays at 6%.
The AIA is pro-rated for accounting periods shorter than 12 months — a nine-month period gets 9/12 × £1,000,000 = £750,000.
Step 4: apply the rate
| Taxable total profits | Rate |
|---|---|
| Up to £50,000 | 19% |
| £50,001 to £250,000 | 25% less Marginal Relief |
| Over £250,000 | 25% |
Marginal Relief is calculated as (F × (U − A)) × (N ÷ A), where F is 3/200, U is the £250,000 upper limit, A is augmented profits and N is taxable total profits. Where there is no franked investment income, A and N are the same figure and the sum simplifies to 3/200 × (£250,000 − profits).
Both limits are divided by the number of associated companies including the company itself, and pro-rated for short periods.
Worked example 1: profits below £50,000
Harbour Design Ltd — a five-person studio, year ended 31 March 2027.
| £ | |
|---|---|
| Accounting profit before tax | 62,000 |
| Add back: depreciation | 4,200 |
| Add back: client entertaining | 1,850 |
| Add back: parking fines and a Companies House late filing penalty | 310 |
| Add back: legal fees on taking a new 10-year lease | 1,440 |
| Adjusted profit before capital allowances | 69,800 |
| Less: full expensing on new laptops and monitors | (6,400) |
| Less: AIA on a second-hand van | (15,400) |
| Taxable total profits | 48,000 |
Corporation tax: 19% × £48,000 = £9,120.
Note the van. It is second-hand, so it cannot qualify for full expensing, which requires assets to be new and unused — but the AIA covers second-hand plant, so the company still gets 100% relief.
Payment is due 1 January 2028. The CT600 is due 31 March 2028.
Worked example 2: profits in the marginal relief band
Larkfield Engineering Ltd — a precision engineering firm, year ended 31 March 2027, no associated companies.
| £ | |
|---|---|
| Accounting profit before tax | 142,000 |
| Add back: depreciation | 18,500 |
| Add back: client entertaining | 3,200 |
| Add back: loss on disposal of a machine | 1,800 |
| Add back: fines and penalties | 380 |
| Adjusted profit before capital allowances | 165,880 |
| Less: full expensing on a new CNC machine | (40,000) |
| Less: writing-down allowance, main pool £42,000 at 14% | (5,880) |
| Taxable total profits | 120,000 |
Now the tax:
- Main rate: 25% × £120,000 = £30,000
- Marginal Relief: 3/200 × (£250,000 − £120,000) = 0.015 × £130,000 = £1,950
- Corporation tax due: £30,000 − £1,950 = £28,050
That is an effective rate of 23.375%. Note what the £5,880 writing-down allowance was worth: at a 26.5% marginal rate, £1,558 of tax. Under the old 18% rate the allowance would have been £7,560 and the saving £2,003 — a real, if modest, cost of the April 2026 change.
What else can move the number
Four things sit outside the four steps and can change the answer significantly:
- Trading losses. A loss can be set against other profits of the same period, carried back against the previous 12 months, surrendered as group relief, or carried forward. A carry-back claim must be made within two years of the end of the loss-making period.
- R&D relief. Claimed under the merged R&D expenditure credit scheme at 20%, or — for loss-making, R&D intensive SMEs — under enhanced R&D intensive support.
- Chargeable gains. Selling an asset for more than it cost produces a gain that forms part of taxable profits.
- Pension contributions. Employer contributions are generally deductible in the period paid, not accrued.
Frequently asked questions
Do I pay corporation tax on profit before or after depreciation?
Neither, exactly. You start with accounting profit after depreciation, then add the depreciation back, then deduct capital allowances instead. Depreciation is an accounting estimate and is never a tax deduction; capital allowances are the statutory replacement.
Can I deduct client entertaining from corporation tax?
No. Entertaining clients, customers and suppliers is specifically disallowed and must be added back in the tax computation. Staff entertaining is treated differently — an annual staff function open to all employees is exempt from a benefit-in-kind charge if it costs no more than £150 a head across the year.
What is the Annual Investment Allowance limit?
£1,000,000 per accounting period. It gives 100% relief on most plant and machinery, new or second-hand, but not on cars. The limit is pro-rated for accounting periods shorter than 12 months, so a nine-month period gets £750,000.
Has the writing-down allowance rate changed?
Yes. The main pool rate fell from 18% to 14% on 1 April 2026 for corporation tax and 6 April 2026 for income tax. Accounting periods straddling the change date use a hybrid rate weighted by the proportion of the period falling either side. The special rate pool remains at 6%.
Do I have to use software to file my corporation tax return?
Yes. HMRC’s free filing service closed on 31 March 2026. From 1 April 2026 a Company Tax Return must be filed using commercial software, with the accounts and computation tagged in iXBRL. Paper filing is only available with a reasonable excuse or if you are filing in Welsh.
Where computations go wrong
In practice the errors are rarely exotic. Depreciation left in. Capital allowances never claimed on equipment bought three years ago. A second-hand asset claimed under full expensing when it only qualified for AIA. Associated companies nobody mentioned.
SmartFiling prepares and files CT600 returns on a fixed fee, including the full corporation tax computation, capital allowances and HMRC submission, with a three-week turnaround from receiving your records. Every return is reviewed and signed off by an ICAEW Chartered Accountant.
