What is corporation tax?

How does corporation tax work in practice?

A sole trader pays income tax on profits through Self Assessment. A limited company pays corporation tax instead, on its own profits, as a separate legal person. The director then pays personal tax on whatever they take out as salary or dividends.

The company is responsible for calculating its own bill. Nobody sends one. Profit from the accounts is adjusted for things tax treats differently, such as depreciation being replaced by capital allowances, and the rate on gov.uk is applied to the result.

The rate and any small profits relief change at Budgets, so the figure to use is always the current one on gov.uk. The mechanics do not change: profit, adjustments, rate, pay, file.

A worked example

A design agency with a 31 March 2026 year end has turnover of £120,000 and allowable costs of £72,000, leaving a profit of £48,000. Depreciation of £3,000 is added back and capital allowances of £3,000 deducted, so the taxable profit is also £48,000.

The bill is £48,000 multiplied by the current rate on gov.uk. The point is that it is worked out on the £48,000 profit, not the £120,000 turnover, and that the director's salary was already deducted in reaching it.

Payment is due by 1 January 2027; the CT600 return is due by 31 March 2027. The agency puts a share of each month's profit into a separate account from April onwards, so January is a transfer rather than a scramble.

How is it different from income tax on a sole trader?