UK Corporation Tax 2026: Rates, Deductions and Legal Strategies to Reduce It

Corporation Tax is the tax on company profits in the United Kingdom — the British equivalent of Italy's IRES. For anyone managing a UK LTD, understanding it is not merely a compliance obligation: it is an opportunity. The British tax system offers a range of deductions, exemptions and incentives that, when correctly planned, allow for a significant and fully legal reduction in the tax burden. Without a thorough understanding of the rules, however, the risk is paying far more than necessary — or making errors that attract HMRC's attention.

This guide analyses in detail the rates in force in 2026, the main allowable deductions, available tax incentive mechanisms and the most effective strategies for optimising the tax position of a UK company.

Corporation Tax rates in 2026

From 1 April 2023, the UK Corporation Tax system returned to a banded structure based on profit levels, after years of a single 19% rate. The rates in force in 2026 are as follows:

Small Profits Rate — 19%
Applies to companies with taxable profits up to £50,000. This is the lowest rate and applies automatically without any specific election required. For micro and small businesses falling within this threshold, the UK tax burden remains highly competitive by European standards.

Main Rate — 25%
Applies to companies with taxable profits above £250,000. This is the standard rate and applies to the full amount of profits, not just the portion exceeding the threshold.

Marginal Relief — effective rate between 19% and 25%
For companies with profits between £50,001 and £250,000, the marginal relief mechanism applies: the effective rate increases progressively from 19% to 25% based on the position of the profits within the band. The marginal relief calculation requires the application of a specific formula and is one of the more technical aspects of the CT600 return.

Reduced thresholds for associated companies
The £50,000 and £250,000 thresholds are divided by the number of associated companies — companies connected through common control. If a UK LTD forms part of a group with two other companies, the thresholds become £16,667 and £83,333 respectively. This is particularly relevant for those holding structures with multiple interconnected companies.

What are taxable profits: the calculation basis

Corporation Tax applies to taxable profits, which do not necessarily coincide with the accounting profit shown in the financial statements. Taxable profits are derived from the gross profit by applying a series of tax adjustments:

• Adding back non-deductible expenses (e.g. personal expenses, penalties, accounting depreciation)
• Deducting tax-relieved items not reflected in the accounts (e.g. capital allowances in place of accounting depreciation)
• Adjusting for intra-group transactions subject to transfer pricing rules

The result is the taxable profit, on which the tax is calculated. It is possible for a company to have a positive accounting profit but a lower — or even negative — taxable profit through the correct application of available deductions.

Main allowable deductions

The UK tax system permits the deduction of all expenses incurred wholly and exclusively for the purposes of the business. The main categories include:

Ordinary operating expenses
Rent, utilities, office costs, marketing expenses, professional subscriptions, training costs relevant to the business, business travel and commercial hospitality expenses (with certain limitations for the latter category).

Salaries and contributions
Salaries paid to employees and directors, including employer National Insurance contributions. Contributions made to approved company pension schemes are fully deductible without an absolute upper limit, provided they are commercially justified.

Interest payments
Interest on loans and financing contracted for business purposes is generally deductible, but subject to the Corporate Interest Restriction (CIR) rules for companies with net interest above £2 million per year.

Research and development expenditure
Subject to a specific incentive regime — covered in detail in the following section.

Losses from prior periods
Unused tax losses can be carried forward indefinitely and offset against future profits. It is also possible to carry them back by up to 12 months, generating a refund of tax paid in the prior period.

Capital Allowances: tax relief on investment

Accounting depreciation is not deductible for Corporation Tax purposes. Instead, the UK tax system provides an alternative mechanism: Capital Allowances, which allow the cost of capital assets to be deducted according to specific tax rules.

The main Capital Allowances categories in 2026 are:

Annual Investment Allowance (AIA)
Allows the immediate and full deduction of the cost of plant, machinery and equipment up to a maximum of £1 million per accounting period. For the vast majority of SMEs, the AIA covers the entire annual investment amount, making the tax deduction immediate and eliminating the need for multi-year depreciation calculations.

Full Expensing
Introduced on 1 April 2023 and made permanent by the UK Autumn Budget 2024, Full Expensing allows companies subject to the main rate (25%) to deduct 100% of the cost of new plant and machinery in the year of purchase, with no upper limit. For special rate assets (long-life assets and integral features of buildings) the first-year deduction is 50%.

Writing Down Allowances (WDA)
For assets not covered by AIA or Full Expensing, WDAs apply: 18% per year for assets in the main pool and 6% per year for assets in the special rate pool.

R&D Tax Relief: the incentive for research and development

The R&D Tax Relief regime is one of the most powerful tools in the UK tax system for companies carrying out research and development activities. From 1 April 2024 the system was reformed with the introduction of the unified RDEC (Research and Development Expenditure Credit) regime, which replaced the previous separate regimes for SMEs and large companies.

In 2026 the RDEC regime provides:

• A tax credit equal to 20% of qualifying R&D expenditure
• The credit is payable even in a loss-making position, making the benefit accessible to start-ups and companies with limited profits
• Qualifying expenditure includes: salaries of staff directly engaged in R&D, cost of materials consumed in the research process, software costs used exclusively for R&D, and subcontracted costs (with certain limitations)

To access the regime, the company must notify HMRC in advance of its intention to make an R&D claim via the dedicated online form — an obligation introduced from April 2023 to counter fraudulent claims.

Patent Box: reduced taxation on intellectual property income

The Patent Box regime allows UK companies holding registered patents to apply a reduced effective rate of 10% on profits derived from the exploitation of those patents. The regime also applies to supplementary protection certificates, plant variety rights and certain software protected by equivalent rights.

To access the Patent Box, the company must have actively contributed to the development of the patent (the development condition) and the income must be directly attributable to the use of the protected intellectual property. The regime requires a dedicated calculation and the submission of a formal election to HMRC.

Company pension contributions: the most accessible deduction

For many directors of small UK LTDs, employer pension contributions represent the most immediate and straightforward tax optimisation strategy. The company can make contributions on behalf of the director or employees into a registered pension scheme and deduct them in full from taxable profits, without an absolute upper limit — provided they are commercially justified and proportionate to the beneficiary's remuneration.

Unlike personal contributions, employer contributions are not subject to the personal Annual Allowance cap for the recipient, but are subject to the overall contributions limit for the pension scheme (annual input).

For a director extracting profits from their LTD, the combination of a low salary (just above the NI threshold), dividends and employer pension contributions is generally the most tax-efficient remuneration structure.

Legal strategies to reduce Corporation Tax

Beyond standard deductions and specific incentives, several legal tax planning strategies are particularly relevant for non-residents:

Salary and dividend optimisation
The combination of director salary and dividend distribution reduces the overall Corporation Tax and personal tax burden. The salary is deductible from company profits (reducing the CT base), while dividends are distributed from post-tax profits. The optimal calibration depends on the director's tax residency and the applicable personal tax rates.

Timing of expenditure
Bringing forward significant expenditure before the end of the accounting period — investments in equipment, training, marketing — reduces taxable profit for the period. This strategy is particularly effective for companies approaching the £250,000 threshold, where even a marginal reduction in profit can lower the effective tax rate.

Use of losses
Tax losses from one period can be carried forward indefinitely. During the start-up phase, when costs exceed revenues, it is essential to document losses correctly in order to use them against future profits.

Group structure and transfer pricing
For those holding multiple companies, a group structure can allow losses in one company to be offset against profits in another through the group relief mechanism. However, intra-group transactions must comply with transfer pricing rules (the arm's length principle) to avoid challenges from HMRC.

Common mistakes in managing Corporation Tax

• Confusing accounting profit with taxable profit: the two figures diverge due to tax adjustments and capital allowances
• Failing to use AIA or Full Expensing for investments, missing out on significant immediate deductions
• Forgetting to notify HMRC in advance of an R&D claim, invalidating the right to the credit
• Distributing all profits as dividends without making employer pension contributions, missing an accessible and highly effective deduction
• Failing to consider the impact of associated companies on rate thresholds, ending up paying the main rate when the small profits rate would apply

FAQ

What is the UK Corporation Tax rate in 2026?
In 2026 there are two main rates: 19% (small profits rate) for profits up to £50,000 and 25% (main rate) for profits above £250,000. For profits between £50,001 and £250,000, marginal relief applies, producing a progressively tapered effective rate between the two.

Does a UK company with no profits pay Corporation Tax?
No. Corporation Tax applies only to taxable profits. If the company records a loss or a nil profit, no tax is due. However the CT600 must still be submitted to HMRC within the required timeframe, declaring the loss or nil result.

What is marginal relief and how is it calculated?
Marginal relief is a mechanism that gradually reduces the difference between tax calculated at 25% and that which would be due at 19%, for companies with profits between £50,001 and £250,000. The formula is: Marginal Relief = (£250,000 − taxable profit) × (taxable profit / total profit) × 3/200. In practice this requires accounting software or a tax adviser for accurate calculation.

Are employer pension contributions always deductible?
Yes, provided they are made to a registered pension scheme, are commercially justified and are proportionate to the remuneration of the director or employee beneficiary. There is no absolute upper limit on the company deduction, but amounts disproportionate to the remuneration level may be challenged by HMRC.

How does Full Expensing work and who can use it?
Full Expensing allows companies subject to the main rate (25%) to deduct 100% of the cost of new plant and machinery in the year of purchase, with no upper limit. It applies to new (not second-hand) assets purchased from 1 April 2023. Companies subject to the small profits rate (19%) cannot access Full Expensing but have access to the AIA up to £1 million.