Corporation Tax Changes 2026: What You Need to Know

Corporation Tax Rates in 2026/27

Corporation Tax is the tax that UK limited companies pay on their taxable profits. Since April 2023, the UK has operated a two-tier Corporation Tax system, and this structure remains in place for the 2026/27 financial year. The key rates are:

• Small Profits Rate: 19% — applies to companies with taxable profits of £50,000 or less.
• Main Rate: 25% — applies to companies with taxable profits of £250,000 or more.
• Marginal Relief — applies to companies with profits between £50,000 and £250,000, creating an effective tax rate that gradually increases from 19% to 25% across this band.

For most small businesses in London, the 19% small profits rate or the marginal relief band will apply. Understanding which band your company falls into is essential for accurate tax planning and cash flow management.

How Marginal Relief Works

Marginal Relief is designed to smooth the transition between the 19% and 25% rates. Without it, a company earning £50,001 would jump from paying 19% to 25% on all its profits — a punitive cliff edge. Instead, Marginal Relief applies a formula that gradually increases the effective rate as profits rise through the band.

The formula is: Marginal Relief = (Upper Limit - Profits) x Profits / Profits x fraction. The fraction for 2026/27 is 3/200. In practice, companies in the marginal band face an effective marginal rate of 26.5% on each additional pound of profit within the band. This means that for every extra £1 of profit between £50,000 and £250,000, you pay 26.5p in tax — higher than both the small profits rate and the main rate. This counterintuitive result is an important consideration when planning the timing of income and expenditure.

Associated Companies and the Thresholds

The £50,000 and £250,000 thresholds are divided equally among "associated companies." Two companies are associated if one controls the other, or both are under common control. If you are a director and shareholder of two limited companies, both are likely associated, and the thresholds are halved: the small profits rate would apply up to £25,000 per company, and the main rate from £125,000.

This rule is particularly important for business owners who operate multiple companies or have a spouse or family member who also runs a company. HMRC takes a broad view of "control," and dormant companies can also count as associated companies in certain circumstances. If you have more than one company, it is essential to review whether they are associated and how this affects your Corporation Tax position.

Key Planning Strategies for 2026

There are several legitimate strategies that can help manage your Corporation Tax liability:

1. Maximise Allowable Deductions

Ensure you are claiming all allowable business expenses. Common deductions include staff costs, rent, utilities, professional fees, travel, training, and marketing. Many businesses overlook smaller expenses that add up over the year. Keep thorough records and receipts for all business expenditure.

2. Pension Contributions

Employer pension contributions are a tax-deductible expense for the company. Contributing to a director's pension reduces taxable profits and builds a retirement fund in a tax-efficient way. With the annual allowance for pension contributions now at £60,000 (or 100% of earnings, whichever is lower), this remains one of the most effective tax-planning tools available to owner-managed businesses.

3. Capital Allowances and Full Expensing

The full expensing regime, introduced in April 2023 and made permanent from April 2024, allows companies to deduct 100% of the cost of qualifying plant and machinery in the year of purchase. This means that investments in equipment, vehicles (excluding cars), computer hardware, and other qualifying assets can be written off immediately against taxable profits. The Annual Investment Allowance (AIA) of £1 million also remains available, covering a broader range of capital expenditure.

4. R&D Tax Credits

If your company undertakes qualifying research and development activities, you may be able to claim R&D tax relief. The merged scheme (RDEC) for accounting periods beginning on or after 1 April 2024 offers a credit of 20% of qualifying R&D expenditure. For loss-making R&D-intensive SMEs, a higher rate of relief is available. R&D relief can significantly reduce your Corporation Tax bill or generate a cash payment from HMRC. Many businesses underestimate the scope of qualifying activities — it is not limited to laboratories and tech companies. Any project that seeks to achieve an advance in science or technology can potentially qualify. Our tax planning team can help you assess whether your activities qualify.

5. Timing of Income and Expenditure

If your profits are near the £50,000 or £250,000 thresholds, the timing of income and expenditure can make a significant difference to your tax bill. Bringing forward allowable expenses or deferring income by a few weeks around your year-end could keep you within a lower tax band. This needs to be done carefully and legitimately — HMRC can challenge arrangements that have no commercial purpose other than tax avoidance — but sensible timing decisions are an accepted part of tax planning.

Payment Deadlines

Corporation Tax is generally due nine months and one day after the end of your company's accounting period. For example, if your year-end is 31 March 2027, your Corporation Tax payment is due by 1 January 2028. Your Corporation Tax return (CT600) must be filed within 12 months of the end of your accounting period.

Large companies — those with profits exceeding £1.5 million — must pay Corporation Tax in quarterly instalments during the accounting period itself, rather than waiting until after the year-end. The thresholds for quarterly instalment payments are also divided by the number of associated companies.

Late payment attracts interest from the due date, and late filing of the CT600 results in automatic penalties: £100 if the return is up to three months late, £200 if it is more than three months late, and further tax-geared penalties for returns that are six or twelve months overdue.

Looking Ahead

The government has committed to maintaining the Corporation Tax main rate at 25% for the duration of this Parliament, providing some certainty for business planning. However, other aspects of the tax system — such as capital allowances, R&D relief rules, and loss relief — continue to evolve. Staying on top of these changes is essential for effective tax planning.

At London Accountant, our Corporation Tax specialists work with hundreds of London-based businesses to ensure they are paying the right amount of tax — and not a penny more. Whether you need help with your annual Corporation Tax return, advice on structuring your business for tax efficiency, or guidance on R&D tax credits, we are here to help. Get in touch for a free consultation.