Tax Planning for High-Earning Company Directors
Here's a number that surprises people. A company with £50,000 of profit pays £9,500 in Corporation Tax. Double the profit to £100,000, and the bill doesn't double. It rises to £22,750, which is more than two and a third times as much. Nothing went wrong. That is simply how the rules work once profit crosses a certain line.
I explain this to company directors across Tunbridge Wells, Tonbridge and Sevenoaks every year, usually when they're delighted that the business has had a good twelve months and slightly alarmed by the tax bill that follows. Corporation Tax is the one bill that a limited company pays on its own account, and it's one of the least understood. Directors tend to know that it exists. Fewer know how it's worked out, when it's due, or what they can do about it.
This guide is meant to fix that. We'll look at what Corporation Tax is, who pays it, which profits are taxable and how the calculation works, from accounting profit through to the final bill. I'll use plain English and a worked example, and I'll point out the places where directors most often go wrong.
Corporation Tax is a tax on a company's profits. The company is a separate legal person, so it pays tax on what it earns, just as you pay income tax on what you earn. It files its own tax return, called a Company Tax Return, and it pays its own bill.
This is the first thing to grasp as a director. The tax is not yours personally. It comes out of the company's bank account, and it's paid before any profit reaches you as a dividend. When you later take money out, you pay personal tax on it as well. That two-layer structure is the reason salary and dividend planning matters so much, which I've covered in a separate guide.
The rates are simpler than they used to be. The small profits rate is 19% on profits up to £50,000. The main rate is 25% on profits above £250,000. In between, a company pays the main rate less a relief, called marginal relief, which creates a gradual transition from one rate to the other. Across that middle band, each extra pound of profit is effectively taxed at 26.5%, which is higher than the main rate itself. That's the reason a profit of £100,000 produces a bill of £22,750, an average of 22.75%.
If you've ever wondered why your tax bill seems to climb faster than your profit, this is why.
The £50,000 and £250,000 limits aren't fixed in every case. They're divided by the number of associated companies, which broadly means companies under common control. Two companies under your control, for example, share the limits, so each gets £25,000 and £125,000. They're also reduced pro rata for accounting periods shorter than twelve months.
I once worked with a Tunbridge Wells director who ran a consultancy and a small property company, both owned by him. He assumed each had its own £50,000 band at 19%. They didn't. The thresholds were halved for each, and the Corporation Tax on the consultancy was higher than he'd planned for. It was a short conversation, and an expensive one.
Companies with profits above £1.5 million (again, divided by the number of associated companies) pay in quarterly instalments rather than a single payment. Most owner-managed businesses in Kent are well below that level.
A company that is resident in the UK pays Corporation Tax on its worldwide profits. In practice, that means almost every limited company registered in England, Wales and Scotland that is run from the UK. It applies whether the company is trading, holding investments, or simply sitting on cash.
A company based abroad pays UK Corporation Tax on profits that are linked to a permanent establishment in the UK, such as a branch or office, and on certain UK property income. That's less relevant to most readers of this guide, but worth knowing if you work with international groups.
Sole traders and ordinary partnerships don't pay Corporation Tax. They pay income tax on their profits through Self Assessment. This is one of the central differences between the two structures, and a reason why the choice between them deserves careful thought. I've written about that in our guide to sole traders and limited companies.
Registered charities are generally exempt on profits they use for charitable purposes. Some clubs and unincorporated associations pay Corporation Tax on their investment income and any trading profit. If you run or advise one, take advice.
Even a company that isn't trading can have obligations. A new company must tell HMRC when it starts business activity, within three months, so that a Corporation Tax account can be set up. And a dormant company still has to file accounts at Companies House, and in some cases a tax return.
I've met more than one director who incorporated "just to secure the name", forgot about the company and discovered two years later that it had missed filing deadlines and picked up penalties. A company is never too small to be ignored.
The largest category is trading profit: the income from the company's business, less the costs of earning it. For a consultancy, this is fees less running costs. For a builder, it's the value of jobs completed, less materials, labour and overheads. It's calculated using the company's accounts, with adjustments I'll explain below.
Interest on the company's bank deposits, rent from property it owns, and income from other investments are all taxable. This is a point that catches directors who let cash build up in the company. The interest is part of the company's profit, and is taxed at the same rates.
When a company sells an asset for more than it cost, such as shares, land or a building, the gain is taxable within Corporation Tax, not under Capital Gains Tax. There is no annual exempt amount for companies, so even small gains are taxed.
A UK company is taxed on income arising abroad, often with relief for any foreign tax already paid. If you have clients, property or subsidiaries overseas, it will need to be reported.
Dividends received from other UK companies are generally exempt from Corporation Tax. That's why holding company structures work as they do. Money you put into the company as capital, or loans you make to it, isn't profit either. And the company's own dividends to you are not a deductible expense, because they're paid from profit that has already been taxed.
Not every year is profitable, and the system recognises that. A company's trading losses can generally be carried forward and set against future profits, and in some cases carried back for twelve months to recover tax already paid. The detail is technical, particularly for larger losses, but for most small companies the principle is straightforward: a loss in one year can reduce the bill in another. Losses must be claimed, and they're easily forgotten.
At a high level, the calculation has four steps. Start with the profit shown in the company's accounts. Adjust it for items that tax law treats differently from accounting. Deduct capital allowances and reliefs. Then apply the right rate to what's left. The result is the Corporation Tax payable.
The step that surprises directors most is the second one. The profit in your accounts is not the figure HMRC taxes.
Accounting profit is the starting point. It's the result shown in your company's profit and loss account, prepared under accounting rules: turnover, less the costs of earning it, including salaries, rent, materials, professional fees, depreciation and so on. Your accountant produces this from your bookkeeping, and it's filed at Companies House as part of your annual accounts.
It's a good measure of how the business has performed. But it's built to give a fair picture for owners, lenders and shareholders, not to follow the tax rules.
Tax law starts from accounting profit and then adjusts it. The adjustments fall into three groups.
Costs added back. Some costs appear in the accounts but are not deductible for tax. The most common are depreciation, which is replaced by capital allowances, client entertainment, fines and penalties, and private or non-business expenses. Certain legal and professional fees of a capital nature, and general provisions, are also added back. The dividends you pay yourself, and the Corporation Tax itself, are not deductible either.
Capital allowances deducted. Instead of depreciation, tax gives relief for spending on equipment, machinery and vehicles through capital allowances. Many companies can claim the Annual Investment Allowance, which allows up to £1 million of qualifying spending to be deducted in the year of purchase. Companies can also claim full expensing on certain new plant and machinery. Cars don't qualify for the Annual Investment Allowance, and have their own rules.
Reliefs and other deductions. Brought-forward losses, qualifying charitable donations, research and development relief and certain other reliefs reduce the taxable amount. Employer pension contributions are deductible as a business expense, which is one of the most useful levers available to directors.
The result is called taxable profit. The rate is applied to it, not to the accounting profit.
Let me show you how this looks. Imagine a trading company with accounting profit of £82,000 for the year.
First, the add-backs. The accounts include £3,000 of depreciation, £2,400 of client entertainment and a £300 parking fine. Those three items, £5,700 in total, are added back, giving an adjusted profit of £87,700.
Next, capital allowances. During the year, the company bought a van and some equipment for £14,000, which qualify for the Annual Investment Allowance. That £14,000 is deducted, leaving taxable profit of £73,700.
Now the rate. The profit sits between £50,000 and £250,000, so marginal relief applies. The main rate of 25% on £73,700 is £18,425. Marginal relief reduces this by £2,644.50, which is 3/200 of the amount by which profit falls short of £250,000. The Corporation Tax bill is £15,780.50, an average rate of about 21.4% on the taxable profit.
If we had simply applied the rules to the £82,000 accounting profit, we'd have estimated a bill of £17,980. The adjustments made a difference of £2,199.50. This is why the accounting profit, taken on its own, is a poor guide to what you'll owe.
(This assumes a single company with no associated companies, a twelve-month period and no other income.)
Marginal relief is a way of avoiding a cliff edge. Without it, a company with £50,001 of profit would suddenly pay 25% on everything. Instead, the relief eases the transition, so that tax rises smoothly. It only matters for profits between £50,000 and £250,000, and it can affect decisions such as whether to make a pension contribution or buy equipment before the year-end. A pension contribution that reduces profit inside that band saves tax at 26.5p on every pound, which is more than the 19p saved once profit has fallen below £50,000.
Directors often assume that their Corporation Tax is due when the accounts are filed. It isn't. The dates are separate, and the payment date comes first.
Corporation Tax is due nine months and one day after the end of your accounting period. For a company with a 31 March 2027 year-end, that is 1 January 2028. Your Company Tax Return is due twelve months after the end of the period, which would be 31 March 2028. And your annual accounts must be filed at Companies House within nine months of the year-end, which here would be 31 December 2027. For a company's first accounts, the deadline is 21 months after the date of incorporation.
Missing filing deadlines brings penalties, which rise the longer the delay. Late payment brings interest. Records must be kept for at least six years from the end of the relevant period, and longer in some cases.
A Tonbridge consultant came to us once with a tax bill of £14,000 and an empty bank account. His company had had a strong year, and he had paid himself well, but he hadn't set aside anything for the tax. Because Corporation Tax is payable after the year ends, it's very easy to spend the cash before the bill arrives. I'd suggest putting aside around a fifth to a quarter of your profit in a separate savings account as you go, depending on your level of profit. It turns the bill from a shock into a routine payment.
Nobody should pay more tax than the law requires. These are the areas that matter most for owner-managed businesses, and the year-end is the time to look at them, before it's too late.
Planning is legitimate, but it has to be genuine. The rules reward the businesses that spend, invest and plan with a purpose, and they penalise those who try to engineer a tax saving with no commercial reason.
Quick answer: Corporation Tax is the tax a limited company pays on its profits. For 2026–27 the rate is 19% on profits up to £50,000, 25% above £250,000, and a gradual scale in between, with an effective marginal rate of 26.5%. It's worked out by taking the accounting profit, making tax adjustments, deducting capital allowances and reliefs, and applying the rate to the result.
What this means for a company director: The tax belongs to the company, not to you, but it reduces the profit available for dividends, so you feel it indirectly. The bill falls due nine months and one day after your year-end, so cash planning matters. A little thought before the year-end can reduce it legitimately.
Example: A company has accounting profit of £82,000. After adding back £5,700 of depreciation, client entertainment and a fine, and deducting £14,000 of capital allowances, taxable profit is £73,700. Corporation Tax is £15,780.50, compared with an estimate of £17,980 if the accounting profit had been used directly.
Common mistakes: Assuming the accounting profit is the taxable profit; forgetting that associated companies share the thresholds; spending the cash before the tax is due; missing the nine-months-and-one-day payment date; overlooking capital allowances and losses; and treating the nine-month filing deadline for accounts as the date by which tax must be paid.
When should you speak to an accountant? Before your year-end, while there is still time to plan. When your profit is near £50,000 or £250,000. Before a large purchase, a pension contribution or a change in how you pay yourself. And whenever you set up a second company.
Corporation Tax doesn't need to be a mystery. With the right preparation, it's a predictable bill, and often a smaller one than directors expect. At Peter Hodgson & Co, we prepare accounts and Company Tax Returns for limited companies across Tunbridge Wells, Tonbridge, Sevenoaks and the wider Kent and South East area, and we talk to our clients before the year-end, not after it, so there's still time to act.
If you'd like help with your Corporation Tax, whether you're approaching your first year-end or you'd like a second opinion on your current arrangements, we'd be glad to hear from you. You can complete the "Contact Us" form on our website, call us on 01892 515 733, or send us an email at info@peterhodgson.co.uk.
Disclaimer:
The content of this blog is for general informational purposes only and should not be considered professional tax advice. The information is correct at the time of publishing but may change following future UK budget announcements or updates to HMRC guidance. Individual circumstances vary, and tax obligations can differ based on your personal situation. We strongly recommend consulting with us or a qualified tax professional to receive advice tailored to your specific needs.
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