Understanding Corporation Tax and Business Tax Reliefs

Understanding how corporation tax works is essential for business owners looking to manage their tax liabilities effectively. From the rate of corporation tax payable on profits to the reliefs available for capital investment, research and development, and everyday business expenses, careful planning can make a significant difference. This 2026/27 guide outlines the key corporation tax rules and highlights some of the most valuable reliefs available to limited companies and other businesses, helping you make informed decisions and maximise the tax reliefs to which you are entitled.

Corporation Tax 

Limited companies pay corporation tax on their taxable profits. In arriving at the taxable profits figure, directors’ salaries and employers’ secondary Class 1 National Insurance Contributions (NICs) are deducted. Dividends are, however, not deducted. Corporation tax is calculated for financial years as follows:

Companies with profits between the lower and upper thresholds pay tax at 19% on profits up to the lower threshold and at 26.5% on profits between the lower and upper threshold. This differs from the approach for companies with profits above the upper threshold, as they must pay tax at 25% on all profits arising. 

The thresholds must be equally shared between companies in a group and those owned by the same person or persons. 

Loans to shareholders and employees 

If a limited company has loaned money to certain shareholders, a corporation tax charge will be levied at 35.75% on any amounts outstanding nine months and one day after the end of the accounting period in which the loan was made. The charge is refunded to the company after the shareholder has repaid the loan. 

In addition, low-interest loans made to employees may give rise to a taxable benefit (see above). This only applies if the loan exceeds £10,000 during the tax year. 

Research and Development tax relief 

Enhanced Research & Development (R&D) tax reliefs may be available to companies that work on innovative projects in science and technology. The rules surrounding R&D tax relief have recently changed, so please talk to us if you are considering making a claim.

Business Tax Reliefs 

For limited companies and unincorporated businesses, the following are often viable tax deductions from trade profits. 

Capital allowances 

Limited companies and unincorporated businesses can claim capital allowances when they buy qualifying capital assets for use in their trade. 

Capital allowances vary from 3% to 100%. For plant and machinery, qualifying expenditure is, depending on its nature, held in either a ‘main’ or a ‘special rate’ pool, with annual writing down allowances given as a deduction from profits.

* The AIA can be used for most equipment purchased by a business, including vans and commercial vehicles but not cars. In situations where there is a corporate group and/or a person owns multiple businesses, the AIA may need to be shared between those businesses. Further, some businesses, including partnerships with a corporate partner, are not entitled to the AIA at all. 

Tip: ** 100% FYAs are available for brand-new electric cars and electric vehicle charging points, as well as some other less common asset types. 

Capital allowances can be claimed on cars that are not new or electric, but at the main or special writing down allowance rates, depending on whether the car has carbon dioxide emissions of up to or more than 50g/km respectively. 

*** For limited companies and a small number of other business structures, a practice of ‘full expensing’ is permitted. This is effectively an unlimited 100% FYA on almost any brand-new plant and machinery acquired (again, excluding cars), although a lower 50% FYA is in operation for ‘special rate’ items (broadly fixtures and systems that are an integral part of a building). Full expensing is useful for companies that have no available AIA.

The structures and buildings allowance is only applicable for costs on construction contracts signed on or after 29 October 2018 and is more suitable for some businesses than others. 

If you are planning to buy or sell capital assets, please talk to us, as the nature and timing of the transaction could affect how much tax relief you can claim and when. 

Expenses incurred ‘wholly and exclusively’ for the purposes of the trade 

There is a range of expenditure items on which you can claim 100% tax relief with the broad test being whether the expense was incurred ‘wholly and exclusively’ for trading purposes. This includes stock purchases, business travel, office expenses, certain clothing, professional fees, finance costs, training courses and more. 

The rules vary depending on circumstances, so please talk to us to identify all available reliefs for your business.

You can download our full, free tax rate guide here: Ritchie Phillips Private Client Tax Rate Guide 2026/27

This guide provides an overview of the key UK corporation and business tax rates and reliefs. It is intended as a general guide only. No action should be taken based on this guide alone. Please contact us before making any decisions or if you would like tailored advice.