Corporation tax is not charged on turnover, and it is not quite charged on the profit in your accounts either. HMRC starts from the accounts profit, adds back costs the tax rules do not allow, and takes off capital allowances. Here is the calculation for 2026/27, the common adjustments, and a worked example.
Written by James Whitfield · Last checked 19 October 2026 · Checked against 2026/27 HMRC rates · Editorial standards · Methodology
Start with the profit before tax in your company's accounts. Add back costs that are not allowable for tax, mainly depreciation, client entertaining and fines or penalties. Then deduct capital allowances on equipment, such as the £1 million Annual Investment Allowance. The result is the taxable profit that the 19%, marginal relief or 25% rates apply to.
Director salary, employer National Insurance and employer pension contributions paid in the period are deductible business costs. Dividends are not: they are paid out of profit after corporation tax.
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1. Take the profit before tax from the company's profit and loss account for the accounting period.
2. Add back depreciation and amortisation of equipment. Depreciation is a capital cost in tax terms, so it is not allowed; capital allowances replace it.1
3. Add back business entertaining and gifts (apart from limited exceptions such as staff entertaining), and fines or penalties for breaking the law, including HMRC late-filing penalties.5
4. Deduct capital allowances on plant and machinery bought in the period.2
5. Apply the corporation tax rate to the result: 19% up to £50,000, marginal relief between £50,000 and £250,000, 25% above.3
The basic test is whether a revenue cost was incurred wholly and exclusively for the purposes of the trade.6
| Director and staff salaries | Deductible |
| Employer National Insurance (15%) | Deductible |
| Employer pension contributionsIn the period they are paid, if wholly and exclusively for the business | Deductible |
| Accountancy, software, insurance, rent | Deductible |
| Staff entertaining (e.g. annual party) | Deductible |
| Client entertaining and most gifts | Add back |
| DepreciationClaim capital allowances instead | Add back |
| Fines and penalties | Add back |
| DividendsPaid from post-tax profit | Not deductible |
| Corporation tax itself | Not deductible |
Most equipment, machinery, computers and vans qualify for the Annual Investment Allowance: 100% of the cost up to £1 million a year is deducted in the period of purchase.2
Companies can also claim full expensing (100%) on new and unused main-rate plant and machinery with no upper limit, and a 50% first-year allowance on new special-rate assets. A new 40% first-year allowance applies to qualifying main-rate expenditure from 1 January 2026, and the main-rate writing-down allowance for companies fell from 18% to 14% from 1 April 2026.4
Cars are treated differently: they do not qualify for the AIA, and allowances depend on their CO2 emissions.
A consultancy's accounts for the year to 31 March 2027 show £80,000 profit before tax, after charging the director's £12,570 salary, £1,135.50 employer NI and a £10,000 employer pension contribution. The accounts also include £6,000 of depreciation, £1,500 of client entertaining and a £400 penalty. The company bought £10,000 of new computer equipment in the year. It paid £30,000 of dividends.
| Profit before tax per accounts | £80,000.00 |
| Add back depreciation | +£6,000.00 |
| Add back client entertaining | +£1,500.00 |
| Add back penalty | +£400.00 |
| Less Annual Investment Allowance | −£10,000.00 |
| Taxable profitSalary, employer NI and pension stay deducted; dividends are ignored | £77,900.00 |
| Tax at 25% | £19,475.00 |
| Less marginal relief: 3/200 × (£250,000 − £77,900) | −£2,581.50 |
| Corporation tax | £16,893.50 (21.69%) |
Charging tax on the £80,000 accounts profit would have given £17,450. The £30,000 dividend makes no difference to either figure.
Treating turnover as profit. Corporation tax is only due on profit after allowable costs.
Deducting dividends. However the money reaches you, a dividend never reduces corporation tax; salary and pension contributions do.
Claiming depreciation and capital allowances together. Add the depreciation back first, then claim allowances.
Forgetting associated companies. If you control more than one company, the £50,000 and £250,000 limits are divided between them, which changes the rate on the same taxable profit.
Take the profit before tax in the accounts, add back disallowed costs such as depreciation, client entertaining and fines, then deduct capital allowances. Corporation tax is charged on what is left.
Yes. A director's salary and the employer National Insurance on it are deductible costs if paid for work done for the company, so they reduce taxable profit.
No. Dividends are distributions of profit after tax, so they never reduce the corporation tax bill.
No. Depreciation is added back and replaced by capital allowances, such as the £1 million Annual Investment Allowance or full expensing for companies.
Yes, in the accounting period in which they are paid, provided they are wholly and exclusively for the business. Very large contributions can be spread over more than one year.
The rates and rules on this page are drawn from the official UK government sources below, using the confirmed 2026/27 figures. Each link opens the relevant HMRC, GOV.UK or Companies House page in a new tab.
The limited company tax calculator turns this guidance into a concrete estimate for corporation tax, dividends and personal take-home, based on 2026/27 HMRC rates.