Corporate tax rates in the UK are the 26% main rate of corporation tax (25% from April 2012) and the 20% small profits rate. Some companies may benefit from marginal relief.
Main rate of corporation tax
Profits chargeable to UK corporation tax include trading income, income from property, interest income and capital gains of a company. Income from foreign dividends is however mostly exempt. Corporation tax is charged on the profits of a company for its accounting period. The main rate of corporation tax is 26% from 1 April 2011, and the rate will decrease to 25% from 1 April 2012.
Small profits rate and marginal relief
A small profits rate of 20% may apply. To determine whether this rate applies, the chargeable profits of the company for the accounting period are augmented by the amount of franked investment income received in the period. Franked investment income (FII) is the sum of UK and most foreign dividends received, plus tax credits of one ninth of these dividends. This FII is not itself subject to tax but is used to compute the profits for the purpose of determining the rate of corporation tax applicable to a company. Where the chargeable profits of a company plus FII do not exceed £300,000, the lower rate limit, the small profits rate of corporation tax applies. The corporation tax payable is computed by applying the small profits rate to the chargeable profits, not including FII. Where this lower rate limit is exceeded, the main rate of corporation tax applies. If the chargeable profits plus FII do not exceed £1,500,000 marginal relief is deducted from the tax liability. The marginal relief is computed by multiplying the difference between £1,500,000 and the augmented profits by the “marginal relief fraction” which is 3/200 for 2011/12. The result of this calculation is then reduced by a fraction arrived at by dividing the unaugmented profits (excluding FII) by the augmented profits, and the result is the marginal relief due.
When corporation tax is payable
Corporation tax is payable nine months and one day after the end of the accounting period. Large companies must pay corporation tax in four equal quarterly instalments based on the estimated tax payable. The first instalment is due six months and fourteen days after the beginning of the relevant accounting period, and the difference between estimated and actual tax payable is adjusted in the final instalment. A large company for this purpose is a company that pays corporation tax at the main rate without marginal relief. A company does not need to pay tax by instalments if it has chargeable profits of £10 million or less in an accounting period and was not a large company in the previous period.