Corporation tax calculator — methodology

Two profit figures, and which one does what

Corporation tax runs on two measures of profit, and they are not interchangeable. Using one where the other belongs is worth hundreds of pounds on an ordinary company.

• Taxable total profits (N) — what the tax is charged on. This is the profit figure you enter.
• Augmented profits (A) — what decides which rate applies. Taxable total profits plus exempt distributions received from companies outside the group. Dividends from a 51% subsidiary, from a company yours is a 51% subsidiary of, or from a quasi-subsidiary are all excluded, so ordinary intra-group dividends do not count.

CTA 2010 s18A(c) gives the small profits rate only where “its augmented profits of the accounting period do not exceed the lower limit”, and s18B(c) gives marginal relief only where augmented profits “exceed the lower limit but do not exceed the upper limit”. Augmented profits can never be lower than taxable total profits, so reading one for the other can only ever move a company down the rate scale — which is to say it can only ever understate the tax. Most companies have no exempt distributions at all, and for them the two figures are the same number.

The charge, in order

1. Divide the lower and upper limits by the number of companies in the group, counting this one. HMRC states the same rule as “one plus the number of associated companies”; the divisor is the same number either way.
2. Add any exempt distributions to the taxable profit to get augmented profits. Compare that figure against the limits.
3. Augmented profits at or below the lower limit: the small profits rate on the taxable total profits, and there is nothing else to do.
4. Augmented profits at or above the upper limit: the main rate on the taxable total profits, with no relief.
5. Between the two, the main rate is charged on all of the taxable total profits, and marginal relief is then deducted.

lower = floor(lower limit ÷ companies)
upper = floor(upper limit ÷ companies)

N = taxable total profits          (what the tax is charged on)
A = N + exempt distributions       (what the limits are compared against)

A ≤ lower   →  tax = N × small profits rate
A ≥ upper   →  tax = N × main rate
otherwise   →  tax = N × main rate − F × (upper − A) × (N ÷ A)

F is the standard fraction, 3/200 for every year this site models. The relief is proportional to how far augmented profits fall short of the upper limit, which is why it vanishes exactly at that limit and is largest at the lower one. The final N ÷ A factor then apportions it, so relief is given only on the share of profit actually chargeable to corporation tax — a company with exempt distributions gets less relief than the shortfall alone would suggest. With no exempt distributions A equals N, that factor is exactly 1, and the formula collapses to F × (upper − profits).

Why the marginal rate is higher than the main rate

Expand the middle case, for a company with no exempt distributions — so that augmented profits and taxable total profits are the same figure and the N ÷ A factor is 1. Writing M for the main rate and U for the upper limit:

tax = M × profits − F × (U − profits)
    = (M + F) × profits − F × U

The coefficient on profits is M + F, not M. Every extra pound of profit inside the band is charged at the main rate and destroys F of a pound of relief, and the company bears both. Measured against the engine at the middle of the band, that comes to 26.50% against a main rate of 25.00% — so a company inside the band pays a higher rate on its next pound than a company with profits ten times larger.

Neither the calculator nor the table above uses the M + F identity to produce that figure. Both measure it: the tax at one profit level, the tax at a thousand pounds beyond it, and the difference divided by the step. The identity holds in the interior of the band and not at its edges, where the next thousand pounds genuinely crosses a limit and the honest answer is a blend — so the measurement is right in one more place than the formula is.

The two limits are also where the relief earns its name. At the lower limit the deduction is exactly large enough to bring the charge back to the small profits rate, and at the upper limit it is nothing — so the effective rate runs continuously from 19.00% to 25.00% with no step at either end. That continuity is asserted by packages/tax-core’s own tests at a penny either side of both limits.

Rates and limits

Corporation tax is not devolved: the same figures apply across the whole UK. Nothing in this table differs between the years offered, which is why the calculator’s tax-year selector does not move its answer.

Sources

• gov.uk — Rates and allowances: corporation tax
• gov.uk — Corporation tax rates
• gov.uk — Marginal relief for corporation tax
• HMRC Company Taxation Manual — associated companies (CTM03900)
• HMRC Company Taxation Manual — the marginal relief formula (CTM03925)
• HMRC Company Taxation Manual — definition of augmented profits (CTM03915)

Four limits that change the answer, stated here rather than buried

• The profit is yours to work out, and that is where it usually goes wrong. This page taxes the taxable total profits you enter. Allowable expenses, capital allowances, the annual investment allowance, disallowable items, losses brought forward and R&D relief all sit before that figure and none of them happen here. Enter turnover and every number the page produces is arithmetic on the wrong input, with no symptom on screen.
• An accounting period is not apportioned across a rate change. Corporation tax rates are set by financial year, 1 April to 31 March, and an accounting period straddling that date falls into two of them. Where a rate or limit differs between the two, the profits must be time-apportioned and charged separately in each part. The engine takes a single tax year and a single profit figure; it has no period dates and does no apportionment. No figure differs between the years modelled here, so today that omission changes no answer — but it will the moment a Budget moves one, and the page will not warn you it has started to matter.
• The limits are not reduced for a short accounting period. They are annual figures, and a period shorter than twelve months has them scaled in proportion — a six-month period is measured against half of each. This calculator always applies the full-year limits, so a short period is measured against limits that are too generous and the tax shown is too low.
• The associated-company count is taken on trust. Association turns on control and on substantial commercial interdependence, reaches through connected persons, and treats dormant and non-UK companies differently in different circumstances. Nothing here derives it. One company too few divides the limits by too little and understates the tax; one too many overstates it. There is also no handling of close investment-holding companies, which are denied the small profits rate outright, no ring fence or patent box rates, and no quarterly instalment payments.