Calculating Taxable Income for Companies: A Step-by-Step UK Guide
Calculating your company’s taxable income for Corporation Tax purposes is not simply a matter of looking at your profit and loss account. If you are new to this area, it helps to start with a broader understanding of Corporation Tax, what it is, who it applies to, and how it works, before working through the calculation steps below.
Understanding how your company accounts relate to your Corporation Tax position is an important starting point — our guide on company accounts and Corporation Tax facts covers the key connection between the two before you begin any calculations.
Claim too little, and you overpay. Claim too much, and you risk penalties. This step-by-step guide from CIGMA Accounting walks you through the calculation clearly, with a worked example.
Step 1: Start With Your Accounting Profit
Your starting point is the net profit (or loss) shown in your company’s statutory accounts prepared under UK GAAP (typically FRS 102) or IFRS. This is the figure after all revenue and expenses have been included but before adjustments for tax.
Before working through these steps, it is worth confirming that your company’s activity qualifies as a trade for tax purposes — our guide on the meaning of trade for tax purposes explains how HMRC assesses this and why it matters for your calculation.
It is also important to confirm the length of your accounting period before beginning the calculation. Corporation Tax rules apply on a period-by-period basis, and periods longer than 12 months must be split into two separate returns, which affects how allowances and thresholds are apportioned. See our guide on accounting periods for Corporation Tax for full details.
Step 2: Add Back Disallowable Expenses
Certain expenses in your accounts are not deductible for tax purposes. You must add these back to your accounting profit.
- Depreciation replaced by capital allowances
- Client entertaining – HMRC disallows business entertainment costs
- Fines and penalties – statutory penalties are never deductible
- Non-business portions of dual-purpose expenses
- Capital expenditure incorrectly expensed through the P&L
- Amortisation of goodwill in certain circumstances
It is also worth noting that costs incurred before your company began trading may still qualify for tax relief in certain circumstances — our guide on pre-trading expenditure for companies explains what qualifies and how to treat these costs correctly.
Step 3: Deduct Tax-Allowable Items Not in the Accounts
Some items provide a tax deduction that does not appear as a cost in your accounts. These are deducted from your adjusted profit:
- Certain timing differences – income or expenses recognised differently for tax vs accounting purposes
- R&D enhanced deductions – SMEs can claim enhanced relief on qualifying expenditure
Step 4: Claim Capital Allowances
Capital allowances are the tax equivalent of depreciation. You deduct them instead of the accounting depreciation added back in Step 2. The main types available are:
Annual Investment Allowance (AIA)
100% first-year deduction on qualifying plant and machinery up to £1,000,000 per year. Covers most business equipment, machinery, and fixtures.
Full Expensing
100% deduction on qualifying new main pool plant and machinery. There is no monetary cap for incorporated companies.
Writing Down Allowance (WDA)
For assets not qualifying for AIA or full expensing: 18% per year on a reducing balance for main pool assets, 6% for special rate assets such as integral features and long-life assets.
Capital allowances are one of several reliefs available to reduce your Corporation Tax liability — our guide on reliefs and allowances for Corporation Tax purposes sets out the full range of options your company may be able to claim.
Step 5: Include Other Taxable Income
Add other income streams not included in trading profit:
- Net chargeable gains from asset disposals
- Investment income (interest, rental income from company-owned property)
- Overseas income (after relief for foreign taxes paid)
For a full breakdown of which income streams are included in a company’s taxable profits and how each is treated, our guide on which profits add to a company’s taxable income covers this in detail.
Step 6: Deduct Loss Relief
If your company has unused trading losses from prior years, these can be carried forward and offset against current-year profits, reducing your TTP. Losses can also be carried back one year to reclaim previously paid Corporation Tax. Group relief may also be available if you are part of a corporate group.
Step 7: Arrive at Taxable Total Profits
After all adjustments, you arrive at Taxable Total Profits, the figure on which Corporation Tax is calculated. Apply the relevant Corporation Tax rate to determine your liability, refer to the present rates of Corporation Tax to confirm which rate applies to your company’s profit level.
Complete Worked Example
Example: Software Company, 12-month period to 31 March 2026
Accounting net profit: £195,000
ADD BACK:
Depreciation: £28,000
Client entertaining: £4,500
Parking fines: £500
Adjusted profit: £228,000
DEDUCT:
Capital Allowances (AIA): £45,000
R&D Enhanced Deduction: £12,000
Trading Profit: £171,000
ADD:
Chargeable gain on property disposal: £18,000
Taxable Total Profits: £189,000
Corporation Tax Calculation:
25% of £189,000 = £47,250
Marginal Relief = (3/200) × (£250,000 − £189,000) = £915
Final CT Liability = £46,335
Effective rate = 24.5%
If your profits fall between £50,000 and £250,000, Marginal Relief reduces your effective rate below 25%. Read our detailed guide on the marginal rate of Corporation Tax to understand exactly how this taper is calculated and how it applies to your company.
Common Mistakes in Calculating Taxable Income
- Forgetting to add back depreciation (one of the most common errors)
- Missing capital allowance claims – especially on qualifying fixtures and fittings
- Not claiming R&D relief where qualifying activity exists
- Overlooking loss carry-forward from previous years
- Incorrect treatment of director loans and benefits in kind
Speak to a Specialist About Business Profit Adjustments
At Cigma Accounting, we help businesses across London understand how to correctly calculate taxable income so they can meet their corporation tax obligations without errors or unnecessary risk. From Fulham Broadway, including Bishop’s Park and Crabtree Lane Area, many companies struggle with adjusting accounting profit for tax purposes, especially when dealing with expenses, allowances, and timing differences, which is why our support focuses on clarity and accuracy.
Getting taxable income calculations right is essential for avoiding overpayment, underpayment, and potential HMRC enquiries. With physical offices across London, we provide structured guidance to ensure your figures are correctly adjusted, properly documented, and fully compliant with UK tax rules.
