How Is Taxable Income Calculated for a UK Company?
How is taxable income calculated for a UK company? Start with the company’s accounting profit, then make Corporation Tax adjustments for expenses that are not deductible, capital allowances, taxable income not already included correctly in the accounts and available loss relief. The resulting figure is broadly the company’s taxable total profits for Corporation Tax purposes.
Accounting profit and taxable profit are therefore not always the same. The tax calculation adjusts the accounts so that income, expenses and reliefs are treated according to Corporation Tax rules.
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.
How to Calculate Company Taxable Income at a Glance
| Step | Corporation Tax adjustment |
|---|---|
| 1 | Start with accounting profit before tax. |
| 2 | Add back expenses that are not deductible for Corporation Tax. |
| 3 | Deduct tax reliefs or allowable amounts not already reflected correctly in the accounts. |
| 4 | Replace accounting depreciation with any available capital allowances. |
| 5 | Include other taxable income where required. |
| 6 | Deduct eligible trading losses or other available reliefs. |
| 7 | Arrive at taxable total profits and apply the appropriate Corporation Tax calculation. |
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.
Accounting Profit vs Taxable Profit: What Is the Difference?
| Accounting profit | Taxable profit |
|---|---|
| Calculated using the company’s accounting records and applicable accounting standards. | Calculated after applying Corporation Tax rules and tax adjustments. |
| Can include accounting depreciation. | Accounting depreciation is generally added back and qualifying capital allowances may be deducted instead. |
| May include expenses that accounting rules recognise. | Expenses that are specifically disallowed for Corporation Tax are added back. |
| Appears in the company’s financial accounts. | Used to determine the company’s Corporation Tax position. |
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.
Do Business Expenses Reduce Taxable Income?
Yes, qualifying business expenses can reduce a company’s taxable profit where they meet the Corporation Tax rules. Revenue expenses generally need to be incurred wholly for a business purpose and must not be specifically disallowed.
However, not every cost shown in the accounts is deductible. Client entertaining, fines and penalties, certain non-business expenditure and accounting depreciation are examples of items that may need to be added back when calculating taxable profits.
- 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 expenditure is generally not deducted from taxable profits in the same way as ordinary revenue expenses. Instead, qualifying companies may claim capital allowances, which reduce taxable profits where the relevant conditions are met.
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.
Once the Corporation Tax calculation is complete, the taxable profit and Corporation Tax liability feed into the company’s Company Tax Return. The tax computation should support the figures reported to HMRC.
What Corporation Tax Rate Applies to Taxable Profits in 2026?
| Profit level | Corporation Tax treatment |
|---|---|
| £50,000 or less | 19% Small Profits Rate, subject to the relevant conditions. |
| Between £50,000 and £250,000 | 25% main rate with Marginal Relief potentially reducing the effective Corporation Tax liability. |
| Above £250,000 | 25% main Corporation Tax rate. |
The £50,000 and £250,000 limits can be reduced where the company has associated companies or a short accounting period.
How to Calculate Taxable Income: Company 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.
What Is Taxable Income for a Company?
For Corporation Tax purposes, a company’s taxable amount is based on its taxable profits after applying the relevant tax rules to trading profits and other taxable income, deductions, capital allowances and available reliefs.
This is why the profit shown in the statutory accounts may differ from the taxable total profits used in the Corporation Tax calculation.
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
CASE STUDY: How Taxable Income Is Calculated for a UK Company Using Corporation Tax Adjustments
Ahmed, a company director, visited our Wimbledon office while preparing his annual Corporation Tax return. His business had reported an accounting profit of £150,000, and he assumed this was the amount HMRC would use to calculate the company’s tax liability.
During our review, we explained that taxable income for a UK company is not always the same as accounting profit. Certain expenses must be added back, while qualifying capital allowances and other tax reliefs can reduce taxable profits.
We reviewed the company’s accounts and prepared a simplified Corporation Tax calculation:
Accounting profit before tax: £150,000
Add back depreciation: £12,000
Add back client entertaining: £3,000
Deduct qualifying capital allowances: £18,000
Final taxable profit: £147,000
Ahmed had initially assumed that depreciation was automatically deductible for Corporation Tax. We explained that accounting depreciation is generally added back, with qualifying capital allowances deducted instead.
We also discussed how trading losses, eligible expenditure and other taxable income could affect the final calculation. Because the company’s taxable profits fell between £50,000 and £250,000, we explained that Corporation Tax Marginal Relief could apply, assuming the standard thresholds were available.
Ahmed left understanding that calculating taxable income for companies requires adjustments to accounting profit before applying the relevant Corporation Tax rate. He also recognised the importance of accurate bookkeeping and supporting tax computations when preparing the company’s CT600 return.
