Your 2025/26 Corporation Tax Roadmap – Cut Liabilities, Stay Compliant

 Introduction

What is Corporation Tax?

Corporation Tax is a direct tax levied on the profits of limited companies and certain organisations, such as clubs, societies, and associations. Profits include:

• Trading profits (profits from regular business activities)
• Investment income (dividends, rental income, interest)
• Chargeable gains (profits from selling assets like property or shares)

For UK-resident companies, worldwide profits are generally taxable. Non-resident companies may also be subject to Corporation Tax if trading through a UK permanent establishment or branch.

Corporation Tax differs from Income Tax, which applies to individuals. The compliance requirements are rigorous: companies must calculate taxable profits, claim allowances, and file a CT600 return annually.

HMRC: Corporation Tax Overview

Current Corporation Tax Rates (2025/26)

For the financial year 2025/26, the following rates apply:

These thresholds are not adjusted for inflation — meaning that more businesses are being “dragged” into higher bands each year, a phenomenon known as fiscal drag.

Worked Example – Sutton Manufacturing Business
A Sutton-based manufacturing company with taxable profits of £180,000 will fall within the marginal relief band. Instead of paying 25% on the entire sum, it benefits from tapered relief, bringing its effective rate closer to 23.5%. Without careful planning, however, accelerated purchases or losses could push the company into a less tax-efficient outcome.

Commons Library Briefing on Tax Thresholds

Quick Tip Box – Fiscal Drag Explained

Even if Corporation Tax rates remain unchanged, frozen thresholds mean that inflation naturally pushes more businesses into higher brackets. This hidden effect, called fiscal drag, is costing London SMEs thousands each year. Strategic tax planning ensures you don’t pay more than necessary.

Roadmap: Key Rules & Allowances

Maximising reliefs is crucial to keeping Corporation Tax bills under control. Key mechanisms include:

Annual Investment Allowance (AIA)
Allows businesses to deduct 100% of qualifying capital expenditure (plant, machinery, equipment) up to £1 million per year. Effective for construction firms in Wimbledon or hospitality businesses in Canary Wharf investing in fit-outs.
CIGMA: Capital Allowances Guide

Full Expensing (2023–2026)
A temporary measure enabling 100% deduction of qualifying new plant and machinery costs in the year of purchase. For growing firms, this provides immediate tax savings and boosts cash flow.
HMRC: Full Expensing Guidance

R&D Tax Relief
Encourages innovation by allowing qualifying development expenditure to be claimed as enhanced deductions. London’s fintech scale-ups and AI startups in Farringdon often unlock six-figure savings.
CIGMA: R&D Tax Credits

Capital Allowances
Covers long-life assets, building fixtures, and integral features. Claims reduce taxable profits and can be spread over multiple years. Strategic use of capital allowances helps businesses manage profits consistently.

Worked Example – Wimbledon Tech Firm
A Wimbledon-based digital agency invested £250k in servers and software. Using full expensing, it reduced taxable profits by the full £250k, lowering its tax bill by £62,500 in year one. Without relief, the cash outflow would have been crippling.

Planning Tips for SMEs & Scale-Ups

SMEs and fast-growing companies in London face unique pressures, from cash flow constraints to investor expectations. Strategic tax planning can mitigate these challenges.

• Cash Flow Planning – Time asset purchases to maximise AIA and full expensing. Avoid clustering all expenditure into one year if profits are volatile.
  CIGMA: Cashflow Planning
• Dividend vs Salary – Directors should consider a mix of dividends and salary to optimise both Corporation Tax and personal Income Tax liabilities.
  CIGMA: Dividends Explained
• R&D Claims – Even small, innovative projects may qualify. An app developer in Farringdon who invests £200k in staff costs for innovation could cut their tax bill by over £80k.
  CIGMA: Research and Development (R&D) Explained
• Loss Relief – Losses can be carried back to reclaim tax from prior years, or carried forward to offset against future profits.

Case Study – Wimbledon Creative Agency
A creative agency with £600k turnover invested £150k in new equipment. By claiming AIA and R&D credits, it reduced its effective tax bill by 40%, freeing cash to hire two additional staff members.

Case Study – Canary Wharf Finance Startup
A Canary Wharf fintech with £1.2m turnover used marginal relief and R&D credits to reduce Corporation Tax liability by £140k, which was reinvested into product development.

Quick Tip Box – SME Strategy

SMEs in South London can often combine multiple reliefs in one tax year. For example, pairing R&D credits with AIA can produce savings of up to 40% on Corporation Tax. Always review timing of expenditure with an advisor.