Which Profits Add to a Company’s Taxable Income? A Clear Guide for UK Businesses

Not all money your company receives is automatically subject to Corporation Tax – and your taxable profit is almost certainly different from the figure shown in your profit and loss account. Understanding which types of profit count towards your company’s taxable income is essential for accurate tax calculations and effective financial planning.

This guide from CIGMA Accounting explains the different sources of income that contribute to Corporation Tax, what is excluded, and how your accounting profit is adjusted to arrive at the taxable figure.

The Difference Between Accounting Profit and Taxable Profit

Your company’s accounts are prepared under accounting standards (typically FRS 102 for most UK SMEs). HMRC requires adjustments to this accounting profit to arrive at taxable profit, known as Taxable Total Profits (TTP). These adjustments include:

• Adding back expenses that are not allowable for tax (e.g. client entertainment, depreciation)
• Deducting capital allowances (the tax equivalent of depreciation on qualifying assets)
• Including or excluding certain types of income based on specific tax rules

The result TTP is what you pay Corporation Tax on, not simply the net profit from your accounts.

Types of Income That Form Part of Taxable Profits

1. Trading Profits

The most significant component for most companies. Trading profits are the profits arising from your company’s core business activities – selling goods, providing services, or any other commercial trading. This is calculated as trading income minus allowable trading expenses.

Key point: Certain expenses are not deductible for tax even if they appear in your accounts. Examples include depreciation (replaced by capital allowances), client entertaining, and fines.

2. Investment Income

Investment income earned by your company is generally taxable. This includes:

• Interest received on bank accounts or loans made by the company
• Rental income from property owned by the company
• Royalty income

Note that UK dividends received from other companies are generally exempt from Corporation Tax (see below). Foreign dividends may or may not be exempt depending on the source and the UK’s tax treaties.

3. Chargeable Gains

If your company disposes of a capital asset – such as property, shares in another company, or goodwill – and makes a profit, that profit is a chargeable gain and forms part of your TTP. The gain is calculated as the disposal proceeds minus the original cost (plus allowable enhancement expenditure).

For assets held before 31 December 2017, Indexation Allowance can reduce the gain to reflect inflation.

Income That Is NOT Subject to Corporation Tax

UK Dividends Received

Dividends received from UK companies are generally exempt from Corporation Tax. This prevents double taxation – the paying company has already suffered Corporation Tax on the profits from which the dividend was paid.

Certain Overseas Dividends

Many overseas dividends are also exempt, though the rules are complex and depend on the relationship between the companies and any applicable double tax treaties.

Capital Grants (in some cases)

Government capital grants may not form part of trading income, though this depends on the purpose and structure of the grant.

Allowable Deductions That Reduce Taxable Profits

Arriving at your taxable profit also involves claiming all allowable deductions:

• Staff salaries, wages, and employer National Insurance
• Rent, rates, and utility costs for business premises
• Professional fees (accountancy, legal, etc.)
• Capital allowances on qualifying plant, machinery, and equipment
• Business loan interest (subject to restrictions)
• Research and Development expenditure (potentially with enhanced relief)

A Practical Example

Company Example

A consulting company has:

Accounting profit: £180,000
Depreciation in accounts: £20,000 (add back for tax)
Capital allowances claimed: £35,000 (deduct for tax)
UK dividends received: £5,000 (exclude – exempt)
Client entertaining: £3,000 (add back for tax)

Taxable Profit = £180,000 + £20,000 – £35,000 + £3,000 = £168,000

Corporation Tax at 25% less Marginal Relief applies to this figure, not the £180,000 accounting profit.

Recordkeeping for Taxable Income

HMRC can enquire into your Corporation Tax return for up to four years (or longer in cases of fraud or deliberate errors). Maintaining accurate records of all income streams is essential.

We recommend:

• Using cloud accounting software (Xero, QuickBooks, etc.) to categorise income automatically
• Keeping supporting documentation for all investment income and asset disposals
• Reconciling bank statements to your accounting records at least monthly

Make Sure You’re Not Overpaying Corporation Tax

At Cigma Accounting, we help businesses across London understand what is included in taxable profits so they can calculate corporation tax correctly and avoid reporting errors. From Wimbledon, including New Malden and Norbury, many companies are unsure how different income streams and adjustments affect their final tax position, which is why our guidance focuses on simplifying the rules into practical, real-world understanding.

Knowing which profits are taxable—and which adjustments must be made—is essential for accurate year-end reporting and avoiding HMRC enquiries. With physical offices across London, we support businesses in preparing compliant calculations that reflect true taxable income and ensure corporation tax returns are completed correctly.