What's the quick version?
There are two profit numbers, and they're usually not the same. One is the profit your accounts show. The other is your taxable profit, the figure your tax is actually worked out on. You start from the first, make a handful of changes, and arrive at the second. Then you apply the rate to it.
That's the whole job: profit in the accounts, then a few adjustments, then taxable profit, then the rate, then your tax bill.
Why isn't my tax just a percentage of my profit?
Because the profit in your accounts and the profit the tax is based on follow slightly different rules. Your accounts are built to show how the business did. The tax figure is built to a set of tax rules, and those rules treat a few things differently. So before any rate is applied, your accounts profit gets adjusted into your taxable profit.
This is why you can show a small profit in your accounts and still owe tax, and it's the part that surprises most people. The adjustments below are the reason.
What gets added back?
Some costs are real, and your company genuinely pays them, but the tax rules don't let them lower your tax. So they get added back on, which pushes your taxable profit up. The usual ones:
- Entertaining clients: taking a customer for lunch, drinks or an event is a real cost your company can pay, but it never reduces your tax. It gets added back.
- Depreciation: this is the slice of an asset's cost your accounts spread across the years you use it. For tax, that figure is added back, and equipment is handled a different way instead (see below).
- The personal share of anything part-business: if a cost was partly for you and partly for the business, only the business part can stay in. The personal part gets added back.
- Most fines and penalties: a parking fine or a late-filing penalty is not a cost the tax rules let you take off, so it's added back too.
What gets taken off?
One big thing comes off your profit: the cost of equipment you buy and keep, like laptops, tools, machinery or a van. You don't get this through depreciation (that was added back). You get it through a separate relief, and for most small companies the full cost comes straight off your profit in the year you buy it, up to a yearly limit of £1 million. So buying £8,000 of kit usually takes the whole £8,000 off your taxable profit. (Cars follow their own rules.)
So the depreciation in your accounts is swapped out, and this equipment relief is swapped in.
So what's my taxable profit?
It's the result of all of that:
Profit in your accounts, plus the bits added back, minus the equipment relief, equals your taxable profit.
That taxable profit is the number the rate gets applied to. It can be higher or lower than your accounts profit, depending on whether the add-backs or the equipment relief is bigger.
What rate do I pay?
Once you have your taxable profit, the rate depends on how big it is:
- Up to £50,000 of profit: you pay 19%.
- Over £250,000 of profit: you pay 25%.
- Between £50,000 and £250,000: you pay a rate that climbs gradually from 19% towards 25%, so there's no sudden jump the moment you cross £50,000.
Two things shrink those £50,000 and £250,000 marks. If your company is linked to other companies under common control, the marks are split between them (two linked companies, and each gets half). And if your accounting period is shorter than a full year, the marks are scaled down to match. Both of these can push you into a higher rate sooner than you'd expect, and they're easy to get wrong by hand.
Can you show me with real numbers?
Say your accounts show a £42,000 profit for the year. Here's the journey to the tax bill:
| Step | Amount |
|---|---|
| Profit in your accounts | £42,000 |
| Add back client entertaining | + £1,500 |
| Add back depreciation | + £6,000 |
| Take off equipment you bought (a £8,000 laptop and kit) | - £8,000 |
| Taxable profit | £41,500 |
Your taxable profit is £41,500. That's under £50,000, so the whole amount is taxed at 19%:
£41,500 × 19% = £7,885 Corporation Tax.
Notice the taxable profit (£41,500) is close to the accounts profit (£42,000) here, but it didn't have to be. If you hadn't bought the £8,000 of equipment, your taxable profit would have been £49,500, and your tax bill would have been higher, even though the business earned exactly the same. The adjustments are what move the number.
How does SimpleReturns handle it?
You don't work any of this out yourself. Connect your bank or upload a statement, and we read your year's money in and out, add back the bits that don't count for tax, take off the equipment relief, work out your taxable profit, and apply the right rate, including the gradual rate in the middle and the shared limits if your company is linked to others. You see every figure before anything is sent.