The corporation tax structure every contractor needs to know
Every limited-company contractor pays corporation tax on the company's profits before a penny can be touched as a dividend. The bill is not simply a flat percentage: the UK has operated a three-band structure since April 2023, and which band your company falls into determines exactly what rate applies and whether you are sitting in a hidden high-rate trap that most contractors do not notice until they see the calculation.
The rates for Financial Year 2026 (1 April 2026 to 31 March 2027) are the same as for Financial Year 2025. Finance Act 2026 made no change to corporation tax rates, so the figures below hold for any accounting period falling in 2026/27.
The three bands: 19%, the marginal zone and 25%
The starting point is the company's augmented profits for the accounting period. For most single-director contracting companies with no external investment income, augmented profits and taxable trading profits are the same figure. Where the company receives dividends from non-group companies, those are added to taxable profits before applying the thresholds.
| Augmented profits | Rate | Notes |
|---|---|---|
| Up to £50,000 | 19% (small profits rate) | The full profit is taxed at 19% |
| £50,001 to £250,000 | 25% less marginal relief | Effective marginal rate on this slice is approximately 26.5% |
| Above £250,000 | 25% (main rate) | No marginal relief; full 25% on all profits |
The statutory authority is CTA 2010 Part 3, sections 18 to 18N. The limits above assume the company has no associated companies and a full twelve-month accounting period; both of those assumptions need checking, as explained below.
Marginal relief: why the middle band costs more than 25%
The marginal relief band is one of the least intuitive features of corporation tax. A contractor whose profits rise from £49,000 to £80,000 does not pay 25% on the additional £31,000; they pay more than that on each pound in the band, because the relief formula tapers away as profits rise.
The formula works as follows. The company first pays 25% on all augmented profits, then deducts a marginal relief deduction calculated as:
Standard fraction (3/200) × (Upper limit £250,000 minus augmented profits)
At profits of £80,000, the deduction is 3/200 × (£250,000 minus £80,000) = 3/200 × £170,000 = £2,550. The effective total tax is (25% × £80,000) minus £2,550 = £20,000 minus £2,550 = £17,450, an effective rate of 21.8% on all profits. But the marginal rate on the slice between £50,000 and £80,000 is higher: the extra £30,000 of profit cost (£17,450 minus £9,500 at the 19% rate on the first £50,000) = £7,950, which is 26.5% of that extra £30,000.
This ~26.5% effective rate on profits between £50,000 and £250,000 is the core planning point. Any pound of profit earned in that band is more expensive than a pound earned below £50,000 or above £250,000. A contractor whose company makes £90,000 in profits and who could legitimately reduce those profits to below £50,000 by, say, making a £45,000 employer pension contribution stands to save more than just the headline rate suggests.
Associated companies: the band divisor that catches family structures
The £50,000 and £250,000 limits are not absolute for every company. They are divided by the number of associated companies plus the company itself. Two companies are associated where one controls the other, or both are under the common control of the same person or persons (CTA 2010 s.18E onward).
The most common scenario that triggers this for a contractor is a spouse or civil partner who also runs a personal service company. If each partner controls their own company and those companies are also under common control of both partners together, the rules can treat both companies as associated. The effect is that each company's limits are divided by two: the small profits threshold drops to £25,000 and the upper limit to £125,000.
A contractor earning £75,000 in company profits would normally sit in the marginal band. If their company is treated as having one associated company, that £75,000 now exceeds the halved upper limit of £125,000 and they pay the full 25% main rate on everything above £62,500. The bill is meaningfully larger than a straightforward reading of the rates would suggest.
The associated companies rules are complex, and whether a spouse PSC is actually associated depends on the precise shareholding and control facts of both companies. Do not assume the standard thresholds apply if there is any connected company in the picture: take specific advice and model the position before it crystallises in the accounts.
Short accounting periods and pro-rating the limits
The £50,000 and £250,000 limits assume a twelve-month accounting period. Where the period is shorter (for example, a company incorporated in January that adopts a March year-end will have its first period running for only three months), the limits are reduced proportionally. A three-month period has limits of £12,500 and £62,500. A company with profits of £25,000 in a three-month period would sit in the marginal band, not the small profits rate. New companies and those that change their year-end need to check this carefully.
When corporation tax is due: the payment deadline
For most contractor companies, corporation tax is due in a single payment nine months and one day after the end of the accounting period. For a company with a 31 March year-end, the payment date is 1 January the following year. For a 31 December year-end, it is 1 October.
The quarterly instalment regime for large companies (profits over approximately £1.5m, adjusted for associated companies and period length) does not apply to the vast majority of contractor PSCs. Most contractors will pay once, in the nine-month-plus-one-day window.
Interest runs from HMRC from the day after the due date. Filing the CT600 return is a separate obligation: the return must be submitted within twelve months of the end of the accounting period, which is later than the payment deadline. The penalty for a late return starts at £100, rising to £200 after three months and escalating further if the return is more than six months late or the pattern is repeated.
The practical consequence is that you need cash ready several months before the filing deadline. If dividends have been paid from the company throughout the year, the retained cash must be sufficient to cover the tax bill when it falls due. Running the company's funds too low before a tax payment is one of the most common cash-flow problems contractors face in their early years of trading.
What goes into taxable profit: the levers you control
Corporation tax is charged on the company's taxable profit, which is broadly the accounting profit after adjusting for items the tax rules treat differently. For a typical contractor PSC, the main categories that reduce the taxable profit are as follows.
Director's salary
A salary paid to the director is a deductible trading expense. It reduces taxable profits before the corporation tax rate is applied. A salary set at the lower earnings limit of £6,708 (2026/27) saves the company between £1,274 (at the 19% small profits rate) and about £1,778 (at the 26.5% marginal rate) in corporation tax, depending on which rate band applies. A salary at the personal allowance level of £12,570 saves proportionally more, though the company also pays employer national insurance on the portion above the secondary threshold (£5,000), which offsets part of the tax saving.
The interaction between salary, employer NIC, income tax, employee NIC and the resulting corporation tax saving is nuanced, and the right salary level depends on whether the company can claim the Employment Allowance (not available to single-director companies with no other employees) and whether the director has other income using up the personal allowance. The full salary and dividend optimisation framework is covered in the guide to PSC limited company tax planning for contractors.
Employer pension contributions
An employer pension contribution paid by the company is deductible against corporation tax in the accounting period in which it is paid. Under Finance Act 2004 section 196, the contribution must be paid on a paid basis (you cannot accrue it and claim relief before the cash leaves the company) and must satisfy the wholly-and-exclusively test.
The advantages are significant. There is no employer or employee national insurance on the contribution. The director does not pay income tax on it when it is paid in. The annual allowance for 2026/27 is £60,000 across all pension contributions (employer and personal combined). A contractor whose company makes £90,000 in profits and who makes a £40,000 employer pension contribution reduces taxable profits to £50,000, bringing the entire profit within the 19% small profits rate. The corporation tax falls from £20,100 (on £90,000 in the marginal band) to £9,500 (on £50,000 at 19%), a saving of £10,600, while the £40,000 also funds the director's pension.
Unused annual allowance from the previous three tax years can be carried forward, which means a contractor who has been under-contributing can make a larger one-off payment in a high-profit year. This carry-forward benefit is why pension timing decisions often need to be made with an eye on the full picture of available allowance, not just the current year's limit.
Pensions are covered in more depth in the guides on employer pension contributions for contractors and pension carry-forward.
Accountancy and professional fees
Accountancy fees, professional indemnity insurance, public liability insurance and similar business-running costs are deductible. These are relatively small in the context of the total profit but are genuine deductions and should all be captured correctly in the company's accounts.
Equipment and capital allowances
Capital expenditure on equipment, computers and similar business assets does not reduce profit directly in accounting terms (it is depreciated), but corporation tax relief is given via capital allowances. Most contractor companies claim the Annual Investment Allowance (AIA), which gives a 100% deduction for qualifying capital expenditure in the year of purchase, up to the annual limit. For most contractors with modest equipment needs, the AIA covers all capital expenditure in full, so the effective relief is immediate. Finance Act 2026 also introduced a new 40% first-year allowance (section 29) for qualifying expenditure from 1 January 2026, alongside changes to the main-rate writing down allowance. For most labour-only contractors, the AIA remains the primary route and the new allowances are of limited practical relevance.
What corporation tax does not cover: the individual's tax
Corporation tax applies to the company's profits, not to the money the director personally receives. Once the company has paid corporation tax on its profits, the remaining retained profits can be distributed as dividends. Those dividends are then taxed on the director at the dividend rates: 10.75% (ordinary rate), 35.75% (upper rate) and 39.35% (additional rate) for 2026/27, after the £500 dividend allowance. These rates rose from 8.75% and 33.75% on 6 April 2026 under Finance Act 2026 section 4.
This layering of corporation tax on company profit, then dividend tax on distribution, is the reason the full extraction strategy requires careful modelling rather than a simple rate comparison. The combined effective rate on profits that are earned, taxed and then distributed depends on the company's CT rate, the director's personal tax position, the size of the dividend relative to the higher-rate threshold, and how much of the personal allowance is used by salary. The comprehensive framework for that modelling is covered in the guide to PSC limited company tax planning, which links to both the salary-dividend split guide and the pension planning pages.
A worked example: three profit scenarios
The following figures illustrate how the three-band structure plays out in practice for a contractor company with a full twelve-month accounting period and no associated companies.
| Taxable profit | CT band | Corporation tax | Effective rate |
|---|---|---|---|
| £40,000 | Small profits (19%) | £7,600 | 19.0% |
| £80,000 | Marginal band | £17,450 | 21.8% overall; ~26.5% on the slice above £50,000 |
| £180,000 | Marginal band (upper) | £43,950 | 24.4% overall; ~26.5% on every extra pound |
These figures assume a full-year period and standard limits. The £80,000 calculation: 25% × £80,000 = £20,000, less marginal relief 3/200 × (£250,000 minus £80,000) = 3/200 × £170,000 = £2,550, giving £17,450. The £180,000 calculation: 25% × £180,000 = £45,000, less 3/200 × (£250,000 minus £180,000) = 3/200 × £70,000 = £1,050, giving £43,950, an effective rate of 24.4% across all profits.
The planning implication is clear. A contractor with £80,000 in company profits who can reduce taxable profits to £50,000 through a £30,000 employer pension contribution pays £9,500 instead of £17,450, a saving of £7,950. The 26.5% effective marginal rate in the band makes each pound of reduction in that range worth more than the headline rates suggest.
How IR35 status affects the corporation tax picture
The corporation tax calculation described above applies to outside-IR35 contracts, where the company earns genuine trading income and pays corporation tax on its profits in the normal way. Inside-IR35 engagements change the picture significantly, and it is worth understanding the distinction before drawing conclusions about your tax position.
Where an engagement falls inside IR35 and is governed by Chapter 10 (the off-payroll rules, which apply where the client is a medium or large company), the fee-payer deducts PAYE and national insurance before paying the PSC. The income arrives in the company having already had tax deducted, and there is no equivalent corporation tax saving from salary or pension in respect of that specific income stream, because the tax has already been applied upstream. The PSC still pays corporation tax on any residual profit, but the efficient salary-then-dividend extraction available on outside-IR35 income is largely unavailable for inside-IR35 income.
For a contractor who holds a mix of outside-IR35 and inside-IR35 contracts in the same accounting period, the position needs to be tracked separately for each contract type. The interaction between the two can significantly affect which rate band the company's overall profits fall into, and how much of the annual pension allowance it makes sense to deploy against the taxable outside-IR35 profits.
The IR35 status tests and the consequences of an inside determination are covered in depth in the guides on what IR35 is and what it means to be inside IR35. If you are uncertain about the status of a current engagement, the IR35 contract review service is the starting point.
Estimating your corporation tax bill during the year
Waiting until the accounts are finalised before thinking about the corporation tax bill is one of the more expensive habits a contractor director can develop. By the time the accountant produces the draft accounts, the options for reducing the bill (principally the employer pension contribution and the salary level) are largely fixed. Planning needs to happen during the accounting year.
A straightforward mid-year estimate works as follows. Take the invoices raised to date, deduct expenses already incurred (salary, accountancy fees, insurance, any equipment purchased), and project the total forward to the year-end. Divide the projected profit by the number of months elapsed and multiply by twelve to estimate the full-year profit. Then check where that figure sits against the three-band thresholds (£50,000 small profits, £50,000 to £250,000 marginal, above £250,000 main rate), after adjusting for any associated companies.
If the projected profit sits in the marginal band, the question becomes whether the combined corporation tax saving from an employer pension contribution outweighs the personal tax cost. At 26.5% in the marginal band, each £1,000 of employer pension contribution reduces the corporation tax bill by £265, and the contribution itself carries no NIC and no immediate personal income tax. For many contractors, a contribution that brings profits below £50,000 is clearly worthwhile; for others, the carry-forward pension position or other factors may change the answer.
The key point is that this analysis needs to happen before the year-end, when contributions can still be paid and deducted. An employer pension contribution paid after the accounting period end cannot be backdated into the earlier period.
Other reliefs that can reduce the bill
Salary and pension are the two main levers for most contractor companies, but a few other reliefs are worth knowing.
Research and development relief
Small and medium-sized companies can claim enhanced R&D relief on qualifying expenditure (staff costs, software, consumables) incurred on genuine research or development activities. Most labour-only contractor companies do not qualify (the work is not R&D, it is the provision of professional services), but contractors working in software development, engineering or other technical fields where genuine innovation is part of the engagement should take advice on whether any of their own internal development work qualifies. The relief is claimed on the CT600 and requires detailed documentation. It is not relevant to the majority of contracting businesses but can be material where it does apply.
Trivial benefits
A close company (which almost all single-director PSCs are) can provide the director with small non-cash perks free of income tax and NIC under the trivial benefits exemption (ITEPA 2003 section 323A): each benefit must be £50 or less, not cash or a cash voucher, not a reward for services and not contractual. The annual cap for a director of a close company is £300 (section 323B). These are deductible company expenses and reduce the corporation tax profit, while also being tax-free to the director personally. They are a minor planning point, but a legitimate one.
Loss relief
Where a company makes a trading loss in an accounting period, that loss can be set against profits of the same period (if the company has other income), carried back against profits of the prior year, or carried forward against future profits of the same trade. Most contractor companies with steady billing do not generate trading losses, but a year in which work dried up or significant upfront costs were incurred (professional indemnity run-off cover, equipment write-offs) can create a loss that has genuine value. Losses carried back can generate a cash refund from an earlier year's corporation tax payment.
The boundary with full tax planning
This page covers the corporation tax computation: the rates, the marginal band, the associated companies divisor and the main deductions (salary and pension) that reduce the bill. It does not cover the full extraction decision, which requires comparing salary, dividends and pensions as a combined system, modelling the personal tax consequences alongside the company tax and accounting for IR35 risk where relevant.
The complete framework for PSC directors is in the guide to limited company tax planning for contractors. The salary and dividend split specifically is covered in the guide on the optimal director salary and dividend split.
Keeping the company compliant
Beyond the rate calculation, the mechanics of staying compliant are straightforward for most contractor companies. The company must register for corporation tax with HMRC within three months of starting to trade, file a CT600 return for each accounting period, and pay the tax by the nine-month-plus-one-day deadline. The accounts filed at Companies House and the CT600 filed with HMRC are separate documents but must be consistent.
Most contractors run a March or April year-end to align with the tax year, which makes the annual planning review easier. Whatever the year-end, the key dates to track are: (1) the payment deadline (nine months and one day after period end), (2) the filing deadline (twelve months after period end), and (3) the payroll filing deadlines if the company operates PAYE for a director's salary.
Common administrative pitfalls include: drawing dividends without sufficient retained profit to support them (creating an overdrawn director's loan account, which triggers the section 455 charge at 35.75% for loans made on or after 6 April 2026); failing to keep a record of the formal dividend declaration; and missing the payment deadline because the tax reserves were spent on other costs during the year. None of these problems is difficult to avoid, but they require the kind of ongoing bookkeeping review that a specialist contractor accountant will build into the service.
If you want to review how your company's profits sit against the three-band thresholds and whether salary, pension or other deductions can move the position before the year-end, our team works with contractor companies on exactly this calculation. See what we cover as part of our contractor accountancy service.