Corporation Tax Basics for Limited Company Contractors

Corporation tax basics for a limited company contractor

If you contract through your own limited company, whether you are working on a role the client has classed as outside IR35 or not, corporation tax is one of the fixed costs of doing business this way. Unlike PAYE income tax, corporation tax is not something HMRC deducts automatically. It is calculated, filed, and paid by your company, which means understanding the basics matters just as much as understanding your day rate.

This article explains how corporation tax works for a typical contractor limited company. It is general education, not personal tax advice: your own figures, accounting period, and company structure will affect what you owe, so speak to a contractor accountant for anything specific to your situation.

What corporation tax is actually charged on

Corporation tax (CT) is charged on your company's taxable profits, not on your personal income and not simply on the money that lands in the business bank account. Taxable profit is broadly your contract income (plus any interest earned) minus allowable expenses, director's salary, employer's National Insurance, and pension contributions.

This is an important distinction for contractors. If you take a modest salary and make employer pension contributions, both reduce the profit figure that corporation tax is calculated on. How you structure salary, dividends, and pension payments is a matter for your accountant, but it directly affects your corporation tax bill.

Current corporation tax rates

For the 2025/26 tax year, the rates are:

• 19% on profits up to £50,000 (the small profits rate)
• 25% on profits of £250,000 and above (the main rate)
• An effective rate of around 26.5% on profits between these two thresholds, because of marginal relief

Marginal relief is a mechanism that smooths the jump between the small profits rate and the main rate, rather than applying 25% the moment profits cross £50,000. Most single-company contractors operating outside IR35 with typical day rates will sit at or near the 19% small profits rate, but it is worth checking where your company falls each year, especially if profits are growing.

Full details of the current rates and marginal relief calculation are set out on HMRC's Corporation Tax rates guidance.

Associated companies can reduce your thresholds

The £50,000 and £250,000 thresholds are not fixed for every company. If you control, or have an interest in, other active companies, these may count as "associated companies" and the thresholds are divided between them. For example, a contractor who owns a second trading company alongside their main contracting business may find their small profits threshold effectively halved.

This is a common area where contractors catch themselves out, particularly if they have set up a separate company for a side project or property investment. If this might apply to you, it is worth raising with your accountant before assuming the 19% rate applies to your full profit.

Close investment holding companies

Not every company qualifies for the 19% small profits rate. Close investment holding companies, broadly, companies that exist mainly to hold investments rather than to trade, are excluded and must pay the 25% main rate regardless of profit level. This is unlikely to affect a typical contracting limited company that is actively trading, but it is a relevant distinction if you also use a company structure to hold investments.

Deadlines: payment and filing are different

Two separate deadlines apply, and mixing them up is a common source of penalties:

• Payment deadline: 9 months and 1 day after the end of your accounting period
• Filing deadline: 12 months after the end of your accounting period, for submission of the CT600 company tax return

In other words, HMRC expects payment before the tax return itself is due. Many contractor accountants build the payment date into their year-end process precisely because it is easy to file on time but miss the earlier payment date, which can trigger interest charges.

Further detail on filing your Company Tax Return and the CT600 form is available from HMRC's guidance on Company Tax Returns.

Why this matters alongside IR35

Corporation tax sits alongside, not instead of, the IR35 question. If a client states a contract is outside IR35, that affects how you can pay yourself (salary and dividends rather than deemed employment income), but it does not change the fact that your company still pays corporation tax on its profits in the normal way. Corporation tax planning and IR35 status are related but separate parts of running a contracting business, and both benefit from proper accounting support.

For a broader view of how outside-IR35 contracting affects your take-home pay, see our day-rate benchmarks, and for current opportunities, you can browse outside-IR35 contracts listed on the board.

This platform does not determine, verify, or warrant IR35 status; the SDS is the client's legal responsibility. Contractors should take their own advice and consider IR35 insurance.