How to Calculate Company Profit for Corporation Tax in the UK

When HMRC asks how much corporation tax your company owes, the number that matters is not your revenue — it is your taxable profit. Understanding the difference between revenue, gross profit, operating profit, and taxable profit is essential for calculating your tax liability correctly and for making informed decisions about when to spend, invest, and extract money from your company.

Revenue is not profit

Revenue (also called turnover or sales) is the total money your company received from customers during the accounting period. It is the top line on your profit and loss statement. A company with £500,000 in revenue might have £50,000 in taxable profit or £200,000 — the difference is entirely determined by what is deducted along the way.

The three types of profit

Gross profit

Revenue minus the direct costs of producing what you sell. For a product business, this is revenue minus cost of goods sold (materials, manufacturing, shipping). For a services business, it is revenue minus the direct costs of delivering those services (subcontractor fees, direct labour costs). Gross profit tells you how efficiently you produce your output.

Operating profit

Gross profit minus operating expenses — the costs of running the business that are not directly tied to production. This includes office rent, utilities, salaries (including your own director's salary), marketing, insurance, professional subscriptions, software, travel, and depreciation on equipment. Operating profit tells you how profitable the business is as an ongoing operation.

Taxable profit (profit before tax)

Operating profit adjusted for items that HMRC treats differently from accounting standards. Some expenses that appear in your accounts are not allowed for tax purposes (entertaining clients, for example), and some tax reliefs (like the Annual Investment Allowance) may give you deductions that do not appear in your standard accounts. Taxable profit is the figure your corporation tax is calculated on.

What counts as an allowable deduction

HMRC allows deductions for expenses that are incurred "wholly and exclusively for the purposes of the trade." Key allowable deductions include:

• Director and employee salaries — including your own salary drawn from the company, fully deductible
• Employer National Insurance — the 13.8% employer NI on salaries above the secondary threshold
• Employer pension contributions — deductible when paid, no annual cap for corporation tax purposes
• Rent and business rates — for business premises (including a proportion of home costs if you work from home through the company)
• Professional subscriptions — ACCA, CIMA, ICO registration, professional body memberships
• Accountancy and legal fees — for running the business (not for personal matters)
• Software and IT costs — subscriptions, hosting, domains, tools
• Travel and subsistence — business travel (not ordinary commuting), hotel stays, meals while travelling
• Insurance — professional indemnity, public liability, employer's liability, cyber insurance
• Marketing and advertising — website costs, Google Ads, trade show attendance
• Training — courses, certifications, and CPD directly related to the business
• Bad debts — invoices that are genuinely unrecoverable

What is not allowable

Several common expenses are not deductible for corporation tax:

• Client entertainment — meals, drinks, hospitality for clients are not allowable (staff entertainment is allowable up to £150 per person per year for annual events)
• Clothing — unless it is genuinely protective or branded uniforms
• Fines and penalties — parking tickets, HMRC penalties, regulatory fines
• Dividends — dividends are paid from post-tax profit, not deducted before tax
• Personal expenses — anything that is not wholly and exclusively for the business
• Depreciation — accounting depreciation is not allowable; instead, you claim capital allowances (see below)

Capital allowances: the Annual Investment Allowance

When your company buys equipment, vehicles, machinery, or computer hardware, the cost is not deducted as a normal expense. Instead, you claim capital allowances. The most important of these is the Annual Investment Allowance (AIA), which lets you deduct up to £1 million of qualifying capital expenditure in full in the year of purchase.

For most small and mid-sized companies, the AIA means that capital purchases can be deducted in full immediately — significantly reducing taxable profit in the year of purchase. This is often a useful tool for tax planning: if your company is approaching the £250,000 marginal relief threshold, bringing forward a planned equipment purchase can reduce your effective tax rate.

A worked example

The salary and dividend decision

For owner-managed companies, the split between salary and dividends is the most important tax planning decision. Salary is deducted before corporation tax is calculated (reducing the company's tax bill), but it attracts income tax and National Insurance on the personal side. Dividends are paid from after-tax profit and attract dividend tax at lower rates — but do not reduce the company's corporation tax liability.

The optimal strategy for most single-director companies in 2025/26 is to pay a salary at the NI primary threshold (£12,570) and extract remaining profits as dividends. The IR35 Calculator models this full picture for contractors.

When to talk to your accountant

Online calculators are useful for planning and estimating, but your accountant should prepare the actual CT600 return. Key moments to involve them: year-end tax planning (timing of expenses and capital purchases), salary vs dividend strategy, R&D tax relief claims, associated company considerations, and any transaction that significantly changes your profit profile.