UK Contractor Corporation Tax Basics

Corporation tax is the main tax paid by UK PSC contractors at the company level before any extraction to the director. The structure changed materially in April 2023 with the introduction of the small profits rate (19%) and main rate (25%) with marginal relief, replacing the previous flat 19% rate that applied 2017-2023.

This guide covers the calculation, the marginal relief mechanics, the filing and payment timelines, and the practical points for typical PSC contractor situations.

Corporation tax rates and bands

From April 2023 the structure is: small profits rate 19% on the first GBP 50,000 of profit, main rate 25% on profit above GBP 250,000, marginal relief produces an effective rate of 26.5% on the band between GBP 50,000 and GBP 250,000. The bands are divided by the number of 'associated companies' (broadly companies under common control).

A solo PSC with profit GBP 50,000 pays 19% = GBP 9,500. The same PSC with profit GBP 100,000 pays 19% on first GBP 50,000 + marginal rate on next GBP 50,000. The marginal rate calculation is: tax = (profit * 25%) - (marginal relief), where marginal relief = (GBP 250,000 - profit) * 3/200. For GBP 100,000 profit: GBP 25,000 - (GBP 150,000 * 3/200) = GBP 25,000 - GBP 2,250 = GBP 22,750.

The effective rate on the GBP 50,000-GBP 250,000 band works out to 26.5%. Confirming for GBP 100,000: GBP 22,750 on GBP 100,000 = 22.75% headline rate, but the breakdown is 19% on first GBP 50,000 (GBP 9,500) + 26.5% on next GBP 50,000 (GBP 13,250) = GBP 22,750. The 26.5% on the marginal band is the meaningful figure for pension contribution decisions.

Worked example: a PSC contractor with GBP 90,000 of profit. CT = (GBP 90,000 * 25%) - ((GBP 250,000 - GBP 90,000) * 3/200) = GBP 22,500 - GBP 2,400 = GBP 20,100. Effective rate around 22.3% on the full profit. A GBP 30,000 pension contribution would save 26.5% on the contribution = GBP 7,950 of CT.

Associated companies and thresholds

The GBP 50,000 and GBP 250,000 thresholds are divided by the number of associated companies. Two associated companies each get GBP 25,000 small profits limit and GBP 125,000 main rate limit. The intent is to prevent groups from multiplying the threshold benefit by setting up multiple companies.

'Associated' broadly means under common control. Where a director-shareholder controls multiple companies, those companies are associated. A husband and wife each running a separate PSC are typically not associated unless they jointly control more than one company.

For most solo PSC contractors, the standard thresholds (GBP 50,000 small, GBP 250,000 main) apply. The associated company issue arises when a contractor sets up multiple PSCs for different projects or expands into related businesses through separate vehicles.

Practical action: where multiple PSCs are envisaged, structuring them as a group with a single profit pool (or as a single PSC with multiple revenue streams) avoids the associated company complication. Single PSC operation is typical and avoids the issue entirely.

Filing and payment deadlines

The corporation tax return (CT600) is filed 12 months after the end of the accounting period. The tax is paid 9 months and 1 day after the end of the period. The two deadlines differ - tax is due before the return is filed.

For a PSC with a 31 March year-end: tax payment due 1 January following year (9 months + 1 day after 31 March); return filing due 31 March following year (12 months after period end). Most PSC contractors with annual reporting use 31 March year-end to align with the personal tax year.

Late filing penalties: GBP 100 immediate fixed penalty, additional GBP 100 if 3 months late. Tax-geared penalties at 6 and 12 months. Persistent late filing escalates to GBP 500 and GBP 1,000 fixed penalties.

Late payment penalties (separate from filing): typically interest at the official rate (base rate + 2.5%) plus 5% surcharges at 30 days, 6 months and 12 months. Time to Pay arrangements available with HMRC for affordability issues.

Quarterly instalments for larger companies

Companies with profit above GBP 1.5 million (divided by number of associated companies) must pay corporation tax in quarterly instalments rather than one annual payment. Instalments are paid in months 7, 10, 13 and 16 of the accounting period, with the final payment 3 months and 14 days after period end.

Few solo PSC contractors hit the GBP 1.5 million profit threshold. Typical PSC contractor profits run GBP 50,000-200,000 a year. Quarterly instalments mainly affect larger consulting practices, multi-contractor companies, and corporate consultancies operating at scale.

For PSCs near or above the threshold, the cash flow implications of quarterly instalments matter. The first instalment is due 6 months into the accounting period, requiring the company to estimate full-year profit and pay 25% of it before the year is complete.

Practical action: most contractors will not encounter quarterly instalments. Where the contractor's PSC profit approaches GBP 1.5 million in a year (an unusual situation), the accountant typically alerts the contractor in advance and arranges the instalment payment schedule.

Allowable deductions and tax planning

Deductible expenses for corporation tax follow the same wholly-and-exclusively rule as sole trader expenses but with additional categories specific to companies: employer pension contributions (large deductibility benefit), director's salary (deductible as employment cost), employer NI on salary, business insurance, professional fees, R&D costs (additional uplift available under R&D credit schemes for qualifying activity).

R&D tax credit is a specific UK regime providing additional tax relief for qualifying R&D expenditure. Most PSC contractors do not qualify (typical contracting is the application of existing skills rather than R&D), but software developers and engineers undertaking genuine technical advancement may qualify. The relief is 86% additional deduction for SMEs (the regime is being unified into a single scheme from April 2024).

Capital allowances apply to capital expenditure (equipment, vehicles, software with long useful life). Annual Investment Allowance gives 100% first-year deduction up to GBP 1 million per year - well above any typical PSC capital spend. Full expensing of plant and machinery (introduced April 2023) also provides 100% deduction at company level.

Worked example: a PSC contractor buys a GBP 1,500 laptop (100% business use) and pays GBP 2,000 to an accountant. Both fully deductible. The contractor takes GBP 12,570 salary (deductible as employment cost). The PSC makes GBP 30,000 employer pension contribution (deductible). All these reduce the profit before corporation tax is calculated, maximising the post-CT amount available for dividend extraction.

R&D tax credits for contractors

R&D tax credits provide additional tax relief for qualifying research and development expenditure. The relief gives 86% additional deduction for SMEs on qualifying expenditure under the legacy scheme (being unified into a single scheme from April 2024). A contractor spending GBP 30,000 on qualifying R&D could claim a deduction of GBP 55,800 against corporation tax.

Qualifying R&D: a project seeking to advance the state of knowledge or capability in a science or technology, resolving uncertain technical problems, with a competent professional unable to readily deduce the solution. Standard contracting (applying existing skills to client problems) typically does not qualify.

Where the contractor's own product development qualifies (developing new software or technology, not just delivering services to clients using existing skills), the relief is available. Many software development contractors miss this opportunity because they assume contracting is not R&D-qualifying.

Practical action: where the contractor is developing their own products or technology alongside client services, an R&D tax advisor can assess eligibility. Specialist firms (Forrest Brown, MNP, RIFT) handle small-business R&D claims for around 20-30% of the claim value as fees. The claim is typically worth the cost when qualifying expenditure exceeds GBP 20,000.

Frequently asked questions

What is the corporation tax rate?

From April 2023: 19% on profit up to GBP 50,000 (small profits rate), 25% on profit above GBP 250,000 (main rate), 26.5% effective on the band between GBP 50,000 and GBP 250,000 (marginal relief). Thresholds are divided by number of associated companies. Most solo PSC contractors operate at the small profits rate or in the marginal band.

When do I pay corporation tax?

9 months and 1 day after the end of the accounting period. The CT return (CT600) is filed 12 months after period end - so payment is due before the return is filed. For a 31 March year-end: payment 1 January following year, filing 31 March following year. Larger companies (profit above GBP 1.5 million) pay quarterly instalments instead.

How do I calculate corporation tax on GBP 100,000 of profit?

CT = (GBP 100,000 * 25%) - ((GBP 250,000 - GBP 100,000) * 3/200) = GBP 25,000 - GBP 2,250 = GBP 22,750. Effective rate 22.75% on the full profit. The breakdown: 19% on first GBP 50,000 (GBP 9,500) + 26.5% on next GBP 50,000 (GBP 13,250) = GBP 22,750. The 26.5% marginal rate on the upper band is the figure that matters for pension contribution decisions.

What's the deadline for CT600 filing?

12 months after the end of the accounting period. For a 31 March year-end, the CT600 is due by 31 March of the following year. Late filing penalties start at GBP 100 immediate, with additional GBP 100 at 3 months and tax-geared penalties at 6 and 12 months. The payment deadline (9 months + 1 day after period end) is earlier than the filing deadline.

Can I claim R&D tax credits as a contractor?

Most PSC contractors do not qualify because typical contracting is the application of existing skills rather than R&D. Software developers and engineers undertaking genuine technical advancement (resolving uncertain technical problems, advancing the state of the art) may qualify. The relief is 86% additional deduction for SMEs (unified single scheme from April 2024). Professional advice is normally needed to assess eligibility and prepare claims.