Corporation tax. Most SMEs are getting at least one thing wrong.

Here is what it is. And what to do about it.

Corporation tax is one of those things that feels straightforward until it is not.

Pay your bill, file your return, move on. Simple enough.

Except the number of SME owners paying more than they need to, or storing up a problem they do not know about yet, is higher than most people would expect. And in almost every case, the issue is not deliberate. It is just that nobody ever explained the rules properly.

This newsletter covers the most common corporation tax mistakes I see, the ones that are worth a few minutes of your time to understand.

"Paying more corporation tax than you need to is not bad luck. It is almost always a gap in knowledge or advice."

FIRST, THE RATES. BECAUSE NOT EVERYONE KNOWS THEM.

Since April 2023, the UK has operated a tiered corporation tax system. The flat 19% rate that applied for years is gone for many businesses.

Here is how it works in 2026:

Profits up to £50,000: 19% small profits rate.

Profits between £50,000 and £250,000: a sliding scale with marginal relief applied.

Profits above £250,000: 25% main rate.

Straightforward enough. Except there is a catch that trips up a significant number of SME owners.

MISTAKE 1: NOT KNOWING ABOUT ASSOCIATED COMPANIES

This is probably the most commonly missed issue for owner-managed businesses.

If you have more than one company, the profit thresholds above are divided between them. So if you have two associated companies, the £50,000 threshold becomes £25,000 per company, and the £250,000 threshold becomes £125,000 per company.

That means a business owner with two companies, each making £60,000 profit, might assume both are comfortably in the small profits rate. They are not. The thresholds have been halved, and both companies are now in the marginal relief band, or potentially beyond it.

With four companies the thresholds reduce further still. This catches multi-entity business owners out regularly, particularly those with property SPVs alongside a trading company.

Do this: If you have more than one company, make sure your corporation tax position has been calculated taking all associated companies into account. If you are not sure whether your companies are associated, ask.

MISTAKE 2: NOT CLAIMING ALL AVAILABLE RELIEFS

Corporation tax is calculated on taxable profit, which is not the same as accounting profit. There is a range of reliefs and deductions available that reduce the taxable figure, and a surprising number of SMEs are not claiming all of them.

Capital allowances: The Annual Investment Allowance allows most SMEs to deduct qualifying capital expenditure in full in the year of purchase, up to £1 million. If capital expenditure is being written off over several years when it could be deducted immediately, that is a cash flow cost as well as a tax cost.

Note: From April 2026, the main pool writing-down allowance has dropped from 18% to 14% for assets not covered by the Annual Investment Allowance or full expensing. This makes claiming the AIA correctly even more important for businesses buying plant and machinery.

R&D tax relief: Many SMEs genuinely qualify for Research and Development relief and never claim it. The definition of R&D for tax purposes is broader than most people assume. It is not just laboratories and tech companies. If your business has spent money resolving technical uncertainties, developing new processes, improving existing ones, solving problems that were not straightforward, it may qualify.

HMRC has tightened the rules around R&D claims significantly and is scrutinising them more closely. Any claim needs to be robust and properly documented. But a legitimate claim can make a material difference to your tax bill.

Employment Allowance: Up to £10,500 off your employer National Insurance bill per year. Not available to single director companies with no other employees, but available to most other employers. Still regularly unclaimed.

Do this: Ask your accountant to confirm that every relief available to your business has been claimed. If R&D has never come up in conversation and your business does any kind of development work, raise it.

MISTAKE 3: DIRECTOR LOANS YOU DID NOT KNOW WERE A PROBLEM

Many SMEs are close companies, controlled by five or fewer shareholders. This status brings additional tax rules that most business owners are not fully across.

One of the most common is the loans to participators charge. If a director borrows money from their own company and does not repay it within nine months and one day of the accounting period end, the company faces a corporation tax charge of 33.75% on the outstanding balance. This is separate from and on top of the director's personal tax position.

The loan charge does not disappear when the loan is eventually repaid. It sits as a corporation tax liability until the loan is cleared, at which point the company can reclaim it. But for cash flow purposes, it is a real cost in the meantime.

This catches business owners who treat the company account as a personal overdraft without fully understanding the tax consequences.

Do this: If you have taken money from your company that has not been formally processed as salary or dividends, check the position with your accountant before the nine-month deadline passes.

MISTAKE 4: TREATING CORPORATION TAX AS A YEAR-END PROBLEM

For most SMEs, corporation tax is due nine months and one day after the accounting period end. That gives a reasonable window. But the planning decisions that reduce the bill need to happen during the accounting period, not after it closes.

Pension contributions, timing of capital expenditure, salary and dividend decisions, structuring of director remuneration. All of these have to happen before the year end to affect the corporation tax position for that year. Retrospective planning is rarely possible.

The businesses that consistently pay less corporation tax than they could are not doing anything clever. They are just making the right decisions in good time, with good advice.

Do this: Have a conversation with your accountant at least two to three months before your year end. Not after. Before.

MISTAKE 5: ASSUMING HMRC WILL NOT NOTICE

HMRC is increasingly focused on SME accuracy. Nudge letters, targeted enquiries, and closer scrutiny of R&D claims and close company transactions are all increasing. The days of errors quietly going unnoticed are becoming fewer.

This does not mean HMRC is out to get anyone. It means the cost of getting things wrong is higher than it used to be, and robust records and a well-prepared return matter more than ever.

Do this: Make sure your records are complete, your expenses are properly documented, and your return is prepared by someone who knows what they are doing.

NONE OF THIS IS COMPLICATED. BUT IT DOES REQUIRE ATTENTION.

Corporation tax is not a problem that sorts itself out. Every mistake above is fixable, and most of them are preventable with the right advice at the right time.

If you are not completely confident that your corporation tax position is being managed as well as it could be, that is worth a conversation. We are happy to take a look.

Get in touch with Chelmer Company Services for a no-obligation discussion.

LEGAL AND REGULATORY NOTICES

General information only. This newsletter has been produced for general information and educational purposes only. Nothing in this newsletter constitutes personal financial, tax, or business advice, or a personal recommendation of any kind. Tax rates, thresholds, and reliefs are based on current HMRC rules and legislation as understood at the time of publication and are subject to change. Eligibility for reliefs depends on individual circumstances. Always obtain specific professional advice tailored to your own situation.

Regulated status. Chelmer Company Services is regulated by the Institute of Chartered Accountants in England and Wales (ICAEW). We are not authorised or regulated by the Financial Conduct Authority for investment business.