Corporation tax is the tax that UK limited companies pay on their profits, including income from trading, investments, and selling assets for more than they cost. For agency founders operating through a limited company, this is the primary tax you pay on your retained profits after deducting salaries, dividends, and other allowable business expenses.

From 1 April 2025 to 5 April 2026, the UK corporation tax system uses a marginal relief structure. If your agency's annual profits are £50,000 or less, you pay the small profits rate of 19%. If profits exceed £250,000, you pay the main rate of 25%. Between £50,000 and £250,000, marginal relief gradually increases your effective rate from 19% to 25%. For example, an agency with £100,000 profit pays roughly 22.5% after marginal relief, not a flat 25%.

Key points for agency founders:

  • Payment timing: Corporation tax is due nine months and one day after your accounting period ends. For a 31 March year end, payment is due by 1 January the following year.
  • Quarterly instalments: If your annual corporation tax liability exceeds £10,000 (typically profits over £1.5 million), you must pay in quarterly instalments. Most small agencies won't trigger this.
  • Allowable deductions: You can deduct salaries, pension contributions, rent, equipment, software subscriptions, professional fees, and marketing costs. Dividends paid to shareholders are not deductible.
  • Capital allowances: The Annual Investment Allowance (AIA) remains at £1 million for 2025/26, letting you claim 100% relief on most plant and machinery purchases, including computers and office equipment.
  • Research and Development (R&D): If your agency develops software, tools, or new processes, you may qualify for R&D tax credits, which can reduce your corporation tax bill or generate a cash repayment.

When this matters for agency founders: Corporation tax directly affects how much profit you keep to reinvest in growth, pay yourself dividends, or build a cash reserve. Understanding your effective rate helps you forecast tax bills accurately, time large purchases to maximise capital allowances, and decide whether to retain profits or extract them as dividends. With the main rate rising to 25% for profitable agencies, proper planning around salary, dividends, and pension contributions becomes essential to minimise your overall tax burden.