Small Profits Rate
/smɔːl ˈprɒfɪts reɪt/
The small profits rate is the reduced rate of UK corporation tax applied to companies with taxable profits at or below £50,000, currently set at 19%.
The small profits rate is the reduced rate of UK corporation tax applied to companies with taxable profits at or below £50,000, currently set at 19%.
The small profits rate is the lower rate of UK corporation tax that applies to companies with taxable profits at or below £50,000 in an accounting period. Since April 2023, qualifying companies pay corporation tax at 19% rather than the main rate of 25%. This creates a meaningful tax saving for smaller businesses and early-stage companies that have not yet reached significant profitability.
The reintroduction of the small profits rate marked a return to a tiered corporation tax system in the UK after several years of a single flat rate. For Irish founders who have established a UK subsidiary or registered a UK company, the small profits rate can significantly reduce the tax burden on your UK operations during the critical early years when profits are typically modest.
Understanding whether your UK company qualifies for the small profits rate is essential for accurate tax planning and cash flow forecasting. The rate applies automatically based on your taxable profits, but the thresholds can be affected by associated companies and short accounting periods. Getting this right ensures you pay only what is legally required and can reinvest the savings back into growing your business.
The small profits rate works straightforwardly: if your UK company's taxable profits for the accounting period are £50,000 or less, the entire profit is taxed at 19%. There is no need to make a special claim or application. Your accountant simply applies the correct rate when preparing the corporation tax computation and filing the CT600 return with HMRC.
If your profits exceed £50,000 but remain below £250,000, your company enters the marginal relief band, where the effective rate is somewhere between 19% and 25%. Companies with profits above £250,000 pay the full main rate of 25%. This tiered structure means that the small profits rate provides the greatest benefit to genuinely small businesses with lower earnings.
It is important to note that the £50,000 threshold applies to augmented profits, which include taxable profits plus any exempt distributions received from non-associated companies. In most cases for small businesses, augmented profits will equal taxable profits, but if your company receives dividends from investments, these may affect your position.
The £50,000 lower threshold and the £250,000 upper threshold must be divided by the number of associated companies plus one. Two companies are associated if one controls the other or both are under common control. For founders who operate multiple UK entities, this division can significantly reduce the thresholds available to each company.
For example, if you control three UK companies, the lower threshold for each drops to approximately £16,667. This means each company would need profits below that figure to benefit from the full 19% rate. Planning your corporate structure with this rule in mind can help you maximise the benefit of the small profits rate. Your accountant can advise on whether consolidating activities into fewer entities might produce a better overall tax outcome.
If your UK company has an accounting period shorter than 12 months, the profit thresholds are proportionally reduced. A six-month accounting period, for instance, would halve the lower threshold to £25,000 and the upper threshold to £125,000. This is common for newly incorporated companies whose first accounting period may be shorter than a full year.
This adjustment ensures that companies cannot benefit from a full year's threshold when they have only traded for part of the year. When setting up a UK entity, it is worth discussing the timing of your financial year end with your accountant to understand how the first accounting period will affect your tax position.
Ireland applies a flat 12.5% corporation tax rate on trading profits regardless of the company's size, which is lower than both the UK small profits rate (19%) and the main rate (25%). For Irish founders with both Irish and UK operations, this difference creates opportunities for tax-efficient structuring, subject to transfer pricing rules and the requirement for genuine economic substance in each jurisdiction.
The absence of a tiered system in Ireland simplifies tax planning for purely domestic operations, but founders expanding into the UK must factor in the small profits rate and potential marginal relief when forecasting their group's overall tax compliance costs. Accurate financial statements for both entities are essential for calculating the correct tax position and claiming any available double taxation relief.
There are several legitimate planning strategies that can help your UK company benefit from the small profits rate. Timing the recognition of income and expenses to keep profits within the £50,000 threshold can be effective, provided it reflects genuine commercial decisions rather than artificial arrangements. Making pension contributions, accelerating capital expenditure, or timing bonus payments can all influence the accounting period in which profits fall.
Companies approaching the upper threshold should also consider whether loss relief from prior periods or group relief from associated companies could reduce taxable profits into the small profits band. These reliefs interact with the thresholds and can produce meaningful tax savings when applied strategically.
The small profits rate is applied automatically when you file your UK corporation tax return. There is no separate election or claim required. However, you must accurately report your taxable profits, the number of associated companies, and the length of your accounting period to ensure the correct rate is applied. Errors in any of these areas can lead to incorrect tax payments and potential enquiries from HMRC.
For close companies, which most founder-led businesses are, additional rules around distributions and benefits in kind can affect the overall tax position. Working with an accountant who understands both UK and Irish tax systems ensures your UK entity claims the small profits rate correctly whilst maintaining full compliance on both sides of the Irish Sea.
