What Is Corporation Tax?

Corporation tax is the final deduction in the P&L before arriving at net profit, and its impact on bottom-line results makes tax planning an important FP&A consideration.

The current UK corporation tax structure (from April 2023) has three tiers: 19% small profits rate (taxable profits up to £50,000), 25% main rate (taxable profits over £250,000), and marginal relief between £50,000 and £250,000 (effective rates between 19% and 25%, with a particularly punitive effective rate of 26.5% in the transition band).

FP&A teams must model the tax charge accurately in budgets and forecasts because it directly affects net income, EPS, and cash flow. Key considerations include: the applicable rate based on profit level, the impact of capital allowances (particularly full expensing and the Annual Investment Allowance), R&D tax credit claims, losses brought forward, group relief (offsetting profits in one entity against losses in another), and the timing of quarterly instalment payments for larger companies.

Deferred tax arises from timing differences between accounting profit and taxable profit. Common sources include: accelerated capital allowances (claiming tax relief faster than book depreciation), provisions not yet deductible, and revenue recognition timing differences.

For UK FP&A teams, maintaining a tax forecast model that links to the P&L forecast is essential. The model should calculate the current tax charge, deferred tax movement, and the resulting effective tax rate (ETR). The ETR is a key metric for investors and can vary significantly from the headline rate due to disallowable expenses, tax-exempt income, and available reliefs.