The figure in your accounts and the figure HMRC taxes are rarely identical. Here is the adjustment that turns one into the other, worked through in full.
Zazentax Corporation Tax Series, Part 2 of 3 · Updated July 2026 · Reading time: about 7 minutes
Every director eventually notices the gap. The accounts show one profit figure, the accountant calculates corporation tax on a different, usually larger, number, and the explanation offered is rarely satisfying on the first hearing. The gap is not an error and it is not creative accounting; it exists because accounting profit and taxable profit answer two different questions. Accounting profit measures how the business performed under accounting rules designed for investors and lenders. Taxable profit measures what HMRC (His Majesty’s Revenue and Customs, the United Kingdom tax authority) is entitled to tax under a completely separate set of statutory rules. The adjustment between the two follows a consistent pattern, and once seen, it stops looking mysterious.
The Building Blocks of the Adjustment
The calculation always starts from the profit before tax shown in the company’s own accounts, because this is the figure before dividends have been deducted, and dividends are never a deductible cost for tax purposes; they are simply profit being paid out to shareholders, not an expense of earning it.
From that starting point, two kinds of adjustment are made. Certain costs charged in the accounts are added back because tax law does not allow them as deductions, most commonly depreciation, which is an accounting estimate of an asset losing value, and donations to charity, which receive tax relief through a separate mechanism entirely rather than as an ordinary expense. Certain income included in the accounts is then deducted, because it is taxed under a different heading rather than as trading profit: rental income, bank interest received, and any accounting profit on the sale of a fixed asset, since the true tax treatment of asset disposals runs through the capital gains rules, not trading income.
One rule genuinely surprises new directors coming from a sole trader background. There is no private use adjustment for companies. If a director uses a company vehicle partly for personal journeys, none of that private element is added back in the company’s own tax computation; instead, the director is separately taxed on the benefit personally, through their own employment income. The company’s deduction is left untouched.
Key point: Corporation tax is worked out for the accounting period, never longer than twelve months, and capital allowances, the tax relief for buying equipment, are always calculated for that same period. Since 2023, most new equipment bought by a company qualifies for full expensing, a 100% first year deduction with no scheduled end date, made permanent by the government rather than the temporary measure it started as.
A Worked Example
Solstice Fabrications Ltd prepares accounts for the year ended 31 March 2027, showing a profit before tax of £356,000. Included within that figure are a depreciation charge of £96,000 and a £4,000 donation to a local charity, neither of which is deductible for tax, so both are added back. Also included are an accounting profit of £22,000 on the sale of an old machine, rental income of £18,000 from a spare unit the company lets out, and bank interest received of £6,000, all of which are taxed under different headings and so are deducted at this stage.
The adjusted trading profit before capital allowances is therefore £356,000 plus £96,000 plus £4,000, minus £22,000, minus £18,000, minus £6,000, which equals £410,000. The company’s capital allowances for the period, including full expensing on new qualifying equipment bought during the year, come to £32,000, giving a final trade profit of £410,000 minus £32,000, which equals £378,000.
Trade profit is only the first line of the full computation. The bank interest of £6,000 is added back in as non-trading profit, taxed under the loan relationship rules that govern interest income for companies. The rental income of £18,000 is added as UK property business income. A separately calculated chargeable gain on the machine sale, worked out under the capital gains rules using the asset’s original cost rather than its accounting book value, comes to £14,200, and this is added as a net chargeable gain. Finally, the £4,000 charitable donation, added back earlier because it was never a trading deduction, is now deducted in full as a qualifying charitable donation, the mechanism through which company donations actually secure their relief, covered fully in Part 3 of this series.
Taxable total profits, usually shortened to TTP, come to £378,000 plus £6,000 plus £18,000 plus £14,200, minus £4,000, which equals £412,200. Since this exceeds £250,000, Solstice Fabrications Ltd pays corporation tax at the main rate of 25% for 2026/27, giving a liability of £412,200 multiplied by 25%, which equals £103,050.
Action required: Before assuming your accounting profit is your tax bill’s starting point, separate out any rental income, interest received and profit on asset sales sitting inside it. Each is taxed correctly elsewhere in the computation, and leaving them mixed into trading profit either overstates or understates what is genuinely due.
Why the Rates Matter Once You Reach Taxable Total Profits
For 2026/27, companies with taxable total profits of £50,000 or less pay corporation tax at the small profits rate of 19%. Companies above £250,000, as in the example above, pay the main rate of 25%. Profits falling between the two thresholds are taxed on a sliding scale through marginal relief, which means the effective rate on each additional pound of profit in that band runs higher than 25%, before settling back to the headline main rate once £250,000 is passed. Both thresholds are divided between any companies under common control, so a group of associated companies shares the lower rate bands rather than each accessing them in full.
Key Takeaways
- The computation starts from profit before tax, because dividends are never a tax deductible expense.
- Depreciation and charitable donations are added back; rental income, interest received and profit on asset sales are deducted, since each is taxed under its own separate heading.
- There is no private use restriction on company expenses; personal use of a company asset is taxed on the individual instead.
- Full expensing gives a 100% first year deduction for most new equipment, permanently, with no end date since its introduction in 2023.
- Taxable total profits combine trade profit with non-trading interest, property income and chargeable gains, less qualifying charitable donations, before the 19%, marginal, or 25% rate is applied.
Confused Why Your Tax Bill Doesn’t Match Your Accounts?
Zazentax works through your computation line by line, separates the income that belongs under other headings, and shows you exactly how the figure in your accounts becomes the figure HMRC taxes.
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