Corporation Tax vs Capital Gains Tax: How Do They Impact Profits?

As a limited company director, understanding how different taxes affect your profits is vital to manage your business tax-efficiently.

Two common levies you'll encounter when running a business or selling assets are capital gains tax and corporation tax. Both can reduce the money available to you or your business, but they apply in different situations and are calculated in different ways.

If you're looking to maximise retained profits, grasping the distinction between capital gains tax vs corporation tax is essential.

Let's take a closer look.

Understanding Capital Gains Tax

Capital gains tax is a personal tax charged on the profit made when you sell or dispose of an asset that has increased in value.

Note that the gain you make is the amount that gets taxed, not the total amount of money you receive.

For company directors, this tax most commonly applies when you sell shares in your business or dispose of personal assets used for commercial purposes. This may include vehicles, furniture or technology.

Short Term vs Long Term Capital Gains Tax

While some tax systems separate short-term and long-term capital gains, the UK system takes a different approach.

Standard UK rates depend on your personal income tax band, currently standing at 18% for basic rate taxpayers and 24% for higher-rate taxpayers. However, the length of time you hold an asset still makes a difference to tax liability.

If you hold business assets or company shares for at least two years, you may qualify for Business Asset Disposal Relief. This relief can significantly lower your tax burden should you decide to sell your business.

How Capital Gains Tax is Calculated?

Calculating your liability involves taking the final sale price of the asset and deducting the original purchase cost.

You can also deduct certain allowable expenses, like solicitor fees or improvement costs. Every individual has an annual tax-free allowance, which sits at £3,000 for the 2026/27 tax year. You only pay tax on the profit that sits above this threshold.

Understanding Corporation Tax

Unlike personal taxes, corporation tax is levied directly on the profits of a limited company. This tax applies to the money your company makes from doing business, from investments, and from selling corporate assets for a profit (known as chargeable gains).

Effective Tax Rate for Corporations

The UK uses a tiered system for corporate profits. The main rate of Corporation Tax is 25% for companies with profits exceeding £250,000.

If your company generates profits under £50,000, you pay the small profits rate of 19%. Companies with profits sitting between these figures benefit from marginal relief. This means their effective tax rate gradually increases from 19 to 25% based on their exact profit level.

The Calculation of Corporation Tax

To calculate your corporate tax liability, you take your company's total income and deduct all allowable business expenses, such as staff salaries, office rent, and equipment purchases.

You also add any chargeable gains made from selling company-owned assets. The resulting figure is your taxable profit. You must report this figure to HMRC annually by filing a Company Tax Return.

Comparing Capital Gains Tax and Corporation Tax

When weighing capital gains tax vs corporation tax, the fundamental difference lies in who owns the asset and who pays the final bill.

Key Differences

If you own an asset personally and sell it for a profit, you're liable for capital gains tax. If your limited company owns an asset and sells it for a profit, the company pays corporation tax on that chargeable gain.

Furthermore, companies don't receive an annual tax-free allowance for their gains in the way individuals do. Every pound of profit made from selling a corporate asset is subject to tax.

Advantages and Disadvantages

Holding assets within a company may be tax-efficient in some circumstances, particularly where profits are being retained for business use. However, extracting those profits personally can create additional tax, so the overall position should be considered before deciding where assets should be held.

This makes a limited company an attractive vehicle for accumulating wealth. The disadvantage is that extracting those profits from the company for personal use triggers additional dividend taxes or income tax, resulting in a potential double tax charge.

Capital Gains Tax Planning for Corporations

Effective tax planning requires a strategic approach to how your business holds and disposes of assets.

For instance, if your company sells a piece of commercial property, you can often defer the corporation tax due on that chargeable gain by using Rollover Relief, provided you reinvest the proceeds into a new qualifying business asset.

Navigating the complex overlap between corporate and personal taxation is challenging. Making an uninformed decision about asset ownership can cost your business thousands of pounds. Seeking expert advice from professional Corporation Tax Accountants ensures your asset strategy is perfectly aligned with HMRC rules and highly tax-efficient.

Are you unsure how the latest tax rates impact your business profits?

Contact us today to claim your Free Financial Health Check. We'll review your current financial structure and connect you with the right experts to optimise your tax position.

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