Corporation Tax treats trading income and non-trading income as two separate streams inside the same company. Trading income is the profit from actively buying and selling goods or services; non-trading income covers passive receipts like interest, rents, and dividends. Each stream has its own rules for deducting expenses and relieving losses, and both are reported in separate boxes on the CT600. The classification decides what you can deduct, how you can use a loss, and, in some cases, whether you keep access to reliefs that depend on trading status.1GOV.UK. Corporation Tax
What Counts as Trading Income
Trading income comes from buying and selling goods or services on a regular, organised basis with the aim of making a profit. Part 3 of the Corporation Tax Act 2009 requires companies to calculate trading profits separately from all other income.2Legislation.gov.uk. Corporation Tax Act 2009 Part 3
When an activity is borderline, HMRC applies the Badges of Trade, a set of indicators built up through case law and most commonly associated with Marson v Morton.3GOV.UK. Business Income Manual BIM20201 The current list runs to nine: a profit-seeking motive, the number of transactions, the nature of the asset, whether the company already runs a similar trade, changes made to the asset before sale, the way the sale is carried out, the source of finance, the time between purchase and sale, and the method of acquisition.4GOV.UK. Business Income Manual BIM20205
No single badge decides the question. HMRC weighs the overall picture. A company that repeatedly buys stock, adds value, and sells through an organised operation is trading. A company that buys one commercial building and collects rent is not.
What Counts as Non-Trading Income
Non-trading income is everything outside the active trade. Three categories cover most cases.
Interest and Loan Relationships
Interest on bank deposits, loans to third parties, and debt securities falls under the Loan Relationships rules in Part 5 of the Corporation Tax Act 2009.5Legislation.gov.uk. Corporation Tax Act 2009 Part 5 These receipts are classified as non-trading credits unless the company’s core trade is lending money, as it would be for a bank. Non-trading credits are computed separately from operational turnover, which becomes important once losses enter the picture.
Property Income
Rental income from investment properties is taxed as property business income, not trading profit. The line shifts when the company provides substantial additional services alongside the accommodation. A hotel or a serviced office is more likely to be treated as a trade, because those services form a significant part of what the customer pays for. Collecting rent and maintaining a building does not cross that threshold.
Dividends
Dividends from other UK or overseas companies are technically chargeable to Corporation Tax, but Part 9A of the Corporation Tax Act 2009 exempts the great majority of them to prevent the same profit being taxed twice as it flows between companies.6GOV.UK. HMRC International Manual INTM651020 Small companies get a blanket exemption; larger ones need to meet one of several conditions, but most ordinary dividends still qualify.
Companies With Both Streams
Many companies earn both. A manufacturer might hold cash on deposit and rent out a warehouse alongside its main operation. The tax computation has to keep the streams apart because the deduction and loss rules differ, and sometimes the effective rate does too.
HMRC treats a company as a trading company as long as non-trading activities do not account for more than about 20% of overall activity. Losing that status can knock out reliefs that depend on it, including Business Asset Disposal Relief, so the classification matters beyond the annual computation.
How Deductions Differ
Trading expenses have to be incurred “wholly and exclusively for the purposes of the trade” under Section 54 of the Corporation Tax Act 2009.7Legislation.gov.uk. Corporation Tax Act 2009 Section 54 If a cost has a dual purpose, HMRC can disallow the whole amount. Wages, raw materials, premises, insurance, and marketing are the usual deductions. The company carries the burden of proving each one qualifies, so records matter.
Investment companies and companies with significant non-trading activity deduct their overheads as expenses of management under Section 1219 of the Corporation Tax Act 2009.8GOV.UK. HMRC Company Taxation Manual CTM08580 These cover things like legal fees for managing an investment portfolio, audit costs, and directors’ salaries where the directors oversee investments. Management expenses come off total profits rather than a single income stream. Property income has its own direct deductions: maintenance, insurance, and letting agent fees tied to the units. Putting a cost in the wrong category can lose the deduction altogether.
How Losses Differ
The split matters most when a stream runs at a loss.
A trading loss can be set against the company’s total profits for the same accounting period.9Legislation.gov.uk. Corporation Tax Act 2010 Section 37 Anything unused can be carried back to periods falling within the 12 months before the loss-making period, producing a refund on tax already paid. Whatever remains carries forward against future profits. Carried-forward trading losses arising after 1 April 2017 can be set against total profits of future periods rather than only future trading profits, though the largest companies face a 50% restriction on profits above a £5 million annual allowance.
Non-trading loan relationship deficits, arising when non-trading debits such as interest paid on investment borrowings exceed non-trading credits, follow a narrower path. The company can set the deficit against total profits for the same period, surrender it as group relief, or carry it forward against future non-trading profits.5Legislation.gov.uk. Corporation Tax Act 2009 Part 5 An investment loss cannot simply wipe out tax on a healthy trade without meeting specific conditions. That is why the category has to be right from the start.
Tax Rates and Marginal Relief
The main Corporation Tax rate is 25% on annual profits above £250,000. Profits of £50,000 or less pay the small profits rate of 19%.10GOV.UK. HMRC Corporation Tax Rates and Allowances Profits in between attract marginal relief, which lifts the effective rate gradually from 19% toward 25%.
The thresholds are divided between associated companies.11GOV.UK. Marginal Relief for Corporation Tax With three associates, the limits are split by four, dropping the lower limit to £12,500 and the upper limit to £62,500. That is a common and expensive place to make a mistake.
Reporting the Split and Paying on Time
Companies report both streams on Form CT600, the Company Tax Return, submitted through the HMRC online portal with the annual accounts and a detailed tax computation.12GOV.UK. File Your Accounts and Company Tax Return Trading profits and non-trading credits go into separate boxes. The filing deadline is 12 months after the end of the accounting period.13GOV.UK. Company Tax Returns
Payment falls earlier. Most companies pay nine months and one day after the accounting period ends.14GOV.UK. Pay Your Corporation Tax Bill Companies with taxable profits above £1.5 million pay in quarterly instalments instead, with the first due six months and 13 days into the accounting period, which is before the period even ends.15GOV.UK. Pay Corporation Tax if You’re a Large Company
Late CT600 returns attract flat-rate penalties starting at £100 and escalating for repeat lateness, with rates doubling from 1 April 2026, plus tax-geared penalties once a return is more than six months late.16GOV.UK. Corporation Tax Penalty Determinations CT211 Notes17GOV.UK. Company Tax Returns Penalties for Late Filing Getting the trading and non-trading split right at the computation stage is far cheaper than unpicking it after HMRC opens an enquiry.