Paying tax might not be the first thing you associate with running a charity. After all, if your organisation exists to do good, shouldn’t its income be tax free? 

The short answer is: yes, sometimes. But charities aren’t automatically exempt from Corporation Tax across the board. While certain types of income and gains aren’t taxed, others are. That’s why it’s so important to understand how the rules work, and where the exemptions apply.

In this guide, we’ll unpack the essentials of Corporation Tax for UK charities, highlight what income is exempt and outline what you need to watch out for. Let’s start with a quick recap: 

What is Corporation Tax?

Corporation Tax is the levy that Limited Companies - and some other organisations - pay on their taxable profits. For most businesses, this covers trading income, investment returns and gains from selling assets. 

For the 2025/26 tax year (where your charity has taxable, non‑exempt profits):

• Profits over £250,000 are taxed at 25%.
• Profits under £50,000 are taxed at the small profits rate of 19%.
• Anything in between is taxed at a marginal rate.

Charities are technically subject to Corporation Tax too. The difference is, if a charity’s income is used for charitable purposes, that income is often exempt.

When charities don’t pay Corporation Tax

Charities benefit from a range of tax exemptions, provided they stick to the rules. If income and gains are applied only for charitable purposes, they usually don’t face a Corporation Tax bill.

Common exempt (tax free) income includes:

• Donations and gifts from individuals or companies.
• Legacies left in wills.
• Fundraising event profits, as long as the event is run mainly by volunteers.
• Grants from government bodies or other charities.
• Most investment income (like bank interest, dividends, or rental income), as long as the money is used for charitable aims.
• Profits from trading activities that are directly related to the charity’s purpose (for example, a museum selling entry tickets or a charity for animal welfare selling pet care guides).

As long as the funds are put back into the charity’s work, HMRC generally won’t come knocking for Corporation Tax.

When charities may have to pay Corporation Tax

Exemptions don’t mean a charity has a free pass in every situation. There are circumstances where Corporation Tax may apply, such as:

• Non-charitable trading: If your charity carries out trading activity that isn’t directly linked to its charitable objectives, the profits may be taxable. For example, if a health charity runs a café that isn’t connected to its charitable activities, HMRC might view that income as taxable.
  
  
• Significant levels of non-primary purpose trading: If your charity earns income from trading activities that aren’t directly related to its charitable objectives, HMRC allows a small trading exemption. The amount depends on your charity’s overall income. Smaller charities can earn up to £5,000 of this kind of income tax‑free, with the allowance rising as income grows, and capped at a maximum of £80,000. If your non‑primary purpose trading exceeds this limit, the surplus might be subject to Corporation Tax.
  
  
• Using income for non-charitable purposes: If any of your charity’s funds are applied to activities that aren’t charitable (e.g. private benefit), those amounts lose their tax-exempt status and can be taxed.
  
  
• Property or investment gains not used for charitable aims: Selling an asset at a profit isn’t taxable if the gain is reinvested in charitable work. But if it’s diverted elsewhere, Corporation Tax could be due.

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How HMRC checks compliance

To benefit from tax exemptions, your charity must be formally recognised by HMRC. That means registering for tax and ensuring your governing documents (like your constitution or trust deed) show that the organisation is set up for exclusively charitable purposes.

HMRC may ask you to provide:

• Annual accounts.
• Trustees’ reports.
• Evidence of how funds are applied.

If they find that income has been used for non-charitable purposes, they can withdraw tax exemptions and apply Corporation Tax on those funds.

Filing responsibilities for charities

Even if most or all of your income is exempt, you might still need to submit a Company Tax Return (CT600) if HMRC asks for one, keep proper financial records of all your charity’s income, spending and assets, and report income and expenditure accurately in your annual return to the Charity Commission (if this applies to you).

Failing to file when required can lead to penalties, even if no tax is ultimately due. That’s why we’ve put together this list of ideas for things charities can do to ensure they stay on the right side of HMRC:

1. Set up separate trading subsidiaries

‍If your charity wants to run significant non-charitable trading (like a café, shop or consultancy service), consider setting up a trading subsidiary. The subsidiary pays Corporation Tax on its profits, but it can gift those profits back to the charity, often tax-efficiently.

2. Keep clear records:

‍Document exactly how funds are raised and how they’re spent. If HMRC queries your exemptions, having a clear audit trail makes life much easier.

3. Apply for Gift Aid:

Don’t forget that donations from UK taxpayers may be eligible for Gift Aid, boosting your income by 25% at no extra cost to donors.

4. Get help from a tax professional:

Charities face unique tax rules, and it’s easy to get tripped up. An accountant with experience in the charity sector - such as one of our friendly team at Crunch - can help you structure your activities efficiently and avoid costly mistakes.

Tax isn’t optional, even for charities

In the UK, charities enjoy generous Corporation Tax exemptions, but they come with conditions. As long as your income and gains are used exclusively for charitable purposes, you can usually avoid a tax bill. But step outside the rules, and HMRC will expect payment just like they would from any other company.

If you run a charity and want clarity on your tax responsibilities, it pays to get expert help. At Crunch, our accountants understand both business and charity rules, and can guide you through the exemptions, filings and any tricky grey areas. That way, you can spend less time worrying about HMRC, and more time making a difference.