A trustee meeting is going smoothly… until someone asks: “We’ve started selling training places and merch — do we now owe Corporation Tax?” That single question can spark a lot of anxiety, because the rules feel like they were written for big businesses, not busy charities juggling restricted funds and programme delivery.

Here’s the reassuring bit: in many cases, UK charities don’t pay Corporation Tax — provided the income and gains are eligible for charitable tax exemptions, and you can show they were applied properly. But it’s not automatic, and a few common scenarios can trip you up, especially around trading. And when Corporation Tax does arise, it can be material: the UK main rate is 25% for profits above £250,000 (with different bands below that).

In this guide, I’ll walk you through the practical “when it’s exempt vs when it’s taxable” reality, the small trading exemption (with worked numbers), when to consider a trading subsidiary, and what to do if HMRC asks for a CT600 — so you can make decisions confidently and keep clean records that stand up to scrutiny.

Direct answer

Most UK charities do not pay Corporation Tax on income and gains that are used for charitable purposes and fall within HMRC’s charitable tax exemptions. Corporation Tax can apply where a charity has taxable non-primary purpose trading, income not applied correctly, or certain chargeable gains that don’t meet the exemption rules. (HMRC expects you to keep evidence and may still ask you to file a return.)

Key takeaways

• Charities are usually exempt from Corporation Tax if income/gains are applied to charitable purposes and the conditions are met.
  
• Primary purpose trading (trading that directly advances your objects) is commonly exempt; non-primary purpose trading can be taxable unless it falls within the small trading exemption.
  
• The small trading exemption is based on turnover (income), not profit: up to £8,000 (if gross annual income under £32,000), 25% (up to £80,000 cap), or £80,000 (if gross annual income over £320,000).
  
• If you exceed the small trading exemption limits, HMRC says you may have to pay tax on all profits from that trade (not just the excess).
  
• UK Corporation Tax rates (non-ring fence): 19% small profits rate (≤ £50,000), 25% main rate (> £250,000), with marginal relief between £50,000–£250,000.
  
• A trading subsidiary can protect the charity’s exemptions by ring-fencing taxable trading and passing profits up via Gift Aid (where conditions are met).
  
• You must file a Company Tax Return when HMRC asks you to (a “Notice to deliver”); penalties can apply even if there’s no tax due.
  

Corporation Tax in the UK

Corporation Tax is a tax on a company’s taxable profits. In the UK, the headline rates for non-ring fence profits are:

• 19% small profits rate for profits under £50,000
  
• 25% main rate for profits over £250,000
  
• Marginal relief applies between £50,000 and £250,000 (HMRC provides a calculator; the standard fraction is 3/200).
  

Charities are different because Parliament has created tax reliefs/exemptions to support organisations that exist for charitable purposes and provide public benefit. In plain English: HMRC generally doesn’t want to tax income that is raised and used properly to deliver charitable outcomes.

But “charity = automatically tax-free” is the myth that causes problems.

The reality: a charity can have a mix of income streams — some fully exempt, some exempt only if conditions are met, and some taxable unless managed carefully (often through a trading subsidiary). HMRC’s “Charities: detailed guidance notes” are the best place to see how HMRC frames this in practice.

When a charity is usually exempt from Corporation Tax

A charity is usually exempt from Corporation Tax on income and gains that:

1. fall within the categories HMRC recognises as exempt (examples below), and
   
2. are applied for charitable purposes (with appropriate governance and record-keeping), and
   
3. don’t create unacceptable private benefit or non-charitable application.
   

Think of it like a three-part test: source + use + evidence.

What “applied to charitable purposes” looks like in practice

Trustees often assume “we intend to use it charitably” is enough. HMRC will generally expect to see:

• trustee minutes approving budgets and spending decisions,
  
• a clear audit trail from income to expenditure,
  
• restricted funds respected and documented,
  
• contracts/invoices that match the charity’s objects.
  

If your finance team can explain the story of the money in two minutes with paperwork to back it up, you’re usually in a strong place.

Commonly exempt income: the categories trustees should recognise

Below are the income types that are commonly exempt, assuming the “applied properly” conditions are met.

1) Donations (including Gift Aid) and fundraising gifts

Voluntary donations are typically within the exemptions. If the donor completes a valid Gift Aid declaration, the charity can usually claim an extra 25p for every £1 donated (subject to the donor having paid enough UK tax).

Practical note: Gift Aid is not “free money” — it’s a tax reclaim. Keep declarations, maintain eligible records, and reconcile claims to bank receipts and your donor system.

2) Legacies

Legacy income is commonly treated as exempt where applied for charitable purposes (again: evidence matters, and timing can matter where estates take time to administer).

3) Grants

Grants are commonly within the exemption framework, but watch:

• conditions on use (restricted vs unrestricted),
  
• whether any grant element looks like payment for services (which may be trading).
  

4) Investment income

Interest, dividends, rental income and certain other investment returns are commonly exempt for charities, assuming they’re received by the charity and used appropriately.

5) Primary purpose trading

This is the big one for modern charities.

Primary purpose trading is trading that directly furthers the charity’s objects. HMRC’s trading guidance and detailed notes set out the principles; in practice, you ask: “Is this activity how we deliver our charitable purpose (or integral to it)?”

Examples (typical):

• A theatre charity selling tickets to performances (advancing arts/culture).
  
• An education charity charging for courses that deliver its educational objects.
  
• A museum charity charging admission (advancing heritage/education).
  

Common pitfall: labelling something “primary purpose” because the profits fund good work. That alone doesn’t make it the primary purpose — that’s often non-primary purpose trading (fundraising trading).

When can Corporation Tax apply to UK charities?

Corporation Tax can apply when the charity has taxable profits that don’t qualify for exemption — most often in these areas:

1) Non-primary purpose trading (above the small trading exemption)

If trading is not the primary purpose (e.g., selling unrelated goods/services mainly to raise funds), it can be taxable. HMRC provides a small trading exemption (explained in detail below).

2) Non-charitable application of funds or unacceptable private benefit

If funds are applied outside charitable purposes (or trustees can’t evidence proper application), exemptions can be restricted.

3) Taxable gains not handled correctly

Gains can be exempt in many charity contexts — but if the conditions aren’t met, Corporation Tax on chargeable gains can arise.

4) Mixed activities and “blended” income

Some income streams are part grant/part service fee; some events blend fundraising with trading. Where it’s not clearly structured, tax risk increases — and HMRC questions become harder to answer quickly.

The small trading exemption— explained clearly

HMRC’s small trading tax exemption is designed to let charities do a modest amount of non-primary purpose trading without a tax charge.

Key point: the exemption uses turnover (income) from non-primary purpose trading — not profit.

HMRC summarises the limits like this (based on the charity’s gross annual income):

• If gross annual income is under £32,000 → max small trading turnover £8,000
  
• If gross annual income is £32,001 to £320,000 → max small trading turnover 25% of total annual turnover
  
• If gross annual income is over £320,000 → max small trading turnover £80,000
  

If the charity’s small trading turnover is higher than the exemption limits, HMRC states you’ll have to pay tax on all profits from that trade.

Worked example 1 — staying within the exemption

GreenSteps Youth Charity has a total gross annual income of £120,000.
It runs a fundraising “merch” shop online that is a non-primary purpose trading.

• Gross annual income: £120,000
  
• Exemption limit: 25% of £120,000 = £30,000 (because £32,001–£320,000 band)
  
• Merch turnover: £24,000
  
• Merch costs: £14,000
  
• Merch profit: £10,000
  

Outcome: Turnover (£24,000) is below the £30,000 limit, so the profit is normally exempt (assuming other conditions are met and records are kept).

What to document: a trading log that shows turnover by activity, cost allocation method, and trustee oversight (especially if it’s growing fast).

Worked example 2 — exceeding the exemption

Community Paws Rescue has a total gross annual income of £300,000.
It starts running a paid “pet first aid” course for the general public that is not part of its charitable objects (non-primary purpose).

• Gross annual income: £300,000
  
• Exemption limit: 25% of £300,000 = £75,000 (still within £32,001–£320,000 band)
  
• Course turnover: £92,000 → exceeds limit by £17,000
  
• Course costs: £52,000
  
• Course profit: £40,000
  

HMRC’s guidance indicates that exceeding the turnover limit can mean tax is due on all profits from that non-primary purpose trade (not just the excess turnover).

If taxed at the small profits rate (illustrative, assuming total taxable profits fall within that band), the tax could be:

• £40,000 × 19% = £7,600 Corporation Tax
  

How it’s avoided (typical options):

• Restructure the activity so that it is genuinely the primary purpose (only if it truly advances objects), or
  
• Move the activity into a trading subsidiary and Gift Aid profits up to the charity, or
  
• Reduce turnover / change pricing/limit cohorts to stay under the exemption.
  

Mini case study 1: Ayesha and the “too-successful” training programme

Ayesha Khan, trustee of Eastside Employability, was delighted when their new CV workshops took off. The charity’s objects were employability support for unemployed adults, so the workshops were the primary purpose when delivered to beneficiaries funded by grants.

But demand from local businesses grew. The charity began selling the same workshops commercially to corporate clients: £58,000 turnover in the year, with £22,000 profit. Total charity income was £180,000, so the small trading exemption limit would be 25% = £45,000.

Because the corporate work didn’t directly advance the charity’s objects in the same way (it was essentially a commercial training service), it was treated as non-primary purpose trading and exceeded the small trading limit.

Outcome: They set up a trading subsidiary for corporate contracts. The subsidiary Gift Aided £20,000 of profit to the charity and retained £2,000 for working capital. Lesson: growth is brilliant — but growth without structure can create an avoidable tax bill.

Trading subsidiaries: when to use one

A trading subsidiary is a separate company (usually wholly owned by the charity) that carries out taxable trading. It helps by:

• ring-fencing risk (commercial contracts, staffing liabilities, refunds),
  
• protecting the charity’s exemption position by keeping taxable trading outside the charity,
  
• allowing profits to be passed to the charity via Gift Aid (where conditions are met).
  

When a subsidiary is commonly a good idea

• Your non-primary purpose trading is consistently close to, or above, the small trading exemption limits.
  
• You’re signing commercial contracts, taking on significant customer liabilities, or hiring staff for trading activities.
  
• You want clearer reporting: charity accounts show charitable delivery; subsidiary accounts show trading performance.
  

How profits usually move from a subsidiary to a charity

Commonly, the trading subsidiary donates its distributable profits to the charity under Gift Aid (subject to rules and timing). That can reduce the subsidiary’s taxable profits. Gift Aid rules and eligibility still matter, so it must be documented properly.

Governance and accounting considerations

• Separate bank account, bookkeeping, VAT position review, and contracts in the correct entity.
  
• Written intercompany agreements (management charges, shared staff recharge, IP use).
  
• Trustees should manage conflicts: the charity as a shareholder must oversee the company properly.
  
• Ensure the charity’s support to the company (staff time, loans, guarantees) is documented and in the charity’s best interests.
  

Mini case study 2: Tom and the charity shop expansion decision

Tom Williams, finance manager at Harbour Homes Support, oversees three charity shops. Shop sales were £260,000 turnover, with £48,000 profit. The charity’s total gross annual income was £900,000, so the small trading turnover cap would be £80,000 (because gross annual income is over £320,000).

Tom separated the shop income correctly: donated goods and volunteer-run activity supported the charity’s fundraising, but the scale was now significant and included paid staff, online selling, and regular new goods lines.

Outcome: They kept the shops within the charity for the moment because the non-primary purpose turnover stayed below £80,000 for the specific taxable trading streams they identified — but they implemented a monthly “trading thermometer” report and pre-approved a trigger point: if taxable non-primary purpose turnover hit £70,000 by month 9, they would incorporate a trading subsidiary before year-end.

Lesson: charity shops can be fine — it’s the mix and scale of trading streams that drives the tax analysis.

HMRC recognition/registration and compliance checks 

Most charities interact with HMRC in at least one of these ways:

• registering to claim Gift Aid,
  
• operating PAYE,
  
• dealing with VAT (where relevant),
  
• responding to HMRC compliance checks.
  

HMRC’s charity guidance places heavy emphasis on records: governing document, evidence of charitable purposes, accounts, trading analysis, and proof of application of funds. “Charities: detailed guidance notes” are a key reference point for how HMRC approaches this.

Documents and records I’d want ready

• Governing document and Charity Commission registration details
  
• Trustee minutes approving:
  
  • trading activity decisions
    
  • use of funds (especially restricted)
    
  • any subsidiary arrangements
    
• Trading breakdown: primary purpose vs non-primary purpose, with turnover and profit
  
• Gift Aid: declarations, claim calculations, reconciliations
  
• Contracts and invoices for major income streams
  
• Notes on cost allocation methodology (rent, staff time, shared costs)
  

Filing responsibilities: when does a charity need a CT600?

A common misunderstanding is: “We’re a charity, so we never file Corporation Tax.”

HMRC’s position is clearer:

• You must complete a tax return when HMRC asks you to, even if no tax is due.
  
• The CT600 form itself states that if HMRC sends a Notice to deliver a Company Tax Return, you must comply by the filing date or face penalties, even if there is no tax to pay.
  

Practical triggers

• HMRC issues a notice to file (often because of:
  
  • trading indicators,
    
  • size/complexity,
    
  • routine compliance cycles,
    
  • significant Gift Aid claims).
    
• Your charity has taxable income/gains and needs to report and pay Corporation Tax.
  

Deadlines to keep in mind

For companies, Corporation Tax is normally due 9 months and 1 day after the end of the accounting period, and the CT600 filing deadline is usually 12 months after the period end (subject to specifics and HMRC notices). HMRC’s Company Tax Return guidance sets out the process and formatting expectations.

(If your charity is not a company — e.g., a charitable trust — the filing route may differ. The key point remains: respond to HMRC requests and keep evidence ready.)

Mini case study 3: Priya, a surprise CT600 notice, and a calm response

Priya Patel, director of Little Lanterns CIC-to-charity transition, had just converted their organisation into a registered charity company. Year one income was mostly grants (£140,000) and donations (£35,000) plus a small paid conference (£12,500 turnover, £4,000 profit). They assumed “all exempt” and moved on.

Then HMRC issued a Notice to deliver a Company Tax Return. Priya panicked — until they treated it like a normal compliance job.

They prepared: (1) a trading analysis showing the conference was non-primary purpose but below the exemption limit (25% × £187,500 = £46,875), (2) trustee minutes approving application of funds, and (3) Gift Aid reconciliations.

Outcome: CT600 filed on time, no tax due, and a clean compliance trail for future years. Lesson: a CT600 notice doesn’t automatically mean you’ve done something wrong — it means HMRC wants the paperwork.

Practical checklist: How to keep your charity on the right side of HMRC

Use this as a quarterly routine (it saves pain later):

1. Map every income stream
   

• Donations, grants, trading, investments, events, service contracts.
  

2. Classify trading properly
   

• Primary purpose trading vs non-primary purpose trading.
  
• Keep brief notes explaining why you classified it that way (so it’s consistent year to year).
  

3. Track non-primary purpose trading turnover monthly
   

• Compared to your small trading exemption limit:
  
  • £8,000 / 25% / £80,000, depending on gross annual income.
    

4. Documentthe  application of funds
   

• Minutes, budgets, fund reports, and restricted fund tracking.
  

5. Keep Gift Aid clean
   

• Valid declarations, eligibility checks, claim reconciliations (25p per £1).
  

6. If trading is growing, decide early
   

• Reduce/reshape, or move to a trading subsidiary before you breach limits.
  

7. Have a CT600 plan
   

• If HMRC issues a notice, file on time even if nil tax due.
  

Common mistakes

Mistake 1: Assuming “fundraising trading = automatically exempt”

Fix: Separate the question “Does it fund good work?” from “Is it primary purpose trading?” Fundraising trading is often a non-primary purpose, so use the small trading exemption limits or a subsidiary.

Mistake 2: Watching profit, not turnover

The exemption limits are about turnover (income), not profit. A low-profit activity can still breach the limits on turnover and create tax risk.

Mistake 3: Mixing trading streams in the bookkeeping

Fix: Use separate nominal codes (or tracking categories) for each trading activity. You want to answer: “What was turnover from taxable non-primary purpose trading this year?” in seconds.

Mistake 4: Weak cost allocation

Overstating charitable costs to suppress trading profit is risky.
Fix: Use a consistent, reasonable allocation basis (e.g., staff time sheets, floor area, usage).

Mistake 5: Late response to HMRC notices

Fix: Treat HMRC letters like statutory deadlines. If a CT600 notice arrives, file on time even if you believe there’s no tax due.

Ask an accountant

Get tailored advice early if:

• You’re close to the small trading exemption limit (or growing quickly),
  
• you’re setting up a trading subsidiary or drafting intercompany agreements,
  
• You have complex income (service contracts, blended grants/fees, international income),
  
• You’re disposing of property/investments and unsure about exempt gains,
  
• HMRC opens a compliance check or issues repeated CT600 notices.
  

A one-hour review can prevent years of messy unwinding later.

Important disclaimer

This article is general information for UK charities and is not tax advice. Charity tax can be fact-specific. Always check the latest HMRC guidance (including “Charities: detailed guidance notes”) and, where appropriate, take professional advice or confirm your position with HMRC.

8) FAQ

Do charities ever pay Corporation Tax in the UK?

Yes. While many income types are exempt when applied for charitable purposes, Corporation Tax can arise on taxable non-primary purpose trading, certain gains, or where exemptions don’t apply. HMRC may also require a CT600 filing even if no tax is due.

What counts as primary purpose trading?

Primary purpose trading is trading that directly advances the charity’s objects (it’s part of delivering the mission, not just raising funds). HMRC’s charities trading guidance and detailed notes set out principles and examples.

What is the small trading exemption, and how much is it?

It’s an HMRC exemption for non-primary purpose trading turnover up to limits based on gross annual income: £8,000 (if under £32,000), 25% (if £32,001–£320,000), capped at £80,000 (if over £320,000).

Is the small trading exemption based on profit or turnover?

Turnover (income), not profit. A low-profit activity can still exceed the turnover limit. If the turnover exceeds the exemption limits, HMRC says you may have to pay tax on all profits from that trade.

Do charity shops pay Corporation Tax?

Often, charity shop profits are not taxed if structured and managed within charity exemptions, but it depends on the nature and scale of trading and whether it is treated as non-primary purpose trading within the small trading exemption. Larger or more commercial operations may use a trading subsidiary.

Does Gift Aid affect Corporation Tax?

Gift Aid is primarily a tax reclaim on eligible donations: charities can claim 25p per £1 donated (with a valid declaration and donor eligibility). It can also be relevant where a trading subsidiary Gift Aids profits to the charity, reducing taxable profit in the company (if conditions are met).

When should a charity set up a trading subsidiary?

Commonly, when non-primary purpose trading is close to or above the small trading exemption, or where commercial risk should be ring-fenced. A subsidiary can donate profits to the charity (often under Gift Aid rules) while keeping taxable trading separate.

Does HMRC require all charities to file a CT600?

Not always — but if HMRC issues a notice to file, you must submit a return by the deadline, even if there is no tax to pay, or penalties can apply. HMRC states this clearly in its guidance and on the CT600 itself.

What Corporation Tax rate applies if a charity becomes taxable?

If the charity (or its trading subsidiary) has taxable profits, the non-ring fence rates are: 19% (profits under £50,000), 25% (profits over £250,000), with marginal relief between £50,000 –£250,000.

If we exceed the small trading exemption, do we just pay tax on the excess?

HMRC’s published guidance indicates that if turnover exceeds the exemption limits, you may need to pay tax on all profits from that non-primary purpose trade — not just the “excess” turnover. That’s why monitoring and early restructuring matter.

What records should we keep for HMRC charity tax compliance?

Keep governing documents, trustee minutes, trading analysis, income classifications, cost allocation notes, Gift Aid declarations and reconciliations, contracts, and evidence of how funds were applied to charitable purposes. HMRC’s “Charities: detailed guidance notes” are a useful checklist prompt.