The tax reconciliation note explains why the tax charge in the profit and loss account is not simply the profit before tax multiplied by the corporation tax rate. FRS 102 paragraph 29.27(b) requires it, and from accounting periods beginning on or after 1 January 2026 small companies using Section 1A must give it too. You start with accounting profit at the applicable rate and list each item that moves the charge up or down until you reach the figure in the accounts.

Who has to give a tax reconciliation?

Paragraph 29.27(b) of FRS 102 requires a reconciliation between the tax expense (income) included in profit or loss and the profit or loss on ordinary activities before tax multiplied by the applicable tax rate. Companies applying the full standard have always had to give it.

Small companies were in a different position until the Periodic Review 2024 amendments. Appendix C to Section 1A now includes paragraph 1AC.32C, which requires a small entity to give the current and deferred tax disclosures in paragraphs 29.26 and 29.27(b). Paragraph 1.37 makes the amendments mandatory for accounting periods beginning on or after 1 January 2026. ICAEW’s helpsheet on the Section 1A changes also points out that the first accounts under the amended standard need comparatives, so the prior year reconciliation has to be prepared as well. The wider changes are covered in our page on Section 1A small entity reporting.

Paragraph 1A.17A still applies: a small entity need not give a specific disclosure if the information is not material, unless the Act requires it regardless. A company whose tax charge is exactly profit multiplied by one rate, with nothing to explain, may have very little to show, but that is rare.

Which rate is the applicable tax rate?

FRS 102 does not define the applicable rate, so the company chooses one and applies it consistently. For the financial year beginning 1 April 2026 HMRC’s published rates are a small profits rate of 19% for profits under £50,000 and a main rate of 25% for profits over £250,000, with marginal relief between the two limits using a standard fraction of 3/200.

In practice there are two common approaches:

  • Main rate start. Use 25% and show marginal relief, or the small profits rate saving, as a reconciling item. This keeps the starting rate stable from year to year.
  • Effective rate start. Use the blended rate the company actually suffers on its profit level. This avoids a large reconciling item but the starting rate moves whenever profits move.

Paragraph 29.27(d) requires an explanation of changes in the applicable tax rate compared with the previous reporting period, so whichever approach you pick, say what the rate is and why it changed. If the accounting period straddles 1 April and the rates differ between the two financial years, a time apportioned rate is the usual starting point; for 2025 and 2026 HMRC’s table shows the same rates and limits in both years.

What goes in the reconciliation?

Every item explains a difference between profit before tax at the starting rate and the total tax charge in profit or loss. The common ones for a UK company are:

Reconciling item Why it arises
Expenses not deductible Business entertaining and gifts are disallowed under section 1298 of the Corporation Tax Act 2009 (HMRC manual BIM45000), and capital items are disallowed by section 53 of that Act.
Income not taxable Most dividends received by a company are exempt under Part 9A of the Corporation Tax Act 2009; HMRC’s manual INTM651020 says the rules are designed so that the great majority are exempt.
Effect of marginal relief or small profits rate Only needed if you start at the main rate.
Adjustments to prior periods Over or under provisions of current tax; paragraph 29.26(b) lists these as a component of the charge.
Deferred tax not recognised Losses or other assets not recognised because recovery is not probable under paragraph 29.7.
Rate differences on deferred tax Deferred tax measured at a different rate from the starting rate, or remeasured for a rate change (paragraph 29.26(d)).

Ordinary timing differences, such as capital allowances running ahead of depreciation, do not normally appear. The current tax saving is matched by a deferred tax charge, so the two cancel within the total. They only show up when the deferred tax is measured at a different rate, which is one reason the rate used for deferred tax deserves care.

How do you build one? A worked example

Illustration only. A company with no associated companies and a 12 month period to 31 March 2027 has profit before tax of £400,000. Profit includes £10,000 of exempt dividends received and is after £6,000 of client entertaining and £50,000 of depreciation. It claims £150,000 of capital allowances, and last year’s tax was over provided by £2,000.

Taxable profit is £400,000 plus £6,000 and £50,000, less £150,000 and £10,000, which is £296,000, so the main rate applies and current tax is £74,000. Capital allowances exceed depreciation by £100,000, giving a deferred tax charge of £25,000 at 25%. The total charge is £74,000 less £2,000 plus £25,000 = £97,000.

Reconciliation £
Profit before tax of £400,000 at 25% 100,000
Expenses not deductible (£6,000 at 25%) 1,500
Income not taxable (£10,000 at 25%) (2,500)
Adjustment in respect of prior periods (2,000)
Total tax charge 97,000

The £100,000 timing difference does not appear because the current tax saving of £25,000 is exactly offset by the deferred tax charge. The components note required by paragraph 29.26 would separately show current tax of £74,000, the prior year credit of £2,000 and deferred tax of £25,000.

How does marginal relief show up?

Illustration only. A company with no associated companies and a 12 month period has profit before tax and taxable profit of £120,000, with no other adjustments. HMRC’s formula in CTM03925 gives marginal relief of 3/200 × (£250,000 less £120,000) × (£120,000 ÷ £120,000), which is £1,950. Tax is £30,000 at the main rate less £1,950, so £28,050.

Starting at 25%, the reconciliation shows £30,000 less marginal relief of £1,950. Starting at the effective rate of 23.375%, the starting figure is already £28,050 and there is nothing to reconcile. Both are acceptable if the rate is described clearly. Our page on marginal relief covers the formula, and remember that HMRC divides the limits by the number of associated companies plus one and reduces them for short periods.

Where does tax in other comprehensive income or equity go?

The reconciliation is to the tax expense in profit or loss. Tax on items in other comprehensive income or equity, such as deferred tax on a property revaluation, is disclosed separately under paragraph 29.27(a) and is not a reconciling item. Paragraph 29.22 requires tax to follow the transaction it relates to, so if a revaluation gain sits in other comprehensive income, so does its deferred tax. Our page on deferred tax on revaluations explains the measurement.

How should the note be laid out?

Paragraph 29.25 sets the objective: users should be able to evaluate the nature and financial effect of the current and deferred tax consequences of recognised transactions. A clear note usually has two parts. First, the components of the charge required by paragraph 29.26: current tax, prior period adjustments, deferred tax on origination and reversal of timing differences, and the effect of rate changes. Second, the reconciliation itself, starting from profit before tax at the stated rate and ending at the total charge, with the comparative year alongside.

Keep the captions specific. “Expenses not deductible for tax purposes” tells a reader more than “Other”. If one item is large, such as a big unrecognised loss, describe it in a sentence. Make sure the closing figure agrees exactly to the tax line in the profit and loss account. The current tax side of the calculation is explained in our page on accounting for current tax.

What mistakes come up most often?

  • Reconciling to current tax only. The reconciliation is to the total tax expense, current and deferred, in profit or loss.
  • Listing timing differences as reconciling items when deferred tax has been fully provided at the same rate. They cancel and should not appear.
  • Leaving out the prior year adjustment, so the note does not add up to the charge.
  • A mystery balancing figure. A large “other” usually means an item has been missed, often unrecognised losses or a deferred tax rate difference.
  • Not explaining the rate. Paragraph 29.27(d) requires an explanation where the applicable rate changes, which happens whenever a company moves between the small profits rate, the marginal band and the main rate on an effective rate basis.
  • Small companies assuming they are exempt. For periods beginning on or after 1 January 2026, paragraph 1AC.32C brings the reconciliation into Section 1A, with comparatives.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.