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Accounting
Effective Tax Rate
The actual percentage of profit a company pays in tax after all deductions, credits, and differences are applied.
Investors and analysts watch the effective tax rate closely. A much lower rate than the statutory rate can be normal (due to legitimate incentives) or a red flag (aggressive tax structuring). Companies must reconcile it in the notes to the accounts.
It's the real tax bill as a percentage of profit — not the headline corporation tax rate the government advertises.
Real world: A tech company reports £100 million profit and pays £15 million in tax. Its effective tax rate is 15%, even though the statutory rate is 25%. This happens because of R&D credits, overseas tax planning, and deferred tax timing.
💡 Effective tax rate shows what the company actually pays — not what the law says on paper.