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How does this corruption system work? Ive only gotten it up to a 3

You pretty much just need to choose the more depraved, sexual, and morally questionable actions. Wandering the city, I've found, is a pretty good way to get events that boost your corruption. As are decisions you make at work, at the Bakery it's a good idea to be extremely submissive towards Keith belittling you to get your corruption up, and at the Cafe doing the sexual favors for bigger tips gets it up pretty well, in my experience.

If you are going the Kate romance path, don't encourage her to open buttons on her shirt (but is ok if you do it). Not sure what other corrupt actions at the cafe you can get away with - certainly not any that involve Kate.

Caesarin explained it pretty well in his reply. Any choice that is more depraved or slutty will increase your corruption points.
If you get 100 and unlock the "Corrupted" achievement you'll get a new school uniform. (You can switch back to the old one in the wardrobe if you wish)