This guide takes you through the fundamentals of Corporation Tax in the UK, helping you make sense of a core component of business taxation and answering questions you might have.
Whether you are a start-up encountering corporate tax for the first time, an established business looking to understand your finances better, or an accountant wanting to give clients an easy-to-understand overview, this helpful guide to Corporation Tax gives you the need-to-know detail.
By outlining the key facts in small segments, we take you through the essentials stage by stage to ensure tackling this important business tax is doable and not daunting.
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What is Corporation Tax?
Corporation Tax is a UK business tax that limited companies, plus some clubs and societies must pay to HMRC based on their annual profits – the money made after overheads and expenses are deducted. It must also be paid on profits businesses make from investments or selling capital assets for more than they cost. As soon as your business starts making a profit, you start paying Corporation Tax (unless the business has previously reported losses).
In a nutshell, Corporation Tax is like an income tax for businesses; except companies don’t benefit from a tax-free allowance, so all profits are taxable. This tax is nothing new, it has been around since 1965, with rates once peaking at 52% in 1982! What is the corporate tax rate now? Thankfully significantly lower at 19%, which is the lowest rate in the G7 (The Group of Seven consists of Canada, France, Germany, Italy, Japan, the United Kingdom and the United States).
How much is Corporation Tax?
Currently, there is a standard rate of Corporation Tax on company profits at 19%. Put simply, if a business has a profit of £50,000, the tax eligible on that sum would be £9,500. However, if the business records a loss but generated a profit previously, it may be eligible for a tax refund by carrying that loss to the previous year.
In the 2021 Budget, a shake-up of Corporation Tax rates was announced that will take effect in 2023. SMEs with profits of £50,000 or under will come under a new small profits category and continue to pay the 19% rate. Those with profits over £50,000 and up to £250,000 will pay a tapered rate of Corporation Tax. The rate of Corporation Tax paid will rise to 25% for companies with profits over £250,000.
How to calculate Corporation Tax
Understanding how to calculate Corporation Tax is crucial in order to meet the requirements, and an accountant or tax adviser can give guidance, or take care of it for businesses that need support. Accurate bookkeeping is essential and knowledge of tax relief is beneficial to ensure your business is overpaying tax.
This is how to work out Corporation Tax in five basic steps:
- Calculate sales and income using a profit and loss account. Include all sales and any interest earned.
- Determine overheads and expenses – you can only claim expenses that HMRC class as “wholly and exclusively” for business use. Deduct this amount from the income to get the profit.
- Establish capital allowances. Fixed assets that are part of the business for several years depreciate in value – but depreciation is not an allowable expense and must be added back into the tax calculation. However, most capital asset purchases will qualify for Annual Investment Allowance tax relief, which can be used to reduce the amount of taxable profit.
- Factor in entertaining costs. Costs from entertaining clients and suppliers are not tax deductible.
- Work out the tax due. Add back any depreciation and client entertaining costs to the profit before accounts total, then subtract any capital allowances. This gives you the sum of profit liable for Corporation Tax.
Who pays Corporation Tax?
All UK limited companies have to pay Corporation Tax, no matter how big or small the business may be. Also liable are foreign companies with a UK branch or office, and organisations including clubs, societies, associations and co-operatives (even if not incorporated). Sole traders or partnerships do not pay Corporation Tax.
When setting up a limited company, registering for Corporation Tax with HMRC should be at the top of your To Do list and must be done within three months of starting to trade. Understanding this tax liability is vital for any business from the outset so it is accounted for and doesn’t come as a surprise.
When is Corporation Tax due?
The payment deadline for Corporation Tax differs depending on your accounting period, which makes this a more complicated tax than others. The deadline to pay is nine months and one day after the end of the accounting period for your previous financial year. Even if your company is loss-making and no tax is due, it still must be declared to HMRC.
So, when does it have to be paid? Corporation Tax must be calculated and paid to HMRC ahead of filing a Company Tax Return, which must be done within 12 months of the end of the financial year. For example, if your financial year was 1st January-31st December 2018, your tax needs to be paid by 1st October 2019. The company tax return must be filed by 31st December 2019. If it is a new business, there may be two Corporation Tax accounting periods set to ensure the accounting period doesn’t exceed 12 months.
How to pay Corporation Tax
Registering for Corporation Tax is the first task, even if you don’t pay until some time later. A business or nominated accountant must prepare and file a Company Tax Return each year, also known as form CT600. A ‘Notice to Deliver a Company Tax Return’ from HMRC should remind you. Regardless of whether the business has any tax due, the return has to be filed.
You should either pay the tax owed or report that there is nothing to pay – but either outcome must be done by your Corporation Tax deadline. Factor in time for your payment to get to HMRC, depending on your payment method; the money must be received by the deadline date to avoid a fine. Here at Taxfiler we provide software for accountants and tax advisers to help prepare and file a Company Tax Return (CT600).
How to reduce Corporation Tax
Before reading further it’s imperative to understand that evading any sort of tax is illegal. Corporation Tax is a compulsory business tax; but there are legitimate ways to reduce the amount you must pay which falls under tax avoidance. This particular tax is often one of the biggest bills a business faces, so taking steps to reduce it can be hugely helpful and is totally legal.
Here are four potential steps to reducing Corporation Tax:
- Claim allowable expenses incurred purely for use by the business. Salaries and employer NICs also count as a business expense. In deducting this, it shrinks the amount due in tax and lowers the bill.
- Draw a salary. As above, a salary and employer NICs are business expenses. Many business owners also choose to pay themselves in dividends, but dividends are not a business expense.
- Offset trading losses against capital gains. Get tax relief by offsetting the loss against other gains or profits in the same accounting period – and you can choose to carry the loss back.
- Pay HMRC early. If you pay your bill early, HMRC will repay some of it as interest. This is usually calculated from the date you pay through to the payment deadline. The earliest date they pay interest from is 6 months and 13 days after the start of your accounting period.
So, what is Corporation Tax? It is an unavoidable and entirely inevitable part of running a business – and a tax that generates substantial revenue for the Government. Support from accountants and tax advisers can help businesses navigate it and save money by reducing the liability, but many businesses successfully go it alone.
Remember that the Corporation Tax rate is set to change in 2022 and 2023. Make calculating your Corporation Tax easier by keeping accurate bookkeeping records – business accounting software can help you with this. Ensure you pay on time and finally, don’t pay more tax than you need to by reviewing legitimate ways to reduce payments.
Taxfiler is here to help with tax software that supports both businesses and practitioners to stay compliant and deal with Corporation Tax easily and efficiently. Get in contact with us today if you require anything else!