Guide to Corporation Tax

Corporation tax is a tax on the profits of limited companies and some other organisations in the UK. If your business is a limited company, a foreign company with a UK branch, or an unincorporated association, you’ll need to pay this tax on your taxable profits.

Currently, the UK’s corporation tax rate stands at 25% for profits above £250,000, with a 19% rate for smaller profits up to £50,000. Businesses with profits between £50,001 and £250,000 benefit from a marginal rate, ensuring that tax increases gradually as profits rise.

If your business is incorporated as a limited company, you are required to pay corporation tax on:

• Profits from doing business (trading profits).
• Investments (e.g., interest on savings).
• Selling assets (e.g., land, property, or shares) for more than they cost (capital gains).

It’s important to note that if you are a sole trader or in a partnership, you won’t pay corporation tax. Instead, you will be taxed on your profits through Income Tax.

Corporation tax is due at the end of your company’s accounting period, which is usually the same as your financial year. Unlike other taxes, there’s no bill sent to remind you. You must:

• File a Company Tax Return (CT600 form) with HMRC within 12 months after the end of your accounting period.
• Pay the corporation tax due within 9 months and 1 day after the end of your accounting period.

For example, if your financial year ends on 31st March 2024, your corporation tax payment is due by 1st January 2025.

1. Determine Your Profits: Start with your total income from trading, investments, or asset sales, then deduct any allowable expenses, including salaries, office rent, equipment costs, and business travel.
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2. Deduct Tax Reliefs: Certain expenses, such as pension contributions and Research & Development (R&D) tax credits, can reduce your taxable profit.
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3. Apply the Tax Rate: Once you have your taxable profit, apply the appropriate tax rate based on your profit bracket

As a business owner, you can reduce your corporation tax liability by taking advantage of deductions and reliefs:

• Allowable expenses: Costs like employee wages, office supplies, and marketing expenses can be deducted from your profits.
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• Annual Investment Allowance (AIA): You can claim 100% of the cost of qualifying plant and machinery, such as office equipment or vehicles, up to a certain limit.
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• Research and Development (R&D) Tax Credits: If your company engages in innovative projects, you may be eligible for tax relief.
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• Patent Box: If your business earns income from patents, you can reduce the tax on these profits to 10%.

When you set up your limited company, you need to register for corporation tax with HMRC within three months of starting to do business. You’ll need your company’s unique taxpayer reference (UTR), which HMRC will send to your company’s registered address after it is incorporated.

Failing to register or pay on time can lead to penalties. Even if your company doesn’t make a profit or owes no tax, you must still file a tax return.

Top Tip! Shortly after forming your limited company, you will receive a UTR (unique tax reference) in the mail. Don’t wait until you need to file your corporation tax return. Setup your government gateway account (if you’ve don’t already have one) and activate your corporation tax account now. This wont change when or how much corporation tax you need to pay, it will however mean you’re not stressing hoping the activation code comes in the mail before your filing deadline.

Your corporation tax return must include:

• Your company’s profits (calculated according to UK tax law).
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• Any reliefs or deductions you’re claiming.
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• How much corporation tax you owe.

Most businesses file their returns online using HMRC’s Corporation Tax Online service or compatible software. Your accountant can assist with this, or you can do it yourself if you’re confident.

If you file your corporation tax return late, you will face penalties:

• 1 day late: £100 penalty.
• 3 months late: Another £100.
• 6 months late: HMRC will estimate your tax bill and add a 10% penalty on the unpaid tax.
• 12 months late: A further 10% penalty.

Late payment also incurs interest, so it’s crucial to stay on top of your deadlines.

Good to Know! – even if your company has not traded or not made a profit, you must still file your corporation tax return failure to do so will result in penalties.

If you file your corporation tax return late, you will face penalties:

• 1 day late: £100 penalty.
• 3 months late: Another £100.
• 6 months late: HMRC will estimate your tax bill and add a 10% penalty on the unpaid tax.
• 12 months late: A further 10% penalty.

Late payment also incurs interest, so it’s crucial to stay on top of your deadlines.

Good to Know! – even if your company has not traded or not made a profit, you must still file your corporation tax return failure to do so will result in penalties.

Corporation tax is a key responsibility for any limited company in the UK, but with a clear understanding and careful planning, it doesn’t have to be a burden. Stay organised, keep accurate records, and ensure you’re aware of important deadlines. When in doubt, seek advice from a qualified accountant or tax advisor to make sure you’re meeting your obligations and taking advantage of available reliefs.

Remember researching online with articles such as this one and the HMRC website is a good place to start however this should not be a substitute for professional advice from an accountant or tax advisor.

Starting a business is an exciting journey, and getting on top of your taxes early will help you focus on growing your company. Happy trading!