What is Corporation Tax? 

Corporation tax is paid by limited companies and some other organisations on business profits and gains made on property, land or shares.

HMRC (Her Majesty’s Revenue and Customs) administers and collects corporation tax on behalf of the UK government.

Our guide explains corporation tax, how to register, calculate and when to pay your corporation tax bill.

What are profits for corporation tax purposes?

A companies profit is the figure left after deductible corporation tax allowances and reliefs. Allowable corporation tax allowances and reliefs are a vital part of your business accounts because they legitimately ensure you only pay the corporation tax you need to.

The types of income that you have to pay corporation tax on are classed as:

• Business income or trading profits.
• Investments.
• Asset sale (for more than it cost initially) also known as chargeable gains.

Corporation tax allowances

There is a long list of allowable deductible allowances which can be offset against your companies profit. Some eligible tax allowances include:

• Employee salaries
• Rent
• Stock for resale
• Employer pension and national insurance contributions
• Business insurance
• Accountancy and legal fees

Capital allowances for corporation tax

Your company can’t include the cost of plant and equipment however capital allowances are usually available giving your company tax relief in a different way.

An example of the type of asset that would be eligible for capital allowances is a company car.

Corporation tax reliefs

Corporation tax reliefs are valuable and available to some companies. They are a common way to reduce your corporation tax profits and include:

• Losses that your company makes.
• Research and development aka R&D costs.
• Disincorporation if you change to a partnership or sole trader and need to transfer some of your companies shareholder or assets.
• Profit from patents under the patent box scheme.

For a UK based company corporation tax is paid on profits made both inside and outside the UK. A non UK based company with an office or base in the UK only pays corporation tax on profits made in the UK.

What are the corporation tax rates?

Corporation tax is currently paid at a rate of 19% for a company with a profit up to £50,000 or 25% for a company with profits of over £250,000.

For a company with a profit of between £50,000 and £250,000 a marginal relief will be applicable which provides a gradual increase from 19% up to 25%.

The percentage is paid on your companies profit after all deductible corporation tax allowances and reliefs have been accounted for.

Your CT600 which forms part of a company tax return will show the total corporation tax owed to HMRC.

When do I pay corporation tax?

A company with profits less than £1.5 million will need to pay corporation tax within nine months of the end of your financial year. You don’t need to wait until the end of the nine month period and can repay what you owe early if you wish.

If your company has profits of between £1.5 and £20 million you will pay your corporation tax in agreed instalments.

How do I pay corporation tax?

The tax office let’s you pay them corporation tax in a number of ways. It has to be done electronically and you are not allowed to use a personal credit card to pay.

If you are paying towards the end of the deadline you should you should take note of how long it takes to transfer your payment to HMRC.

• Online or telephone banking can take between 24-48 hours.
• Online debit card or BACS payment can take up to 3 days.
• Direct Debit can take up to 3 days.
• New direct debit can take up to 5 working days.

Corporation tax and a dormant company

The tax office deems a company dormant if it has no active trading activities or income.

A dormant company should not have any corporation tax liability in a year where there has been no company activity. Because of this HMRC does not expect a company tax return to be submitted.

Companies house still requires you to complete a dormant company accounts and submit a confirmation statement each year.

You can make a dormant company active at a later date. There is a particular process that the company directors need to follow to inform HMRC that your company is becoming active.

Registering for corporation tax

Registering for corporation tax is usually done at the same time as when you incorporate your company with companies house. To avoid financial penalties your corporation tax registration has to be done within three months from when your business activities began.

After you have set up your company companies house will notify HMRC and they will send you a 10 digit UTR number through the post. You need to use the company UTR number to register for corporation tax either online or by post.