What is Corporation Tax? Corporation Tax Explained

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

Business owners who operate a limited company will need to manage company taxes and pay corporation tax on profits to HMRC.

Limited companies are required to pay corporation tax on their yearly profits, much like how individuals pay income tax on their taxable PAYE earnings.

Corporation tax is paid at a different rate to income tax with businesses paying at a rate of between 19% and 25% depending on their level of profits.

By claiming allowable business expenses against your company profits you can reduce taxable income and your overall corporation tax liability.

HMRC (Her Majesty’s Revenue and Customs) administers and collects corporation tax on behalf of the UK government and expects a form CT600 company tax return to be submitted every twelve months.

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

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%.

You can use the HMRC marginal relief for corporation tax calculator to help you work out your rate of corporation tax.

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.

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.

What are corporation tax allowances?

There is a long list of allowable deductible allowances which can be offset against your companies profit.

Some eligible corporation 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 tax credits 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.

When do I pay corporation tax?

HMRC states that a company with profits less than £1.5 million will need to pay “corporation tax 9 months and 1 day after the end of your accounting period” which is a different deadline for the submission of your corporation tax return.

As an example if your financial year concludes on 31 March, HMRC will expect your corporation tax payment on or before the 1 January of the following year.

You don’t need to wait until the end of the nine month period and can repay the corporation tax 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.

Failing to pay your corporation tax on time or paying insufficient amounts will result in HMRC imposing interest charges on your business.

These charges begin to accrue from the day following the due date for the corporation tax payment and is set at the Bank of England base rate plus 2.5%.

When is the company tax return deadline?

The corporation tax return (form CT600) deadline is also called the statutory filing date.

You are required to submit your company tax return to HMRC within the timeframe that spans from the end of your company’s financial year to your statutory filing deadline.

The statutory filing deadline is determined as either 12 months after the end of the financial year or three months following the receipt of a notice to file a return from HMRC, depending on which date is later.

Failure to submit your company tax return (form CT600) by the specified deadline will result in penalties starting at £100.

Should your tax return be overdue on three consecutive occasions, the £100 fines escalate to £500 each time.

If your tax return remains outstanding for six months, HMRC will notify you of the amount of corporation tax they estimate you owe. This notice is referred to as a ‘tax determination’.

How to pay your 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.

Corporation tax help and support

Running a business that needs to pay corporation tax can be a time consuming which is where  a company accountant can assist in preparing your company accounts and computations, tax returns as well as offer guidance on tax planning strategies that could benefit you and your company.

An accountant can help you with the initial steps of registering your business with HMRC by ensuring they recognise your corporation tax obligations and setting up your company with companies house.

After that your business accountant can determine the profit made during each accounting period and the corresponding amount of corporation tax owed on those earnings and help you meet the deadlines set by your company’s annual accounting date.

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