What is Corporation Tax?What is Corporation Tax?

Understanding Corporation Tax

Corporation tax refers to tax you pay on the profits earned by your company. You'll need to register for corporation tax within three months of trading commencing.

Corporation tax is a tax imposed on the profits of companies and other legal entities in the United Kingdom. It is one of the main sources of revenue for the government, and it is important for businesses to understand the rules and regulations associated with it.

Corporation Tax is a crucial aspect of the financial landscape for businesses operating in the United Kingdom. It is a tax levied on the profits generated by companies and is an essential component of the nation's revenue system. You'll need to register for corporation tax within three months of trading commencing.

What is Corporation Tax?

Corporation tax in the United Kingdom is a tax on the profits of limited companies, foreign companies with a UK branch or office, and members' clubs and societies. It is a direct tax that is levied on the taxable profits generated by businesses. The taxable profit is calculated by subtracting allowable expenses from the total income.

Here's a brief overview of how corporation tax works:

  1. Taxable Profit: Companies are taxed on their profits, which include income from trading activities, investments, and other sources, minus allowable deductions.
  2. Allowable Deductions: Allowable deductions typically include business expenses that are necessary for the operation of the business, such as employee salaries, rent, utilities, and other costs directly related to generating income.
  3. Tax Rate: The applicable tax rate is then applied to the taxable profit to determine the amount of corporation tax owed. The standard corporation tax rate in the UK is 25%.
  4. Filing and Payment: Companies are required to file an annual corporation tax return with HMRC and pay any tax owed. The tax return provides a detailed breakdown of the company's income, expenses, and taxable profit.

Who Needs to Pay Corporation Tax?

  • Private and Public Limited companies
  • Foreign companies with a UK branch or office
  • A club, co-operative or other unincorporated association such as community group or sports club

Who is Responsible for Paying Corporation Tax?

The company director or directors are responsible for filing Corporation Tax returns with HMRC. They must also make sure that the corporation tax owed is paid by the deadline, which is usually nine months and one day after the end of the company's accounting period. While some companies hire specialist limited company accountants, the legal obligation still lies with the company directors.

What is the Corporation Tax Rate?

The Corporation Tax Rate refers to the percentage at which a company's profits are taxed by the UK government. It represents the portion of a company's taxable profits that must be paid to the tax authorities. For example, a 25% Corporation Tax Rate means that 25% of a company's taxable profits will be levied as corporate tax. Understanding the Corporation Tax Rate is crucial for businesses to calculate their tax liability and plan their financial strategies accordingly.

Corporation Tax Rates 2024

Your company pays Corporation Tax based on the rates applicable during its accounting period.

If profits exceed £250,000, the main Corporation Tax rate i.e 25% applies.

For profits of £50,000 or less, the 'small profits rate' of 19% is used.

If profits fall between £50,000 and £250,000, you might qualify for 'Marginal Relief.'

Adjustments to the £50,000 and £250,000 thresholds occur for short accounting periods and the total number of 'associated companies' your company has.

Company Profit Rate Type Corporation Rate %
More than £250,000 Main rate 25%
Less than £50,000 Small profits rate 19%
£50,000 - £250,000 Main rate with marginal relief 25% and reduced by marginal relief

What is Corporation Tax Paid On?

Corporation Tax is paid on the taxable profits of a company. Taxable profits are essentially the profits that a company makes during its accounting period, and they serve as the basis for calculating the amount of Corporation Tax owed to the government.

Your company's taxable profits for Corporation Tax include earnings from:

  • Conducting business (known as 'trading profits')
  • Investments
  • Sale of assets at a profit ('chargeable gains')

Corporation Tax Allowances

Corporation Tax allowances are deductions that reduce the taxable profits of a company. Certain business expenses can reduce a company's corporation tax bill. Any cost incurred exclusively for running the business should be subtracted from the company’s profits before calculating tax. A variety of expenses qualify, with the main ones including:

  • Purchase of raw materials
  • equipment bought for company use
  • machinery bought for company use
  • business vehicles, for example cars, vans, lorries
  • Office Supplies
  • Salary of the employees
  • Business Insurance
  • Employer pension contributions
  • Training fees
  • Accountancy costs

Corporation Tax Reliefs

Corporation Tax reliefs are incentives provided by the government to encourage certain business activities. Understanding and applying these reliefs can result in substantial tax savings for eligible companies. Some corporation tax reliefs are listed below:

  • Research and Development (R&D) Relief
  • Profit from patented inventions
  • Creative industries relief (CITR) for profits in theatre, film, television, animation, or video games
  • Disincorporation Relief when closing the company or changing the business structure
  • Relief on goodwill and relevant assets like customer relationships, unregistered trademarks,
  • Terminal, capital, or property income losses
  • Business trading losses

Corporation Tax Deadline

Companies must file their Corporation Tax return within 12 months of the end of their accounting period. Failure to meet this deadline can result in penalties.

There’s a separate deadline to pay your Corporation Tax bill which is usually 9 months and one day after the end of the accounting period if your taxable profits are less than £1.5 million. If your company’s annual taxable profits are between £1.5 million and £20 million. you can pay corporation tax in installments.

How to Pay Your Corporation Tax Bill?

Companies can make their Corporation Tax payments to HMRC through various methods. Ensure you allocate sufficient time if the deadline is approaching, as some methods may have longer processing times than others.

Payment Method Payment Time
online bank account Same day or next day
online or telephone banking by Faster Payments or CHAPS Same day or next day
online by debit or corporate credit card Same day or next day
Direct Debit (if already setup) 3 working days
online or telephone banking by Bacs 3 working days
at your bank or building society 3 working days
Direct Debit (if you have not set up one for HMRC before) 5 working days

Ensure your payment reaches HMRC on the last working day before the deadline if it falls on a weekend or bank holiday.

Corporation Tax Late Filing Penalties

If you don't file company tax return by the deadline, you have to pay late filing penalties:

Time after your deadline Penalty
1 day  £100
3 months Another £100
6 months 10% on the unpaid tax based on the estimated tax bill
12 months Another 10% of any unpaid tax

If you late file your tax return consecutively for three times, the penalties of £100 each is increased to £500.

In addition to corporation tax, companies may also be liable for other taxes such as PAYE, National Insurance Contributions and Value Added Tax (VAT). It is important to note that these taxes are separate from corporation tax and must be paid separately.

Handling the complexity of Corporation Tax requires careful attention to detail and a solid understanding of tax regulations. To ensure compliance and maximize potential savings through allowances and reliefs, it is advisable for businesses to hire small business accountants. Their expertise can help businesses manage the complexities of Corporation Tax and stay on top of their financial obligations, ultimately contributing to the overall success and sustainability of the company.

Frequently Asked Questions:

Why do you need to prepare your company tax return early?

The deadline for paying corporation tax comes before the deadline for filing your company tax return. Therefore, it's essential to get your company tax return ready well in advance of the deadline to know the accurate amount of corporation tax to pay.

Can I reduce my corporation tax bill?

You can reduce your corporation tax bill through by claiming allowable expenses. Additionally, various corporation tax reliefs are available that can lower your final bill, provided you meet the qualifying criteria.

Read more of our free business tax guides

Business accountant available for free consultation

Get a free accounting consultation

We'll walk through everything you need for starting or switching.