UK limited companies need to pay Corporation Tax on their profits. This guide for small businesses gives you a Corporation Tax definition, explains who needs to pay Corporation Tax, runs through the Corporation Tax rates, and reveals how small businesses can pay Corporation Tax.
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Corporation Tax definition
Corporation Tax in the UK is a tax that limited companies need to pay on their profits.
Corporation Tax is a bit like Income Tax for companies, but the difference is that companies don’t have a personal allowance. This means that as soon as your business starts making a profit, it needs to start paying Corporation Tax (unless it’s previously made losses).
But what do you need to pay Corporation Tax on? A company needs to pay Corporation Tax on the profits it makes from doing business (‘trading profits’), its investments, and selling assets for more than they cost (‘chargeable gains’ – company assets include land and property, equipment and machinery, and company shares).
How to register to pay Corporation Tax
One of the first things a small business must do when setting up is register for Corporation Tax, which you can do on the .Gov.uk website with HMRC. This needs to be done within three months of starting to trade.
What counts as trading includes buying, selling, advertising, renting a property, and employing someone. If you register late, you may get a penalty, so make sure registering for Corporation Tax is at the top of your checklist when starting out.
What are Corporation Tax rates?
The Corporation Tax rate for company profits is 19 per cent. This is now a standardised rate for all businesses. In 2016-17, the Corporation Tax rate was 20 per cent. Prior to April 2016, the rate depended on how much profit your company made.
The current government has committed to keeping the Corporation Tax rate at low levels.
Corporation Tax rates by year
|Year||Rate on profits below £300,000||Main rate on profits above £300,000|
You need to pay the Corporation Tax rate that applied in your company’s accounting period for Corporation Tax. You can check your company’s accounting period by signing in to HMRC’s online service, but it will usually be in line with your company’s financial statements and annual accounts. Most businesses have a 12 month accounting period (your accounting period can’t be longer than 12 months).
What is the Corporation Tax return deadline?
This is where Corporation Tax gets slightly tricky, because the Corporation Tax filing deadline differs from other taxes. You need to pay Corporation Tax before you file your company tax return and the date you need to pay it depends on your company’s Corporation Tax accounting period (the accounting period will end on 31 March for most companies).
The deadline to pay your Corporation Tax bill is nine months and one day after the end of your accounting period for your previous financial year, so if your accounting period ends on 31 March, your Corporation Tax deadline is 1 January.
But you need to prepare your company tax return to work out how much Corporation Tax to pay, and the deadline to file your company tax return is 12 months after the end of the accounting period it covers.
If you have just started your small business, you may have two Corporation Tax accounting periods due to the fact that your accounting period can’t be longer than 12 months.
Businesses with more than £1.5 million in profits will need to pay their Corporation Tax in instalments, so the process is different. And, even if your company is loss-making and you have no Corporation Tax due, you still need to declare that with HMRC.
What are the Corporation Tax allowances?
There are some Corporation Tax allowances available when working out how much tax you owe. You can deduct the costs of running your business from your company’s profits before tax when you prepare your accounts. But, if you or your employees get use from something, it must be treated as a benefit.
Some examples of Corporation Tax allowable expenses you may be able to claim through your limited company include mileage, accommodation, and training. These expenses must be necessary to the business and ‘wholly and exclusively’ for business purposes. This essentially means that you don’t also get any personal use from them.
Some costs of running your business aren’t allowed for Corporation Tax, such as entertaining clients.
Purchases of business assets that you keep to use in your business, such as equipment, machinery, and vehicles, are not allowed to be deducted from your company’s income when calculating your taxable profit. In these instances, you may be able to claim capital allowances, which you can check here.
You can learn more in our guide to self-employed tax deductible expenses.
What are the Corporation Tax reliefs?
There are Corporation Tax reliefs available that you can potentially use to minimise your Corporation Tax bill.
Research & Development (R&D) Relief: you may be able to claim this if your company works on innovative projects in science and technology.
the Patent Box: a lower rate of Corporation Tax is available on profits earned from patented inventions and certain other innovations.
Creative industry tax reliefs: this allows companies in the creative industries (film, television, video gaming, etc) to claim a larger deduction when calculating taxable profits.
Disincorporation Relief: a relief that allows a company to transfer assets to its shareholders (for instance when it changes from a limited company to a sole trader or partnership) without the company incurring a Corporation Tax charge on the disposal of those assets.
Marginal Relief may also be available if your company had profits between £300,000 and £1.5 million that were from before 1 April 2015.
How to pay Corporation Tax
Once you’ve worked out how much Corporation Tax you owe and know when your deadline is, it comes time to pay it.
Bear in mind that you need to allow time for your payment to get to HMRC, depending on your payment method.
|Payment method||Time needed|
|Online and telephone banking||Same day/next day|
|CHAPS||Same day/next day|
|Bacs||Three working days|
|Direct Debit||Three working days|
|Online by credit or debit card*||Three working days|
|At your bank or building society||Three working days|
|Direct Debit (if you haven’t set one up before)||Five working days|
Is there anything more you would like to know about Corporation Tax? Let us know in the comments below.