Corporation tax is part of running a business in the UK. For the newly acquainted, we’ll take you through what you need to know, with some expert advice peppered in.
What is corporation tax?
Corporation tax is a tax that your company pays on profits.
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“Corporation tax is charged on taxable profits rather than turnover, which is an important distinction,” Adam Owens, head of tax advisory at Xeinadin, told Small Business. “A business can be bringing in strong revenues but still have a very different tax position once its costs, deductions and allowances are taken into account.”
Who does it apply to?
Corporation tax applies to limited companies in the UK. International companies that do business through a local branch in the UK will also have to pay up. Corporation tax only applies to clubs and community groups if they make a taxable profit. Sole traders do not pay corporation tax.
How much does it cost?
The amount of corporation tax a company pays depends on profit. That’s 19% on profits up to £50,000 or 25% for profits over £250,000.
Now, if your company makes between £50,000 and £250,000, that’s where marginal relief comes in. If your company profits are a little over £50,000, you won’t be smacked with a 25% bill. Instead, the rate of tax will increase incrementally from the 19% starting point up to 25%.
“If a company’s accounting period begins on a date other than April 1, and there is a change in the rate or thresholds of corporation tax during the accounting period, the company’s profits for the accounting period will need to be apportioned between the two financial years,” said Julian Moran, tax partner at Knights. Corporation tax will be calculated on each part applying the respective rates and thresholds. The apportionment of profits is normally done on a time spent basis.
He gave us an example:
The last change in corporation tax was on April 1, 2023. Prior to that the rate of tax was 19%. On April 1, 2023, a new rate of 25% was introduced for companies with profits over £250,000.
A company made a taxable profit of £300,000 for the accounting period which began on April 1, 2023. The profits apportioned to the part of the period from January 1, 2023, to March 31, 2023 (90 days out of 365) are £73,972. The profits for the other part are £226,028. The taxable profits are therefore (£73,972 x 19%) + (£226,028 x 25%), which gives a total of £70,561.
Important deadlines
You won’t receive a corporation tax bill. So, it’s up to you to work out how much you owe and pay it to HMRC. Do this by filing a Company Tax Return (which includes profit or loss for corporation tax and your corporation tax bill).
Fill out and submit the return within 12 months of the end of your accounting period. However, you need to pay any corporation tax you owe earlier – within nine months and one day of the end of your accounting period, to be precise. The company’s accounting period is the length of time covered by your Company Tax Return, which is usually the same as its financial year.
Say your company’s accounting period (or financial year) ends on March 31, 2026, you must file your Company Tax Return on or before March 31, 2027. Plus, you must pay any corporation tax your company owes on or before January 1, 2027.
One last thing – even if you send your accounts to Companies House, you still need to send them as part of your Company Tax Return.
The following fines apply for a late Company Tax Return:
- One day late – £200
- Three months late – £400
- Six months late – 10% added on the amount of tax owed
- 12 months late – 20% added on the amount of tax owed
If the return is late for three years on the trot, the £200 and £400 penalties go up to £1,000 and £2,000 respectively. The company will also be charged a penalty on any unpaid tax from the date the tax is due.
Don’t panic, you can use an accountant, specialist software or a tax agent to give you a hand with all of this.
Allowable vs disallowable expenses
You can deduct allowable expenses from your taxable income when calculating taxable profits and what you owe in corporation tax. Allowable expenses are typically incurred ‘wholly and exclusively’ for the needs of the business, so most expenses are allowable.
Disallowable expenses, as you might expect, can’t reduce your tax bill. Here are some examples of allowable and disallowable expenses.
Guidance for limited companies
When a company makes a loan or advance to a shareholder in an accounting period and it remains unpaid nine months after the end of that period, the company is required to pay an amount to HMRC as if it were corporation tax, Moran told Small Business.
The amount of tax payable is the amount of the loan or advance multiplied by the higher taxpayer dividend rate, which is currently 35.75%. Although this is paid as if it were corporation tax it is separate to the normal corporation tax liability of the company. When the loan or advance is repaid, a reclaim can be made from HMRC, but the repayment is only made by HMRC nine months after the end of the accounting period in which the loan or advance was repaid, which could be a year or more after the loan repayment.
It’s crucial to keep on top of your corporation tax, too. “My advice to limited companies is not to treat corporation tax as a once-a-year exercise,” said Owens. “Keep an eye on profits as the year progresses, set aside cash for the expected bill and consider the tax treatment of significant purchases before committing to them. That gives you a much clearer picture of what the business is likely to owe and reduces the risk of an unwelcome surprise.”
