Corporation Tax is a tax on company profits, payable to HMRC. Unlike Income Tax, businesses do not receive a bill for Corporation Tax. Instead, they must calculate, report and pay it themselves. It applies to:
- Limited companies
- Foreign companies with a UK branch or office
- Clubs, co-operatives and unincorporated associations (such as sports clubs and community groups)
This is a significant source of government revenue, generating billions of pounds each year. The funds contribute to public service such as healthcare and education.
How Do I Calculate Corporation Tax?
Corporation Tax is based on a company’s taxable profits, which include:
- Trading profits from business activities
- Profits from investments
- Profits from selling assets for more than they cost (chargeable gains)
To calculate your Corporation Tax:
- Work out your total profits by adding up all sources of income
- Deduct any allowable business expenses; such as wages, rent, utilities and raw materials
- Apply any reliefs or allowances, such as Capital Allowances for equipment and R&D tax credits
- Determine the correct tax rate, which depends on your company’s profit levels
- Pay the tax owed, as the deadline is 9 months and 1 day after your accounting period ends
Corporation Tax Rates
Corporation Tax rates depend on a company’s annual profits:
- 19% for profits up to £50,000 (small profits rate)
- 25% for profits above £250,000 (main rate)
- Profits between £50,000 and £250,000 qualify for Marginal Relief, which gradually increases the tax rate from 19% to 25%
Ring Fence Corporation Tax
Companies involved in oil and gas extraction in the UK pay different tax rates, known as Ring Fence. The main rate for these businesses is 30%, with a small profits rate of 19%.
How to Register for Corporation Tax
Businesses must register for Corporation Tax within 3 months of starting trading. You can do this online via GOV.UK. You will need:
- Your company’s registration number from Companies House
- The date your business started trading
- Your company’s accounting period details
Failure to register on time can result in penalties and interest charges. Once registered, you now have the following deadlines to meet:
- Pay Corporation Tax within 9 months and 1 day after the end of your accounting period
- File your Company tax Return within 12 months after the end of of your accounting period
- File annual accounts with Companies House within 9 months after your financial year ends
Failure to meet these can also result in penalties and interest charges.
How to Pay Corporation Tax
You can pay Corporation Tax using the following methods:
- Direct Debit
- Online banking
- Telephone banking
- Corporate credit card or debit card
- At your bank or building society (with an HMRC paying-in slip)
Payments must reach HMRC before the deadline to avoid interest charges. If your company fails to meet deadlines, HMRC imposes penalties:
- 1 day late – £100 fine
- 3 months late – Another £100 fine
- 6 months late – 10% of the unpaid tax added as a penalty
- 12 months late – An additional 10% penalty
If late filing happens 3 times in a row, the £100 penalties increase to £500 each. Filing inaccurate returns can also result in penalties. If errors are accidental, HMRC may reduce the fines, but deliberate inaccuracies can lead to increased penalties and legal action.
How to Reduce Your Tax Bill
1. Claim Allowable Business Expenses
Deduct all allowable expenses from your profits before tax. These can include:
- Office rent and utility bills
- Staff salaries and pension contributions
- Travel expenses related to business
- Marketing and advertising costs
2. Use Capital Allowances
If your company purchases equipment, vehicles or machinery for business use, you may be eligible to claim capital allowances. These allow you to deduct part of the asset’s cost from your taxable profits.
3. Claim Research & Development (R&D) Relief
If your company is involved in innovation, you may qualify for R&D tax relief. This can significantly reduce your tax bill by offsetting costs related to developing new products or improving existing ones.
4. Offset Trading Losses
If your company makes a loss, you can carry it forward to offset against future profits. This reduces the taxable amount in future accounting periods.
5. Donate to Charity
Donations to HMRC-registered charities can be deducted from your company’s profits before tax.
6. Make Pension Contributions
Employer pension contributions are tax-deductible, reducing your taxable profits while benefiting employees.
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