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Our Guide to UK Corporation Tax

Navigating the world of UK business taxes can sometimes feel like wandering through a dense forest without a map. Whether you’re a business owner or just curious about how the tax works, you’ve landed at the right place. Let’s unravel the mysteries of UK Corporation Tax in this easy-to-follow guide.

What is Corporation Tax?

At its core, Corporation Tax is a bit like income tax but for companies. Every year, companies need to pay a portion of their profits to the government, and that’s what we call Corporation Tax.

Being a yearly tax on the profits generated by limited businesses and incorporated bodies it’s calculated based on the company’s accounting period, which is usually due for payment every 12 months, or 9 months in the year from 31st March depending on when your annual accounting period ends. 

Who pays Corporation Tax?

If you run a limited company in the UK – whether that’s a small business, a start-up, or a large enterprise, you’ll need to pay Corporation Tax on all your profits. This includes companies that are incorporated in the UK, as well as companies that are incorporated overseas, and have a permanent establishment in the UK.

You must pay Corporation Tax on profits from doing business as:

  • a limited company
  • any foreign company with a UK branch or office
  • a club, co-operative or other unincorporated association, for example, a community group or sports club

How much is it?

The rate you pay differs depending on the amount of profit you make.

  • If you made company profits of more than £250,000, you’ll pay the ‘main rate’ or Corporation tax, which is currently 25%.*
  • If your company made a profit between £50,000* and £250,000* you may be entitled to Marginal Relief which provides a gradual increase between the small and main rate. Find out if you are eligible here.
  • If you made a £50,000* or less profit, you’ll pay the ‘small profits rate’ which is 19%*

How is corporation tax calculated?

The formula is simple:

Corporation Tax = Taxable Profits x Corporation Tax Rate

The tricky part is figuring out what counts as taxable profits, which can include:

  • Trading profits
  • Investments
  • Selling assets (like business property or shares)

Remember, costs like salaries, business expenses, and certain allowances can reduce your taxable profits.

It’s calculated on the profits generated during a company’s accounting period after expenses, such as the cost of goods sold, salaries and rent, have been deducted. 

Deductions and Reliefs

If you’re worried about how much corporation tax you’ll have to pay, the good news is that there are a few reliefs and allowances you can use to claim against your profits like research and development allowances, relief for creative industries and capital allowances.

Find out all the allowances and reliefs here

How and when to pay?

You don’t get a bill for Corporation Tax. Instead, there are specific things you need to work out, pay and report.

To pay, you’ll need to:

  1. Register for Corporation Tax 
  2. Keep accounting records 
  3. Calculate your Corporation Tax (or hire an accountant to do it!)
  4. Pay HMRC – you can do this by Faster Payments, CHAPS or Bacs or over the phone. You’ll need to report if you have nothing to pay by your deadline. This is usually 9 months and 1 day after the end of your accounting period, which is typically the end of your financial year. 
  5. File your Company Tax Return by your deadline – usually 12 months after the end of your accounting period.

What are the penalties for not paying corporation tax?

On a more serious note, companies that don’t pay their corporation tax on time are liable to incur penalties applied by HM Revenue & Customs (HMRC). The penalties can be significant but may also lead to criminal prosecution. They also increase the longer you leave it to pay.

Current penalties are: 

  • 1 day: £100*
  • 3 months: £200*
  • 6 months: HM Revenue and Customs (HMRC) will estimate your Corporation Tax bill and add a penalty of 10%* the unpaid tax.
  • 12 months: Another 10%* of any unpaid tax.
  • If your tax return is late 3 times in a row, the £100 penalties are increased to £500* each.

If you have a reasonable excuse, you can appeal by writing to your company’s Corporation Tax office.

What if I make a mistake?

Mistakes happen. If you realise you’ve made an error on your tax return after it’s been submitted, you can amend it within 12 months. If you’re unsure, it’s always best to get advice from an accountant. To make changes you can:

  • Use commercial software
  • Send a paper return or write to your company’s Corporation Tax office.

Keeping Records

The UK law mandates that you keep records of your company’s income, costs, and other financial transactions for at least 6 years. This helps in case HMRC wants to review your tax calculation or if you need to revisit any data.

How can I find out more about corporation tax?

The government website has a lot of information about corporation tax, including the current rates of tax, how to calculate it on your profits and the penalties incurred for non-payment. 

Find out detailed information here.

Understanding Corporation Tax doesn’t need to be daunting. While there are intricacies to the process, a bit of knowledge and the help of a good accountant can make it all manageable. If you ever feel lost, remember: Your business is our business and we’re always here to lend a friendly ear and a helping hand. 

*All figures are correct at September 2023 and subject to change