Corporation tax is charged on a company's profits. If you trade as a limited company, you'll want to ensure that paying corporation tax is as painless as possible - both in terms of paperwork and the total corporation tax payable.
In terms of corporation tax rates, the UK rate is relatively low - significantly lower than personal income tax. This can provide beneficial tax planning opportunities.
UK corporation tax basics
Corporation tax is charged on taxable profits. This includes trading profits and most investment profits. It also includes any capital gains (where you have sold an asset for more than you paid), usually referred to as chargeable gains.
Corporation tax is generally charged on your taxable profits for a 12-month accounting period that matches your company financial year. There can be exceptions, for example, when you start a new company or change your financial year-end.
UK corporation tax rules set out exactly which reliefs and capital allowances can be set against business income in calculating your taxable profits. Most legitimate business expenses can be.
Corporation tax rates (UK)
Your corporation tax liability is calculated by multiplying taxable profits by the corporation tax rate. The small profits and main rates were aligned on 6 April 2015. It is now charged at a rate of 20% on all profits for the 2015/16 and 2016/17 tax years.
The amount of corporation tax payable depends on your total profits.
In earlier tax years, the lower "small profits rate" was paid at a rate of 20% on profits up to £300,000, while the main corporation tax rate of 21% was charged if your profits were more than £1.5m. There was a system of marginal relief for profits between these two limits.
Corporation tax rates in the UK can change from one financial year to the next. If your accounting period falls into two financial years with different corporation tax rates, the different rates will be charged on each part of your profits.
The Chancellor of the Exchequer has already announced that Corporation tax will be reduced to 19% in April 2017 and further reduced to 17% in 2020.
Corporation tax records, returns and payments
Keeping accurate corporation tax records of your income and expenses is essential - and a legal requirement.
You must pay your corporation tax within nine months of the end of your accounting period, or in instalments if your profits exceed £1.5m. You must also file your corporation tax return within 12 months. You are responsible for calculating the corporation tax due and making sure that you submit the return online in accordance with HM Revenue & Customs requirements.
Most companies find that using an accountant is the best way to ensure they meet their corporation tax obligations. In addition, your accountant can advise you on the best opportunities to reduce the total corporation tax (and other taxes) you pay.
HMRC are currently phasing in the use of online personal tax accounts. All small businesses and personal tax payers will have their own account from April 2016. You will be able to view your tax transactions across the range of business taxes including Self Assessment, Corporation Tax, VAT and PAYE for employers and to make payments at any time.
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