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, UK rates are relatively low — significantly lower than personal income tax. This can provide beneficial tax planning opportunities.
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.
Your corporation tax liability is calculated by multiplying taxable profits by the corporation tax rate.
Small profits rate (turnover up to £300,000): 20%
Marginal rate (turnover between £300,000 and £1.5 million): 21.25%
Main rate (turnover in excess of £1.5 million): 21%
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 corporation tax rates that UK companies pay also depend on their total profits. The lower “small profits rate” is paid on profits up to £300,000, while the main corporation tax rate is charged if your profits are more than £1.5m. There is a system of marginal relief for profits between these two limits.
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.
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