Corporation Tax: what you need to know

Corporation Tax – boring, complicated, not a barrel of laughs. But you can’t avoid it. We promise you it won’t be the cure-for-insomnia that it sounds.

What is corporation tax?

Corporation Tax is simply a tax on your profits. It’s like income tax for companies. You make profits, you pay. 

The fantastic is news is it’s only for limited companies. Sole traders don’t pay it. They pay the actual income tax instead. Tidy.

It’s hardly going to be your favourite thing. But if you’re a small business and need to pay corporation tax it does show you’re doing something right. You’re making profits and on the path to success.

When you set up as a limited company you need to prepare to complete a corporation tax return. Yes, you’re probably getting bored of form filling and here’s another. You need to fill in form CT600 within 3 months of when you start trading. 

As a birthday treat for your business, you’ll pay Corporation Tax each year. What a present!

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What are the corporation tax rates?

It’s actually quite simple: 

  • 19% on profits up to £300,000.
  • 19% on profits over £1.5m.

So it’s just 19%? Not quite. Between £300,000 and £1.5m marginal relief is applied. Find out more Gov.UK. You can use this handy calculator to help. 

The good news is that you don’t necessarily start paying the moment you make a profit. Previous losses can roll forwards. You may have made losses for a few years as you get started, which is completely normal. You can use this to offset liability when you do start making a profit.

When do you pay?

It’s calculated as a business birthday present. But it’s not due straight away. When it’s due will depend on your company accounting period. You can look this up using the online HMRC service. Here you’ll see everything that’s relevant to your tax responsibilities.

Your deadline for paying will be 9 months + 1 day from the end of your accounting period for the previous financial year. Most use 31st March as the end of the accounting period. This makes the deadline 1st January. Happy New Year! The ANNA App can send you Tax Reminders to help make sure you never miss a deadline.

A diary with a pen
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However, this begs a question. How do you work it out without your company tax return? Panic not. You don’t have to file it, but you do have to prepare it.

When you first start trading you may end up with two Corporation Tax accounting periods. This is simply because you cannot have an accounting period longer than a year. This evens out the next year. All perfectly normal.

This is when confusion about Corporation Tax also gets a hold. You don’t file Corporation Tax returns at the same time as you file your company tax return. You pay it before then. 

You can see why Corporation Tax is the reason why many new businesses get their minds in a tangle.

Do you pay corporation tax on everything?

Basically, yes. If it’s a profit, you pay. 

However, there are some nifty things called Corporation Tax allowances. These are costs you can deduct from your profits before working out the tax due. Basically these cover the costs of running your business. Pay some salaries? Knock them off. Ordered some printer paper? Knock it off. You get the picture. Just stop before you get to dividends.

Again, this can be where even more confusion comes in. Some costs are allowed, some aren’t. It’s always good to follow the rule of thumb that for something to count as a legitimate expense it must be used ‘wholly and exclusively’ for the business. And watch out for cars, and we don’t mean when crossing the road.

Other costs get a bit woolly too. For example, take your clients out for a big knees-up, that’s not permitted within allowances. You’ll also need to do some extra bedtime reading on capital allowances if you buy business assets. 

It’s your responsibility to work out how much you owe. Keep hold of your records in case HMRC want to check.

Is there any Corporation Tax relief?

Yes. There are various ways to reduce your Corporation Tax bill without being naughty. These include things such as R&D relief, creative industry tax reliefs and disincorporation relief and more. Yay, more light reading.

How do you pay?

Paying Corporation Tax is simple. It’s calculating the amount due which is a little more complicated. The details of how to pay are available here

Remember to make sure you leave enough time for the payment to actually arrive with HMRC.

Don’t pay on time? Get ready for a fine along with a sharp slap on the wrist.

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The key is in your records

For limited companies liable for Corporation Tax, the key to simplicity is in keeping records. Being able to access your accounting records quickly and simply makes short work of a reputably complicated tax.

Choose ANNA for Absolutely No Nonsense Admin. ANNA is in love with reporting. We help to make Corporation Tax simple for business owners like you.