What is Corporation Tax?

If you are a business owner, there are several taxes you may be required to pay. Which taxes you have to pay depends on the type of business you own.

Some of the taxes you might be liable for include business rates — which is a property tax on your business premises — and VAT on the goods or services you buy and sell. There are also taxes related to your earnings, such as National Insurance, Income Tax, Capital Gains Tax on any profit you make from business assets you’ve sold, and Corporation Tax. If you are running your own business, it is important to understand what tax you owe and how to pay it. 

In this article, we’ll be focusing on Corporation Tax. We’ll explain exactly what it is, who has to pay Corporation Tax and when and how the tax is due. We’ll also reveal some ways you may be able to reduce your Corporation Tax bill.

Corporation Tax is a tax that’s charged on annual profits, which means all UK limited companies must pay it, as well as certain membership organisations, clubs and societies, housing associations, trade associations and groups of people carrying out a business (for example, co-operatives). The company director must ensure the Corporation Tax return is submitted on time and that the bill is paid — even if they pay someone else to handle their finances for them.

Sole traders and partnerships don’t have to pay Corporation Tax; instead, they pay Income Tax on their profits via a Self Assessment tax return.

Continue reading to find out more about Corporation Tax.

If your limited company makes a profit in any of the following ways, you will be charged Corporation Tax on the profits:

• Doing business (“trading profits”)
• Selling business assets such as property, land, shares or machinery (“chargeable gains”)
• Investments

It is worth noting that while domestic businesses must pay Corporation Tax on all profits from both the UK and abroad, foreign businesses only have to pay Corporation Tax on profits made in the UK.

Until April 2016, the Corporation Tax rate was based on how much a company made in profits. Since then, the rate has been 19 per cent for all limited companies.

However, this is set to increase for some limited companies in the 2023/24 tax year. From April 2023, if your taxable profits are more than £250,000, you will pay a Corporation Tax rate of 25 per cent, and if they are between £50,000 and £250,000, you will pay a rate of 26.5 per cent with the benefit of marginal relief (see more on this in the sub-section below). Limited companies that make profits of less than £250,000 will continue to pay the 19 per cent Corporation Tax rate.

2021 to 2023 Corporation Tax rates

What is marginal relief?

If your limited company makes taxable profits of between £50,000 and £250,000, the Corporation Tax rate you will be charged will gradually increase depending on what your profits are. This marginal relief allows you to reduce your rate from the 25 per cent main rate.

While Corporation Tax is due on all the profits a limited company makes, there are various ways you may be able to reduce your Corporation Tax bill legally:

Claim your expenses

You can deduct your business expenses from your profit to reduce the amount of Corporation Tax you owe. 

Some of the expenses you can claim include:

• Employer National Insurance contributions
• Salaries
• Office equipment
• Petty cash for tea and coffee
• Travel expenses for business meetings

As long as you can prove the item or service was used purely for business purposes, you can claim anything back.

Pay yourself a salary

If you pay yourself a salary, it will be a business expense like it is with any employees you have working for you. This means you can reduce your business’ taxable profits by paying yourself. 

However, you should bear in mind that you will need to pay Income Tax and National Insurance on these earnings, so you may be financially better off by keeping your salary under the Personal Allowance or at least under the Higher Rate Income Tax threshold.

Training

Training and related subscriptions that are paid for by your business are also tax deductible. 

Staff parties

Annual staff parties, such as Christmas parties and summer events that cost less than £150 per head are tax-free and tax deductible too. 

It is important to understand, though, that this is an exemption rather than an allowance. So, if you exceed the £150-per-head limit — by even a penny — the total cost of the party will be taxable, and not just the excess.

Pay your bill early

You may be fortunate enough to be in a position where you can pay your Corporation Tax bill early. If so, HMRC will reward you by repaying you a portion of it in interest, at a rate of 0.5 per cent. 

This interest will be paid from the date you pay your bill — provided this is six months and 13 days after your accounting period starts — up until the payment deadline.

Losses

If your business is operating at a loss rather than a profit, depending on the losses, you could be entitled to a tax refund. If so, you may be able to apply the losses to the previous year’s taxes or use them against future profits.

The patent box

Business profits generated from patented products, services or processes could also reduce your Corporation Tax bill.

The Patent Box Tax Regime allows you to reduce your Corporation Tax rate to 10 per cent for profits on patents that generate income.

Research and Development tax relief

Businesses that develop or improve products, services or processes that lead to an advance in science or technology could be entitled to Research and Development (R&D) tax relief.

The Super Deduction

The Super Deduction was announced in the 2021 Budget as a tax allowance for businesses that invest in certain plant and machinery. 

If you qualify, you can deduct up to 130 per cent from your taxable profits for that expenditure.

The Annual Investment Relief

The Annual Investment Relief (AIA) is another tax allowance that applies to plant and machinery. 

It allows you to deduct the full value of an item from your profits, subject to a limit of £1 million until March 2023. This limit is set to revert back to £200,000 after March 2023.

Employee share schemes

You may also be able to reduce the amount of Corporation Tax you owe if you provide a qualifying share scheme for your employees.

HMRC will not send your company a Corporation Tax bill. Instead, it is the responsibility of the company director to register the company and submit all the Corporation Tax documentation by the deadline. The steps you need to take to do this are as follows:

1. Register for Corporation Tax

Usually, limited companies will register for Corporation Tax when they register with Companies House. If you haven’t yet done this, you must register with HMRC within three months of trading as a limited company. 

When registering, you will be asked to provide details such as:

• The name of your company
• Your company registration number, provided by Companies House when you incorporate
• Your business start date (this will be used as the start date of your business’ accounting period)
• Your company’s main address
• The type of business you run
• The names and home addresses of company directors

2. Keep a record of your accounts

To help you prepare your Corporation Tax return and work out how much you owe, you will need to keep accounting documents for as long as your limited company is in operation.

3. File a company tax return

As mentioned, limited companies must calculate their own Corporation Tax and file a return to HMRC by the deadline. This return is known as form CT600, and unless you have a reasonable excuse or want to file the return in Welsh, it must be filed online.

When filling in form CT600, you will be required to provide the following information:

• Your company name
• Your company registration number
• Your company’s main address
• Your tax reference number
• The turnover and profit for the reporting period
• Your tax calculations
• Details of any allowances and reliefs you’ve made use of

Once you’ve filled out the paperwork, you will find out how much Corporation Tax you owe. Note that any changes you make to your company tax return must be implemented within 12 months of the filing deadline.

You can pay your Corporation Tax bill in several ways, including:

• Direct debit
• Online, over the phone or BACS direct credit
• Corporate debit or credit card 
• Bank Giro
• CHAPS

It is important to understand that even if you don’t owe any Corporation Tax, you will still need to submit a company tax return for the accounting period.

If your limited company has ceased trading, you must inform HMRC that it is dormant for Corporation Tax purposes. You will then receive a letter confirming that your business is exempt from paying Corporation Tax and filing company tax returns.

Your Corporation Tax return must be submitted either 12 months from your company year-end or three months after you receive a notice from HMRC (whichever is sooner).

The date on which your Corporation Tax is due depends on your accounting period. This means you may have to pay it before the Corporation Tax return deadline. 

Companies that have made a taxable profit of up to £1.5 million must pay their Corporation Tax within nine months and one day after the end of their accounting period. If, for example, your accounting period ends on 31st March 2023, you must pay your Corporation Tax by 1st January 2024. 

Companies that have made a taxable profit of more than £1.5 million will have to pay their bill in instalments. The due dates depend on the size of the company and how long its accounting period is. For a normal 12-month period, these due dates will normally be quarterly, with two payments due before the end of the accounting year.

You must make sure HMRC receives your payments on time. If your due date falls at the weekend or on a bank holiday, your payment must reach HMRC by the last working day before the due date. To help you with this, here are some approximate timelines, depending on the payment method you use:

If you miss your Corporation Tax return deadline, you will be charged interest on what you owe, and you may also have to pay a fine. How much the fine is, depends on how long your tax is overdue by:

If your Corporation Tax return is late three times in a row, the £100 penalties will be increased to £500 each.

HMRC may also take the following action to recover the money you owe:

• Asking debt collection agencies to collect the money you owe
• Removing the money from your bank or building society account
• Collecting the money through your earnings or pension
• Taking your possessions and selling them
• Issuing court proceedings
• Closing your business or making you bankrupt

You may also incur a fine if you make an error. There are different fines depending on your handling of the error:

• If you realise you’ve made an accidental error and you admit to it, HMRC may decide to fine you up to 30 per cent of your tax bill
• If HMRC identifies an accidental error, the fine increases to between 15 and 30 per cent
• If you admit to an error that was intended but not concealed, HMRC could fine you between 20 and 70 per cent
• If HMRC uncovers an error that was intended but not concealed, the fine increases to between 30 and 70 per cent
• If you disclose an error that HMRC deems to be deliberate and that you attempted to conceal it, you could be fined between 30 and 100 per cent
• If HMRC uncovers an error it deems to be deliberate and you haven’t disclosed it, the fine increases to between 50 and 100 per cent

It is always best to let HMRC know of any errors you have made. If you can’t afford to pay HMRC what you owe, they may be able to set up a payment plan for you.

Remember that you, as the company director, will be liable for any fines, even if you pay someone else to handle your finances for you.

Corporation Tax is a tax that’s charged on annual profits. This means all UK limited companies must pay it, as well as certain membership organisations, clubs and societies, housing associations, trade associations and groups of people carrying out a business. If your limited company makes a profit by doing business, selling business assets or from investments, you will be charged Corporation Tax on the profits. Sole traders and partnerships don’t have to pay Corporation Tax. Instead, they pay Income Tax on their profits via a Self Assessment tax return.

Currently, the Corporation Tax rate is 19 per cent for all limited companies. However, this is set to increase for some limited companies in the 2023/24 tax year, depending on how much their taxable profits are. You may be able to legally reduce your Corporation Tax bill by claiming your expenses, paying yourself a salary, deducting training and related subscriptions, deducting annual staff parties, paying your bill early, receiving a tax refund due to losses, claiming Patent Box, R&D tax relief, the Super Deduction or the AIA or providing a qualifying share scheme for your employees.

It is the responsibility of the company director to register the company and submit all the Corporation Tax documentation by the deadline. Otherwise, you could incur a fine.