Corporation tax is a crucial aspect of running a business in the UK. For many small business owners, especially those unfamiliar with the intricacies of the tax system, it can be confusing and overwhelming. This article is designed to be a one-stop-shop for everything you need to know about corporation tax in the UK.
Whether you’re new to the business world or simply want to better understand your obligations, this guide will answer key questions and provide a solid understanding of UK corporation tax.
What is Corporation Tax?
Corporation tax is a tax levied on the profits of limited companies, public corporations, and other unincorporated bodies such as clubs or associations in the UK. If your business is generating profits, corporation tax is one of the key taxes you’ll need to pay.
Corporation tax applies to the company’s worldwide profits if it is based in the UK. This includes:
Trading profits (from your core business activities),
Investment income (dividends, interest, etc.),
Capital gains (profits from selling assets like land, property, or shares).
Who Pays Corporation Tax?
Corporation tax is paid by:
Limited companies (Ltd)
Public limited companies (PLC)
Any foreign companies with a UK branch or office
If your business is structured as a sole trader or partnership, you won’t pay corporation tax but will instead be taxed through income tax on your business earnings.
When is Corporation Tax Due?
The due date for paying corporation tax depends on your company’s accounting period, which typically lasts for 12 months. For most companies, the payment is due nine months and one day after the end of your accounting period. For example, if your accounting period ends on 31st March, your corporation tax payment will be due by 1st January of the following year.
For larger companies, with profits over £1.5 million, payments are made in quarterly instalments. The instalment system ensures that large companies make advanced payments toward their corporation tax liability throughout the year.
Filing Deadlines
You must file your company’s corporation tax return (CT600) with HMRC within 12 months after the end of your accounting period.
The tax return should include your company’s accounts and computations that show how the tax was calculated.
What Are the Corporation Tax Rates?
The rate of corporation tax depends on the size of your company’s profits. Currently, the main rates are:
Small profits rate (under £50,000): 19%
Main rate (profits over £250,000): 25%
Marginal rate (profits between £50,000 and £250,000): A combination of the two, calculated based on your exact profits.
The marginal rate effectively means that businesses earning profits between £50,000 and £250,000 pay a gradually increasing rate of tax as their profits grow.
Can Corporation Tax Be Paid in Instalments?
For most small businesses, corporation tax is paid in a single lump sum. However, companies with annual taxable profits exceeding £1.5 million are required to make quarterly instalment payments. These payments are due in advance, based on estimated profits, and are spread over the course of the accounting period.
The instalment payment schedule can be complex, with deadlines falling before and after the company’s accounting period ends. Any outstanding balance must be settled once the actual tax liability is determined.
For smaller businesses, instalment payment plans are not the norm, but if your business is struggling to pay, HMRC may offer "time to pay" arrangements in certain circumstances, allowing businesses to spread out the payment.
Can Corporation Tax Losses Be Carried Back?
Yes, corporation tax losses can be carried back. If your company incurs a loss, you may be able to carry it back to a previous accounting period, effectively reclaiming the corporation tax you paid in that year. This is known as loss relief, and it can be particularly beneficial for companies that experience fluctuations in profitability.
Losses can generally be carried back for up to one year. However, there are specific rules and extended carry-back provisions in some circumstances, such as those introduced during the COVID-19 pandemic, which allowed losses to be carried back for up to three years.
Can Corporation Tax Losses Be Carried Forward?
If you can’t fully utilise your losses by carrying them back, you have the option to carry them forward. Losses carried forward can be used to offset future profits, reducing your future corporation tax liability.
There are some restrictions on how much loss can be offset against future profits, particularly for larger companies. As of April 2017, a company can only offset up to 50% of profits exceeding £5 million with carried-forward losses.
How Do Associated Companies Impact Corporation Tax?
Associated companies, also known as "related" or "group" companies, can impact how corporation tax is calculated for your business. When calculating corporation tax thresholds for marginal rates, profits of associated companies are aggregated. This means that, even if your company’s individual profits fall under the threshold for the small profits rate, the presence of associated companies may push you into a higher tax bracket.
An associated company is defined as one where one company has control over the other, or both are under common control (e.g., through a parent company). It’s crucial to assess whether your business is part of a group when considering corporation tax, as this may affect your eligibility for certain tax rates and reliefs.
What Expenses Are Not Deductible for Corporation Tax?
When calculating your corporation tax liability, it’s important to distinguish between deductible and non-deductible expenses. Deductible expenses are those directly related to running your business, which can be subtracted from your taxable profits.
However, some expenses are explicitly non-deductible, including:
Entertaining clients or suppliers: Business entertaining is not tax-deductible, although staff entertainment (like staff parties) may be allowable under specific conditions.
Fines and penalties: If your company incurs a fine (e.g., for late filing), this is not tax-deductible.
Political donations: Any donations made to political parties or political causes cannot be deducted from taxable profits.
Capital expenditure: Purchases of fixed assets like property, machinery, or equipment are not deducted from profits. However, they may be eligible for capital allowances, which provide tax relief over time.
Additional Considerations for UK Businesses
Research & Development (R&D) Tax Credits
If your company undertakes qualifying R&D activities, you may be eligible for R&D tax relief. This is designed to encourage innovation and development, allowing businesses to claim a higher deduction for research and development costs. R&D tax credits can significantly reduce your corporation tax liability or result in a refund.
Capital Allowances
Capital allowances provide tax relief for businesses investing in long-term assets such as plant, machinery, and vehicles. Instead of deducting the cost as an expense, companies claim allowances that spread the deduction over several years. The Annual Investment Allowance (AIA) offers businesses immediate relief on certain types of expenditure.
Dividends vs. Salaries
How you extract money from your business also has tax implications. Dividends, which are paid out of profits after corporation tax, are subject to dividend tax. However, they do not attract National Insurance Contributions (NICs), unlike salaries. Balancing dividend payments and salaries can help optimise the overall tax position of the business.
Final Thoughts
Understanding corporation tax is essential for any UK business owner. With various rates, deadlines, reliefs, and allowances, keeping on top of your obligations can save your business money and ensure compliance with HMRC.
If you are unsure about any aspect of corporation tax, it’s always wise to seek professional advice to ensure your company’s tax affairs are in order.
For further assistance or more personalised advice, feel free to get in touch with
Duo Accountants. We specialise in helping small businesses navigate the complexities of tax and accounting, ensuring you stay compliant while optimising your financial position.