Tax on corporations: what is it?
Limited companies are required to pay corporation tax as their primary tax. The company must pay both corporate tax on its profits as well as on any gains from the sale of assets that have increased in value (such as land, property, or shares).
Partnerships and sole traders aren’t subject to the corporation, but rather to income tax (on the profits of the business) and capital gains tax (on gains from the sale of assets).
Your company is responsible for making sure you pay the right amount of tax. Therefore, you must make accurate company accounts and file your Company Tax Return by the deadline.
How much does corporation tax cost?
A company pays corporation tax at a rate of 19 percent on its profits – that is, the money it earns during that accounting period, less any overheads and expenses. Corporation rates can change from time to time (they used to be higher), so it is important to ensure that you pay the correct amount that matches your accounting period. You can find the dates of your accounting period on your financial statements or on the government’s website.
Paying corporation tax through registration
If you set up as a limited company within three months of starting to trade, you will need to register for corporation tax. It is important to note that ‘trading’ can include any type of business activity, from buying stock to placing an advertisement – it does not have to involve making money. Thus, it is best to register for the corporation as early as possible in order to avoid being penalized.
Is it possible to reduce my corporation tax bill?
A number of ways exist for you to reduce your corporation tax bill, including claiming allowable expenses. Depending on your eligibility, there are also various corporation relief options available that can reduce your final bill.
Tax allowances for corporations
There are certain allowable business expenses for a company that can lower its corporation tax bill, just as there are for sole traders. Expenses incurred solely for the purposes of running the business should be deducted from the company’s profits before taxes. Some of the most common are the following:
- Purchasing stock for resale
- Purchasing of raw materials
- Paying salaries to all employees
- Paying employer’s national insurance contributions (NIC)
- And employer’s pension contributions
- As part of business insurance
- Coverage for travel and accommodation
- Related to training
- Related to accounting
Lists like this aren’t comprehensive. It is advisable to incurred expenses solely and exclusively for business purposes, free of any personal use.
It won’t be able to claim for equipment and plant that are purchased and kept for the business. These are known as capital assets. Nevertheless, capital allowances may be able to be claimed here.
Relief from corporation tax
Furthermore, your company may be eligible for certain corporate tax reliefs. The following reliefs may be available:
- Costs associated with research and development
- Patent revenues
- The production of some creative media (e.g. TV, films, theatrical productions, and video games)
- Losses incurred by your company
- Company dissolution (if your company becomes a sole proprietorship or partnership and needs to transfer assets to shareholders).
- Learn more about making your business more tax-efficient.
The deadline to file corporation taxes is when?
You must pay your corporation tax within nine months and one day after the end of your accounting period if your taxable profits are less than £1.5 million. In the event that your taxable profits exceed this amount, you will be charged in installments. You can find more information on HMRC’s website.
Preparing your company tax return early is important!
You should be aware that the deadline for paying corporation tax comes before the deadline for filing your company tax return (which is 12 months after the end of your accounting period). As a result, you’ll need to prepare your company tax return well in advance of the deadline so that you know how much to pay in corporation.
What you need to know about paying corporation tax
Several payment methods are accepted by HMRC for corporation. If the deadline is approaching, make sure you allow yourself enough time because some take longer than others.
|Making a payment||Taking time|
|Online banking and telephone banking||Usually takes one or two working days|
|Approval||Within three working days|
|Via direct debit|
|(only debit cards are accepted)|
|Starting a new direct debit||Within five working days|