Guide to corporation tax for limited companies
What is corporation tax?
Corporation tax is paid by UK limited companies and some other organisations on their annual taxable profits.
Taxable profits include:
- trading profits from doing business
- investments
- selling assets your business owns, such as property, equipment, machinery, land and shares, for a chargeable gain
There is no threshold for corporation tax, so a company needs to start to pay corporation tax as soon as it makes a profit.
The current main rate of corporation tax for limited companies and unincorporated associations in the UK is 19%.
There are different rules for ‘ring fence companies’ which HMRC describes as businesses “involved in the exploration for, and production of, oil and gas in the UK and on the UK continental shelf”.
Ring fence companies with taxable profits under £300,000 pay the 19% corporation tax rate, while those with taxable profits above £300,000 are liable to a 30% rate.
Companies are not sent a corporation tax bill so it’s your responsibility to ensure your company pays the tax owed by the appropriate deadline.
Who pays corporation tax?
The following are subject to corporation tax:
- UK limited companies
- the UK branch or office of a foreign company
- unincorporated associations such as community groups, sports clubs, housing associations and cooperatives
How is corporation tax calculated?
The amount of corporation tax a company must pay is calculated based on taxable profits. Companies must also pay tax on their investment income and gains.
A company will have a trading profit when its trading income is greater than its trading expenses. To determine the profit or the loss, you start by looking at the company accounting profit or loss figure.
This amount must then be adjusted for tax purposes. This is because an accounts profit or loss is not the same as what is allowable for tax. Certain costs are disallowed for tax and there may also be additional allowances which can be claimed.
Examples of common expenditure amounts which are disallowed for tax are depreciation on capital assets and business entertaining expenditure.
Examples of allowable tax expenditure include costs from making qualifying capital expenditure or research and development tax credit deductions.
Where the income is greater than the adjusted trading expenses, the company will have a taxable profit.
Capital expenditure
When a company incurs capital costs, such expenditure is not deductible from the trading profits. Instead, a company may be able to receive a measure of relief in the form of capital allowances on qualifying expenditure.
Companies may be able to write off 100% of their costs against their business profits by claiming the Annual Investment Allowance (AIA), but this is subject to a cap. The previous cap was £200,000 but this was increased in January 2019 to £1,000,000.
Certain types of expenditure will attract first-year allowances (FYAs) at 100% and are not impacted by the AIA limit.
Otherwise, a company may be able to claim capital allowances at reduced rates of 18% or 6%, dependent on the asset in question.
A new ‘Super Deduction’ tax relief temporarily introduces increased reliefs for expenditure on certain items of plant and machinery. For qualifying capital expenditure incurred from 1st April 2021 up to 31st March 2023, companies can claim:
- a super-deduction providing allowances of 130% on most new plant and machinery investments that would ordinarily qualify for 18% main rate writing down allowances.
- a first-year allowance of 50% on most new plant and machinery investments that would ordinarily qualify for 6% special rate writing down allowances.
Determining if expenditure qualifies and at what rate is therefore quite complicated. It is always worth checking the deduction will be allowable and the tax saving the expenditure will lead to before incurring the cost.
How do you register for corporation tax?
A company must register for corporation tax with HM Revenue and Customs (HMRC). ‘Starting to do business’ includes actions such as buying, selling, advertising, employing someone and renting a property.
You must keep sufficient business records so that your company can prepare and file an accurate company tax return and pay the correct amount of corporation tax.
When do you file a company tax return?
To work out your corporation tax bill, you need to prepare a company tax return. You must fill in a CT600 form outlining your profit and turnover, allowances and reliefs that you’ve used and your tax calculations.
If HMRC sends you a ‘notice to deliver a company tax return’ (CT603), you must file the tax return by 12 months after the end of the accounting period that it covers. This is usually the same period as the financial year covered by your annual accounts but it might be different in certain circumstances. For example, you may have two accounting periods when you commence trading so you will need to file two company tax returns.
If you have made a loss or have no corporation tax to pay, you must still file a return.
You are also required to file company accounts with Companies House.
If you run a private limited company that does not need an auditor, you may be able to file your company tax return to HMRC and your company accounts to Companies House at the same time.
How is corporation tax paid?
The deadline for paying corporation tax depends on the amount of taxable profits and your accounting period.
You can pay corporation tax online as well as using various other methods:
| Payment | Payment speed |
|---|---|
| Faster payments (online or telephone) | Same or next working day |
| CHAPS | Same or next working day |
| Bacs | Three working days |
| Direct Debit (if previously set up) | Three working days |
| Debit or corporate credit card | Three working days |
| Bank or building society | Three working days |
| Direct Debit (if not previously set up) | Five working days |
Which member of staff is responsible for paying Corporation Tax?
Company directors are legally responsible for making sure company tax returns are filed on time and corporation tax is paid by the deadline.
You can employ an accountant to prepare the tax return and advise on tax planning, but the responsibility remains with the company directors.
Corporation tax deadlines
The deadline for a company tax return is one year after the end of the accounting period it covers.
There’s a separate deadline to pay the tax which is usually 9 months and one day after the end of the accounting period.
If you have taxable profits of more than £1.5 million, you must pay your corporation tax in instalments. For 12 month accounting periods, corporation tax is normally paid in four quarterly instalments with two due before the end of the accounting period. There are different rules for businesses with profits over £20 million.
Corporation tax penalties
If you file a late company tax return, the following penalties apply:
- One day late: £100
- Three months late: Another £100
- Six months late: Your corporation tax bill will be estimated and a penalty of 10% of unpaid tax will be added
- 12 months late: Another 10% of unpaid tax
Also, if your tax return is late three times in a row, the £100 penalties are increased by HMRC to £500 each.
If you file an inaccurate company tax return, you face a penalty. The amount you have to pay is dependent on:
- whether HMRC decides the error was careless but not deliberate, deliberate or deliberate and concealed
- whether you tell HMRC about the error before they find out (‘unprompted disclosure’) or you tell HMRC after they find out (‘prompted disclosure’)
Penalties are also imposed if you don’t tell HMRC your company is liable for corporation tax. The penalties are as follows:
- Non-deliberate: 30% of your tax bill
- Deliberate but not concealed: 70% of your tax bill
- Deliberate and concealed: 100% of your tax bill
The full details on penalties are on the HMRC website here.
How corporation tax will increase
During his March 2021 Budget speech, chancellor Rishi Sunak announced an increase in corporation tax.
From April 2023, the rate for businesses with profits over £250,000 will be 25%. A new small profits rate means companies with profits of £50,000 or less will continue to pay corporation tax at 19% and there will be tapered rates for those with profits between £50,000 and £250,000.
Need advice about corporation tax?
TaxAssist Accountants can help with the preparation of company accounts, company tax returns and corporation tax calculations as well as providing advice on tax planning that may benefit you and your company. To find out more about our services and to book a free consultation, call 01332 501122 or fill in our online enquiry form.
Last updated: 20th March 2024