Guide to corporation tax for limited companies

Corporation tax is a fundamental part of running a limited company in the UK. Whether you’re just starting out or need a refresher, this guide covers everything you need to know, including corporation tax rates, company tax return deadlines, corporation tax filing requirements and tax reliefs.

What is corporation tax? 

Corporation tax is paid by UK limited companies and some other organisations on their taxable profits.

Taxable company profits include: 

• trading profits
• investment income
• chargeable gains from selling assets

Who needs to pay corporation tax?

If your business operates as a limited company, you must pay corporation tax on profits, regardless of size or sector. The following are also subject to corporation tax:

• UK branch/office of a foreign company
• Unincorporated associations e.g. community groups, sports clubs, housing associations and cooperatives

Sole traders and partnerships are not subject to corporation tax but pay income tax instead.

Corporation tax rates

• Main rate of corporation tax is 25% where profits over £250,000.
• Small profits rate of 19% for companies with profits below £50,000.
• Companies with profits between £50,001 and £250,000 are able to claim marginal relief which reduces their corporation tax bill.

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”.

How to calculate corporation tax

Corporation tax is calculated on your company taxable profits, including investment income and chargeable gains. Taxable profits = Total income - Allowable expenses - Tax relief

A company has 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 profit or loss shown in the company accounts.

The accounting profit is adjusted for tax purposes, for example 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 and business entertaining expenditure.

Capital expenditure

When a company incurs capital costs, this expenditure is not deductible from the trading profits. Instead, a company can claim tax relief through capital allowances.

• Companies may be able to write off 100% of capital expenditure against their business profits by claiming the Annual Investment Allowance (AIA), but this is subject to a cap of £1,000,000.
• Certain types of expenditure will attract first-year allowances (FYAs) at 100% and are not impacted by the AIA limit.
• A company may be able to claim capital allowances at reduced rates of 18% or 6%, dependent on the asset in question.
• From 1st April 2023, Full expensing and 50% first-year allowance can be claimed. Full expensing lets companies deduct 100% of the cost of qualifying plant and machinery. The 50% first-year allowance lets companies deduct 50% of the cost in the year it was bought.

Your accountant will be able to help with your company tax return and capital allowances claim. 

How do you register for corporation tax?

A company must register for corporation tax with HM Revenue and Customs (HMRC) once it ‘Starts to do business’ i.e. 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.

If you don’t tell HMRC your company is liable for corporation tax you may face penalties.

Filing a company tax return and paying corporation tax

Tax return submission

If HMRC sends a ‘notice to deliver a company tax return’, you must file the tax return within 12 months following the end of the accounting period that it covers. This is usually the same period as the company's financial year but it could be different in certain circumstances.

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.

Paying your tax

The deadline for paying corporation tax depends on the amount of taxable profits and your accounting period, it is usually payable within nine months and one day of the end of the accounting period. You can pay corporation tax online or by various other methods as detailed on HMRC's website.

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.

Who 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. Your accountant can prepare the company tax return, but the responsibility remains with the company directors. Companies are not sent a tax bill so it’s a directors' responsibility to ensure your company pays the tax owed by the appropriate deadline.

Avoiding penalties

Failure to submit your company tax return on time, or pay you tax by the deadline could result in a penalty.

If you file a late company tax return, you'll immediately received a £100 penalty which will increase over time. If your company tax return is late three times in a row, the £100 penalties are increased to £500 each. If you file an inaccurate company tax return, you will face further penalties.

Full details of penalties are on the HMRC website.

How we can help

TaxAssist Accountants Gerrards Cross can help with your company accounts and tax return, as well as providing tax planning that may benefit you and your company. To find out more about our services and to book a free consultation, call 01753 971 440 or fill in our online enquiry form.

Last updated 28 Mar 2022 | First published 28 Mar 2022

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This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.