How to calculate small business corporation tax

Corporation Tax is a tax that all limited companies must pay on their profits – any money your business makes after overheads and expenses have been deducted.

Understanding how to calculate it for small businesses is essential to ensuring you meet Corporation Tax requirements.

What is small business Corporation Tax?

All limited companies are liable for Corporation Tax – no matter how small.

The tax is paid annually to HMRC and must be paid within nine months of the end of your financial year.

This is a self-assessed tax levied on company profits as well as any money your business makes from investments or selling capital assets for more than they cost.

This means it’s your company’s responsibility to calculate how much is owed and pay it to HMRC in advance of filing your company tax return (CT600), which must be filed with HMRC within 12 months of the end of the financial year.

For example, if your financial year ran from the 1st of January to 31st of December, you would need to calculate and pay any tax due within nine months and one day of the financial year end.

In this case, you’d need to pay any tax due by the 1st of October.

You would also need to file your company tax return by the 31st of December.

The current rate is 25% for 2023/24.

How to calculate Corporation Tax for small businesses

Working out your tax requires some skills in accounting, along with accurate bookkeeping.

You’ll also need to understand what tax reliefs your business can benefit from, which helps reduce the amount your business pays.

It’s best to seek professional advice from a business accountant to help prepare your company tax return.

Step 1 – calculate sales and income

You’ll need to create a profit and loss account in order to calculate what you owe.

This should total all sales income your business generates, as well as any interest earned such as in a corporate savings account.

Let’s assume a small consulting business generates sales of £120,000 and interest of £100 on money stored in a business bank account.

This would give total income of £120,100.

• Sales = £120,000)
• Interest income = £100
• Total income = £120,100

Step 2 – calculate overheads

Overheads and other business expenses can be deducted from your trading income to arrive at the profit your business makes.

To ensure you pay no more than necessary, remember to claim all allowable deductions and expenses from the trading income.

However, you can only deduct allowable expenses – which HMRC deem as an expense that is “wholly and exclusively” for business use.

It’s likely you can claim for anything you have bought specifically for your business that you don’t get any personal use from.

Expenses usually include accounting fees, cost of sales such as materials or postage and packaging, salaries, insurance, travel and office costs. For example:

• Directors salary = £25,000
• Professional fees = £2,500
• Marketing = £1,000
• Insurance = £300
• Entertaining = £1,000
• Bank charges = £350
• Software = £2,300
• Travel = £6,000
• Office supplies = £325
• Subscriptions = £90
• Depreciation = £600
• Total overheads = £39,465

Step 3 – capital allowances and depreciation

Capital allowances are expenses that your business incurs buying fixed assets that will be part of your business for several years, such as computing equipment, plant equipment and furniture.

Over time the value of the asset will depreciate.

For example, your business may determine that a computer initially worth £1,800 will depreciate by £600 a year over three years.

At the end of the three years the asset has a value of zero.

However, depreciation is not an allowable expense, so needs to be added back into the tax calculation.

For most small business tax calculations, most capital asset purchases will qualify for Investment Allowance tax relief.

This means that up to £200,000 of capital costs each year are effectively written off and can be used to reduce the amount of profit liable for Corporation Tax.

Step 4 – entertaining costs

Costs associated with entertaining clients and suppliers – such as business lunches, trips to sporting events, gifts and free samples – are not tax deductible; you can’t claim either tax relief or VAT on the costs of entertaining.

Step 5 – calculating Corporation Tax

In our example, let’s assume that £1,800 was spent on capital equipment in the year, which will depreciate at £600 a year over three years, and £1,000 on entertaining clients.

To calculate, you would add back any depreciation and client entertaining costs to the profit before accounts total, then subtract any capital allowances to arrive at the profit value that is liable tax.

• Total income = £120,100
• Overheads = £39,465
• Profit before accounts = £80,635
• Depreciation = £800
• Entertaining = £1,000Capital allowances = £1,800
• Profit liable to Corporation Tax = £80,435
• tax due @ 19% = £20,109

Tax would be due at a rate of 25% on profits, so simply divide the liable profit by 100 then multiply the resulting sum by 25 to arrive at the amount due.

As all businesses are different, it’s always a good idea to seek accounting advice from a qualified professional before submitting your company tax return.