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 opens in new window – 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) opens in new window, 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%.
Starting a business doesn’t come with a set of instructions.
We know that understanding the many different types of financial product in the marketplace can be difficult.
Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.
How to calculate Corporation Tax for small businesses
Working out your tax requires some skills in accounting, along with accurate bookkeeping opens in new window.
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 opens in new window to help prepare your company tax return.
Step 1 – calculate sales and income
You’ll need to create a profit and loss account opens in new window in order to calculate what you owe.
This should total all sales income your business generates opens in new window, 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 opens in new window 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 opens in new window, salaries opens in new window, insurance opens in new window, travel and office costs opens in new window. 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 opens in new window, plant equipment and furniture opens in new window.
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 opens in new window.
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 = £1,000
Capital allowances = £1,800
Profit liable to Corporation Tax = £80,435
tax due @ 19% = £15,282
Tax would be due at a rate of 19% on profits, so simply divide the liable profit by 100 then multiply the resulting sum by 19 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.
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