What is Corporation Tax?

Corporation Tax is one of the most important taxes your small business will pay – here’s our guide to understanding corporation tax, when to pay and how to calculate corporation tax.

Corporation Tax is a tax that all limited companies must pay and it’s a tax that’s payable against the profits a company makes.

Profits are deemed as any money after deductible costs and expenses, or the amount of money your business makes after overheads, salaries and costs incurred in the course of the operation of a business, such as raw materials or marketing costs.

Who pays Corporation Tax?

All limited companies are liable for Corporation Tax, and the tax is aligned to the financial year of the business.

There are some exceptions, such as when starting a new business if the business changes its year end accounting date.

Along with being payable on any profits a business makes in its financial year, Corporation Tax is also due on any money the business makes from investments, and from selling capital assets for more than they cost – known as chargeable gains.

Corporation Tax is paid on profits made in the UK and abroad if the company is based in the UK, or just on its UK profits if the headquarters is based in a different country.

How much Corporation Tax do I pay?

Corporation Tax is currently set at 25% on all profits although you may be able to reduce the Corporation Tax bill of your business through Marginal Relief if your profits are below £250,000.

To calculate your Corporation Tax liability, simply multiple your business profits for the tax year by 25%.

Corporation Tax rates can change each year, which is important if your company tax year is different and runs over April.

If your financial year end differs from April, you’ll need to pay Corporation Tax for the period up to the date the Corporation Tax rate changed, then calculate Corporation Tax at the different, lower rate for the remainder of your financial year.

Make sure that you keep accurate records of all your business expenses and costs – this is a legal requirement as a director of a limited company – so you can calculate how much Corporation Tax you owe.

How do I pay Corporation Tax?

Make sure you register your business for Corporation Tax with HMRC, this can be done at the same time as you when you register your business with Companies House.

You must do this within three months of incorporating your business with Companies House, unless it is dormant.

If you restart a business, you must inform HMRC by reregistering for Corporation Tax.

to register for Corporation Tax you’ll need the Unique Taxpayer Reference that you will have received from HMRC when you registered your business with Companies House.

Once registered, you’ll be able to sign in and report your Corporation Tax within your Company Annual Return.

HMRC will send you notification of Corporation Tax deadlines to the registered office of your business.

A Corporation Tax Return also needs to be filed with HMRC within 12 months of the accounting period it covers. .

Corporation Tax is payable within nine months of the end of the accounting period covered in your return.

If your business earns more than £1.5 million, you’ll have to pay in instalments.