Tax Advice
What You Need to Know About U.K. Corporation Tax
When you run a limited company, tax time can be hectic. You need to gather all your documents (or work with an accountant or tax professional to do so) and pay the corporation tax bill HMRC has sent you. Not sure what this is, how it’s calculated, or when you need to pay it by? Then read on!
In the U.K., owners of limited companies are liable for paying corporation tax on the profit their business makes. The rate of corporation tax is the same for all businesses and, depending on how much you earn, you may also need to pay Value Added Tax (VAT). When and how you pay corporation tax will also vary, depending on how much you earn.
But it doesn’t need to sound daunting. Whether you’re new to running a limited company or have been doing it for many years and need to refresh your memory, our guide to paying U.K. corporation tax is for you.
We’ll cover the corporation tax rate, VAT, payment deadlines, how to work out your taxable profits, and how to pay HMRC. But let’s start with an overview of what corporation tax is.
What Is Corporation Tax?
Anyone who runs a limited company in the U.K. pays corporation tax. It’s calculated on the annual profits of your business, similar to how individuals work out how much income tax they should be paying.
But unlike individuals, businesses aren’t entitled to any kind of tax-free allowance. This means all of your profits, no matter how big or small, are taxable profits. But there are several expenses and reliefs you may be able to claim to help you lower your trading profits and corporation tax bill.
To pay your corporation tax, you’ll need to submit a company tax return (CT600) to HMRC. This must be done once a year, and that’s something we’ll cover in a later section.
What Are the U.K. Corporation Tax Rates?
In the U.K., there are no varying corporation tax rates. The corporation tax rate for all limited companies is 19% for taxable profits below £50,000 (small profit rate) and 25% for taxable profits above £250,000 (main rate).
It’s been this way since 1 April 2023. Before this time, the corporation tax rates you paid depended on how much profit your business made.
VAT
If your company makes an annual turnover of £85,000 or more, you’ll also need to pay VAT. You can register voluntarily if your business earns less than this amount unless the products and services you sell are VAT-exempt. You’ll also be responsible for filing VAT returns.
You register for VAT with HMRC, who’ll then send you a VAT registration certificate. This will confirm:
- Your VAT number
- The date for when you need to submit your first VAT return and payment
- Your effective date of registration (this varies on the date you passed the VAT threshold or voluntarily registered)
You can reclaim VAT on certain purchases you made before registering with HMRC.
Do Small Businesses Pay Corporation Tax?
If your annual taxable profit is below £50,000 (small profit rate), you’ll pay tax at the corporation tax rate of 19%. This rate applies to profits you make from trading and sales of investments and assets.
You’ll need to register for corporation tax when you set up as a limited company and within 3 months of starting to trade. It’s your responsibility to make sure you’re paying the right amount of tax, so you’ll need to keep accurate records and file your company tax return by your deadline. An accountant can help you with this.
Corporation Tax Deadlines
You must send your company tax return to HMRC between your company’s end-of-year date and statutory filing date. Your statutory filing date will be 12 months after the year-end or 3 months after you receive a notice from HMRC to deliver a tax return—whichever is the latest.
However, depending on your limited company’s circumstances, you may need to pay your tax bill before your return is due.
If your business made a taxable profit of up to £1.5 million, you’ll need to pay corporation tax within 9 months and 1 day after your accounting year-end.
So, if your accounting year ends on 31 March, your tax payment will be due on 1 January of the following year. And your tax return will be due 3 months after your corporation tax payment.
If you earn more than £1.5 million in profit, you must pay your corporation tax in installments.
Penalties for Filing Your Company Tax Return Late
HMRC charges penalties if you file your company tax return late.
These are:
- £100 for 1 day
- Another £100 for 3 months
- 10% of your unpaid corporation tax bill for 6 months
- Another 10% of your unpaid corporation tax bill for 12 months
The £100 penalties increase to £500 each if your tax return is late 3 times in a row. And if your return is more than 6 months late, HMRC will write to you explaining how much corporation tax they think you need to pay. This is called a tax determination, and you can’t appeal against it.
You must pay any tax owed and file your tax return. HMRC will recalculate the penalties and interest you owe.
How Do I Calculate My Corporation Tax?
Keeping accurate records makes calculating the tax you owe much easier, as can working with an accountant. You’ll need to create a profit and loss account totalling all the income from sales your company has made, as well as any interest earned. This may have come from a corporate savings account.
Let’s say you generate £100,000 from sales income plus £100 in interest. This brings your total annual income to £100,100.
Next, you need to add up all the costs of running your business. These are your business expenses and can include things like:
- Salaries
- Professional fees
- Marketing
- Insurance
- Bank charges
- Software subscriptions
- Office supplies
Bear in mind that the items you class as expenses must be used solely for business purposes. For our calculation, let’s say these add up to £40,000.
Depending on the nature of your business, you may also be able to claim tax reliefs.
These include:
- Capital allowances, such as equipment and vehicles
- Research and Development Relief
- The Patent Box, if you earned profits from patented inventions
- Creative industry tax reliefs
- Relief on goodwill and relevant assets
- Disincorporation relief, when you change your business structure
- Trading losses
- Terminal, capital, and property income losses
- Marginal relief, if your profits are lower than £250,000
For our calculation, let’s say you’re entitled to £600 in tax relief.
Here’s how you’d work out your corporation tax bill:
£100,100 – £40,000 – £600 = £59,500
19% of 59,500 = £11,305
Your corporation tax bill is £11,305.
Remember, you can’t claim the cost of entertaining clients as an expense or relief. So make sure you don’t include this figure when calculating your corporation tax amount.
How to Pay Corporation Tax
You can pay your corporation tax bill in several ways. However you decide to pay, HMRC must receive the tax you owe by your deadline date or you’ll risk facing a fine.
If your deadline is on a weekend or bank holiday, you must pay HMRC on the last working day before this.
Here are the approximate payment deadlines for HMRC:
- CHAPS, online or telephone baking (faster payments): Same day or next day
- Bacs, direct debit (if you’ve set one up already), online payment via debit or corporate credit card, or via your bank or building society: 3 working days
- Direct debit (if you haven’t set this up before): 5 working days
You can no longer pay using a personal credit card, so make sure you have the funds ready to pay HMRC elsewhere. You also can’t pay corporation tax through the post office.
File Your Corporation Tax Return on Time
Getting your head around corporation tax, or remembering how this works, is another challenge that comes with running a limited company. We hope our guide makes dealing with corporation tax a stress-free experience for you.
If there’s anything you’re unsure of, you can always seek the help of an accountant or tax professional. They’ll support you in filing your return, getting your corporation tax paid on time, and paying HMRC the right amount of corporation tax.
This post was updated in January 2024.