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What is corporation tax?

In this article, we’ll cover the concept of corporation tax, who pays this type of tax, how it’s calculated, and the various factors that can reduce a company’s tax.

What is corporation tax

Corporation tax is the main tax that limited companies pay to HMRC on their profits. Corporation tax must be paid on both profits and any gains from selling assets that have increased in value.

Who pays corporation tax?

Companies that are classed as one of the following must pay Corporation Tax on their profits:

  • A limited company
  • A foreign company with a UK branch or office
  • A club, co-operative or other unincorporated association

Sole traders and partnerships do not pay Corporation Tax, they pay Income Tax on business profits and Capital Gains Tax on any gains from the sale of assets.

What is the corporation tax rate

Companies pay Corporation Tax depending on the profit during the accounting period and the current tax rates. 

The latest corporate tax rate is: 

25% for businesses that have made over £250,000 in profit 

19% for companies that have made a profit of £50,000 or less

You may be entitled to marginal relief If your profit is between £50,000 and £250,000. 

How to register for corporate income tax?

When setting up a limited company you will need to register for corporation tax within 3 months of starting to trade. Trading is any business activity and not just from the date that money is made. This means it is important to register for corporation tax early to avoid facing penalties. 

How to reduce your corporation tax bill?

Tax Allowances 

Similarly to personal income tax for sole traders, there are allowable business expenses that companies can use to reduce the corporation tax bill. If a cost occurs due to a need for running the business, it should be deducted from the company’s profit before being taxed. To qualify as an allowance, the expense must be exclusively for business reasons, without any personal use. 

Tax Reliefs 

You may be able to claim reliefs for:

  • Research and Development (R&D) relief
  • The Patent Box
  • Reliefs for creative industries
  • Relief on goodwill and other relevant assets
  • Disincorporation relief
  • Terminal, capital and property income losses
  • Trading loses

How do you pay corporation tax?

HMRC allows for different ways of paying your corporation bill, however, each one has a different time required, so it is important to know how much time is required to allow you to ensure you make payments on time. 

Payment Time Needed
Online / telephone banking One – two working days
CHAPS One – two working days
Bacs Three working days
Direct debit Three working days
Online (debit card only) Three working days
Bank or building society Three working days
New direct debit Five working days

If your taxable profit is less than £1.5m you must pay corporation tax within nine months and one day of your accounting period ending. If your profit is more than this you will pay in installments. As this deadline is before the company tax return deadline, you will need to prepare your company tax return in advance so you know how much corporation tax you need to pay.

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