Corporation tax is a mandatory payment for all private limited companies generating taxable profits. These profits are calculated after deducting allowable expenses and tax reliefs within a specific accounting period.
Unlike individuals, companies don’t receive a tax-free allowance, meaning all profits are taxable. From April 1, 2023, the corporation tax rate increased to 25%.
Small Profits, Lower Rates
Companies with profits up to £50,000 benefit from a lower rate of 19%. There’s a tapered rate for companies with profits between £50,000 and £250,000, meaning the effective corporation tax rate will be adjusted to fall between 19% and 25%.
Reducing the Tax Burden
Companies can reduce their tax liability through various strategies. Research and development (R&D) tax credits are available for qualifying expenditures. Businesses exploiting patented inventions can benefit from a reduced tax rate of 10% on profits generated from those patents.
Investing in plant and machinery allows companies to claim the Annual Investment Allowance (AIA), providing 100% tax relief on purchases up to £1 million. Claiming all allowable business expenses is essential to minimize taxable profits.
A company’s accounting period typically spans 12 months, aligning with its financial year. However, this period can be longer for newly formed companies or those adjusting their financial year-end.
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Corporation tax must be paid nine months and one day after the end of the accounting period. Large companies, defined as those with profits between £1.5 million and £20 million, pay tax in installments.
Early payment of corporation tax can earn interest from HMRC, while late payment incurs interest charges and potentially damages a company’s credit score.
Understanding corporation tax is vital for UK-registered companies, especially start-ups managing their financial responsibilities for the first time. They must be aware of these obligations to avoid penalties and optimize their tax position.
Frequently Asked Questions About Corporation Tax
Corporation tax applies to various types of profits, including trading profits, capital gains, and other income like rental income. Trading profits are calculated after deducting allowable expenses from the company’s trading activities.
Capital gains refer to chargeable gains when a company sells assets such as land, property, or shares.
Dormant companies, which do not engage in any trade or business during an accounting period, are not required to pay corporation tax. Similarly, loss-making companies can offset their losses against profits in other years, typically carried back to the previous year or forward indefinitely.
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After incorporation, a company must notify HMRC within three months of starting trade. HMRC will then issue a 10-digit Unique Tax Reference (UTR), essential for registering the company for corporation tax.
Additional Ways to Manage Corporation Tax
Companies can further reduce their tax liability by claiming all eligible business expenses, including overheads like office costs, business travel, and advertising. Failing to claim these expenses results in higher taxable profits and increased taxes.
For companies with accounting periods starting after April 1, 2024, R&D tax relief is available under the merged Research and Development scheme or the Enhanced R&D intensive support (ERIS) scheme.
Early payment of corporation tax can earn interest from HMRC at an annual rate of 0.5%, starting six months after the accounting period begins. HMRC charges interest on overdue tax payments, with a rate of 8.25% applying from May 2025.
All companies must submit a corporation tax return 12 months after the end of the accounting period, regardless of size.
Associated Companies and Tax Limits
Tax limits for associated companies are divided by the number of companies under common control. Two companies are considered associated if one controls the other or if both are controlled by the same person or group.
