Corporation Tax guide: How much is it, and what are the reliefs
In this guide, we’ll cover all the key points you need to know to better understand UK Corporation Tax including how to pay it and ways to reduce it.
What is Corporation Tax?
Corporation Tax is a form of UK tax paid by a limited company on any revenue generated in the yearly accounting period. All limited companies incorporated in the UK will have to pay this.
How much Corporation Tax you pay is calculated from a set rate applied to profits arising via general trading profits, returns on investment and from the sale of assets.
These can be tangible assets such as a piece of machinery or liquid assets such as shares. There is also an additional tax in the form of Capital Gains Tax applied when these assets have increased in value.
What is the Corporation Tax rate and how much is it?
As per the Finance Act, the current Corporation Tax rates sit at 19%.
This rate applies to all enterprises operating out of the UK apart from special rules for so-called ‘ring-fence’ companies. These ring-fence organisations are oil and gas companies that profit from extraction or rights and are subject to the energy profits levy and diverted profits tax.
How much Corporation Tax you pay in total will depend on what allowances you are eligible for. For foreign companies operating in the UK, there are separate tax and credit relief systems in place.
How to register to pay corporation tax
As opposed to Income Tax which is often an automated process for most, companies will usually register to pay Corporation Tax when setting up as a limited company and setting up PAYE as an employer with Companies House.
There are a few different ways for corporations to register to pay tax.
You can register directly through the government’s Companies House portal or get an accountant who specialises in Corporate Taxes to do it for you.
Third party software, such as Xero, is also available to easily manage the submission of information from the current accounting period.
Using them will reduce the chance of receiving late filing penalties and ensure you receive confirmation that documents have been received.
If you are a non-resident you might want to read our article on how to register a non-resident company for corporation tax.
Reducing your Corporation Tax bill
While all profits are taxable, there are specific allowances that you can utilise to reduce the amount of total Corporation Tax you are liable for. There are also certain deductions that can be achieved through expenses, as we will explore in this section.
Corporation Tax allowances
Just like personal income tax that applies to sole traders, there are allowances for corporations to help offset the running costs of the business and reduce the total Corporation Tax bill.
There are a number of costs that qualify to be written off as expenses, with some of the main ones being:
- Raw material costs in manufacturing
- Stock purchased with the sole intent of reselling
- Staff salaries
- CPD and employee training fees
- Travel and accommodation for work
- Employer pension contributions
- Employers’ National Insurance contribution
- Accounting costs
- Business insurances
While this list isn’t exhaustive, it should give you a good idea of the type of expenses that can be written off. Anything that is included in these allowances must be “wholly and exclusively” for business reasons – excluding anything that is for personal use.
Capital Tax allowances
There are also Capital Tax allowances afforded to those who make trading profits and pay Corporation Tax.
These allowances are a type of tax relief for a UK company that can be applied to many items required by a limited company, such as business vehicles, equipment and machinery.
If your taxable profits for a given annual accounting period don’t exceed £150,000, then there is a simpler ‘cash basis’ system in place. You will only need to pay expenses at the time cash is received or paid out during each accounting period.
The allowances on plant and machinery can be found at Companies House.
There is also an Annual Investment allowance available on these items, so long as they weren’t owned before being used solely for business needs. This allowance has been temporarily increased to £1 million between 01/01/2019 and 31/03/2023.
Corporation Tax reliefs
Outside of capital tax allowances, there are other Corporation Tax reliefs available to UK companies making taxable profits.
There is marginal relief for companies who have generated between £300,000 – £1,000,000 in taxable profits from accounting periods before 01/04/2015. This applies to oil extraction/rights in the UK or UK continental shelf.
There are also other reliefs that can be claimed on:
- The Patent Box – if your company makes taxable profits from proprietary inventions
- Terminal, capital and property income losses
- Relief for research and development
- Relief on goodwill and other relevant assets – such as consumer partnerships and unregistered IP
- Trading losses
- Reliefs for creative industries – if your company makes a taxable profit from film, television, theatre, animation or computer games
- Disincorporation Relief – if you’re ceasing to trade as a limited company and becoming a sole trader, ordinary business partnership or limited partnership. Find more information here.
When is the Corporation Tax deadline?
There is a specific deadline to pay a Corporation Tax bill. This is normally 9 months and 1 day after the end of the accounting period. There will often be two accounting periods in a given year depending on when your company was incorporated, so be aware of navigating this when filing tax returns.
Why you should prepare your Company Tax return early
Not filing (or not paying) your Corporation Tax bill will incur penalties from HMRC.
While these start off fairly small (£100 for one day late and a further £100 for three months late) they can quickly accumulate and eat into profits.
Six months overdue and HMRC will charge a company 10% of the estimated unpaid tax bill, and two months after that, it rises a further 10%.
How to pay your Corporation Tax bill
You will normally pay your Corporation Tax in one go. However, company’s profits exceeding £1.5 Million are paid in equal instalments. Different rules apply for profits exceeding £20 Million.
You can normally pay your bill via direct debit or corporate credit card. Payments can either be made online, through telephone banking or in-person at your bank or building society.
Simply put, yes. When people refer to business tax they are referring to Corporation Tax. This is different to Income Tax paid by sole traders. Corporation Tax is paid on any profit resulting from business activity by a UK company.
The Corporation Tax rate is currently 19% for the 01/04/2022 – 01/04/2023 accounting period. This rate applies to all companies generating taxable profits in the UK who pay Corporation Tax. It should be easy to keep an eye out for tax changes whenever the government announces a new budget as the rate of corporation tax is usually a hot topic.
While in September the UK government announced that this would rise to 25% in the next financial year, those plans have now been scrapped meaning the current rate of 19% will remain for accounting periods beginning in April for the 2023 financial year.
Salaries are deductible but only in the tax year you make them. Payments must be considered within reason by HMRC and there are other rules applying to bonuses, awards, sick leave and holiday pay.