Corporation tax is payable by companies and corporations and functions as the company equivalent of income tax for registered companies. It is based on the profits that a business makes and the rate payable is dependent on the profits generated by the business in question over the course of a business year.
Corporation tax in the UK affects almost any company registered in the UK for business (rather than charitable) purposes.
Sometimes frustratingly for business owners and directors, Corporation Tax needs to be paid early and promptly, as opposed to income tax and National Insurance on personal income, which allows a number of months (between April and January) leeway before payments are due. Having effective payroll management software in place will also help with Corporation Tax calculations, keeping track of all the numbers.
However, the tax rates for Corporation Tax, with the right company structure and arrangements, often work out much more preferable than rates of income tax for equivalent amounts.
Registering for Corporation Tax in the UK
You will need to register for corporation tax and it is one of the first key tasks to consider when you are setting up a company in the UK. This must, by law, be completed within a three-month period of trading commencing. The government offers further advice on what constitutes trading or non-trading here. Make sure that you get this done within the given period as there may be fine if you fail to do so.
There are companies who may be able to assist you in setting up and registering a limited company in the UK and should you utilise their services, they will charge you a fee to carry out tasks like this.
Who Pays Corporation Tax?
The rate for Corporation Tax in the UK, as of the 2019/19 tax year is set at 19 per cent for all limited companies. Prior to April 2016, Corporation Tax was tailored to the size of a business’ profits.
In 2015, the government announced the rate would be kept at 19 per cent until 2019 with plans to simply reduce it to 18% by 2020. However, in the 2016 Chancellor’s Budget, there was a further planned reduction which was announced which may see the rate drop to 17 per cent for companies by 2020.
If a company’s profits had fallen between £300,000 and £1.5 million prior to the 1st of April 2015, the company may be eligible to apply for marginal relief, which means that your corporation tax bill will be reduced by a certain amount. This will be depending on the precise amount of profit you make.
There is a formula for calculating the marginal relief and it is complex. However, thanks to HMRC and their trusty calculator, companies do not have to worry.
When Do You Pay Corporation Tax?
This tends to be one of the major obstacles associated with Corporation Tax. The payment deadline is actually very different from the other major forms of tax in the UK, such as income tax, National Insurance contributions and VAT. You are required to pay corporation tax before you file your company tax return.
You will have to pay your corporation tax within nine months and one day of the end of the accounting period for the previous financial year. Therefore, if like many firms your accounting period concludes on the 31st of March, then you must settle your corporation tax bill by the 1st of January the following year.
However, it gets slightly more confusing if you are in your first year of trading. This will mean that you will actually have two accounting periods to consider. For businesses who have profits which amount to over £1.5 million, the process is also different and they will need to pay their taxes in instalments.
In addition, it is worth bearing in mind that even when your business is making losses, while you will not have to pay any corporation tax, the company will still need to declare that it has nothing to pay and will therefore have to file a return to HMRC. If you are late in paying, you may receive a penalty.
Corporation Tax Relief and Allowances
When a company comes to calculate its profits at the end of the business’ tax year, it is entitled to deduct any costs and expenses which are directly related to running the business before they file any company accounts. You should bear in mind that there are certain costs which are not counted as ‘allowable’ expenses, such as entertaining clients.
How Do You Pay Corporation Tax?
All corporation tax payments must be made electronically, so if you are used to paying taxes and charges by post you will have to find a new way to settle the bill. Ways to pay for corporation tax include:
- Debit or credit card – you should keep in mind that if you do choose a credit card, there may be a charge attached to that. This sort of payment will take three working days to reach HMRC
- Bank – If you find that you are more comfortable with a more traditional method, you can still pay via your local branch
- Direct Debit – for this, you will need to register with HMRC services, then the website will take you through the direct debit process step-by-step
- Online Banking (faster payments) or CHAPs – if you are in position where you need to get your tax paid quickly, then you could use the faster payment service providing by your online banking provider