What is corporation tax?

What is corporation tax?

Businesses in the UK must pay corporation tax on their annual profits, in a similar way that individuals pay income tax on their earnings. That means, if you’re a trader who has set up a limited company, you’ll need to fix company taxes and pay a corporation tax each year.

The current (2023-24) corporation tax rate is 25%, rising from 19% last year. However, not all businesses need to pay at this level.

If your company made more than £250,000 in profit this tax year, then you’ll have to pay the full main rate of 25%. But if your business made a profit of less than £50,000, you only have to pay the ‘small profits rate’ which has been held at 19%.

If your company earned a profit between those two limits, you may be eligible for marginal relief, which is a sliding rate of corporation tax. 

You can find out how much this will be by using the marginal relief corporation tax calculator on the Government website. 

Unlike individuals, companies don't receive any kind of tax-free allowance, so all profits are taxable. However, there are several expenses and deductions that can be claimed to reduce your bill.

To pay, you must submit a company tax return (form CT600) to HMRC once a year, along with your company accounts.

Who pays corporation tax?

Corporation tax is payable by all UK limited companies.

The following organisations may also need to pay it, even if they're not incorporated:

• members clubs, societies and associations
• trade associations
• housing associations
• groups of individuals carrying out a business (such as co-operatives).

If you're a sole trader or partnership, you won't pay corporation tax. But you will have to pay income tax on your earnings via a self-assessment tax return. You can find out more in our guide to self-employed income tax.

Company directors of limited companies will also have to pay income tax on their salary as well tax on dividends over the allowance. This will also be calculated by self-assessment.

It is the responsibility of the company director to ensure that the corporation tax return has been submitted on time, and the tax bill has been paid - even if the company hires an accountant to prepare their calculations. However, an accountant can still be a wise investment, as they can help you make sure you’re claiming all the allowances you’re entitled to and that your forms are filled in correctly.

• Find out more: small business tax: what you need to pay

How to register with HMRC

Once your company is incorporated, you must tell HMRC within three months of trading that a limited company has been formed.

Depending on the type of business you have, it can be tricky deciding whether your business is 'trading'. HMRC has extensive explanations of what it considers to be 'active', 'trading', 'non-trading' and 'dormant', which you can check to make sure you're giving HMRC the correct information.

When you register with HMRC, you'll need to include details of the following:

• the date you began the business (this will be used as the start date of the company's first accounting period)
• company name and registration number (this will be provided by Companies House when you incorporate)
• the company's main address
• type of business
• the date you'll make your annual accounts up to
• name and home address of the company directors.

Corporation tax deadlines

You must submit your corporation tax return at some point between the date of your company year end and your statutory filing date. 

The statutory filing date is either 12 months after the year end, or three months after you receive a notice to deliver a return from HMRC - whichever is latest.

However, you may be required to pay your corporation tax bill before your return is due.

If your company has made a taxable profit of anything up to £1.5m, you'll need to pay the corporation tax within nine months and one day after the end of your accounting year.

As an example, if your accounting year ends on 31 March, your corporation tax payment will be due on 1 January the following year, while your tax return is due three months later.

For businesses with a turnover of more than £1.5m, corporation tax must be paid in instalments.

How to pay corporation tax

There are several ways to pay your corporation tax bill. Whichever method you choose, HMRC must receive the money by the deadline date to avoid a fine.

If your payment deadline falls over the weekend or on a bank holiday, your payment must reach HMRC on the last working day before.

Below are the approximate timelines for paying HMRC:

• Payments made by Faster Payments (online or telephone banking) will usually reach HMRC on the same or next day, including weekends and bank holidays.
• CHAPS payments usually reach HMRC the same working day if you pay within your bank’s processing times.
• Allow three working days: Bacs, direct debit (if you've already set one up), online payment by debit or corporate credit card, at your bank or building society
• Allow five working days: direct debit (if you've never set one up before).
• You can only pay at your branch by cash or cheque if you have a paying-in slip from HM Revenue and Customs (HMRC). Allow three working days for your payment to reach HMRC’s bank account.

Keep in mind that there’s a fee if you pay by corporate credit card or corporate debit card. The fee is not refundable. There’s no fee if you pay by personal debit card.

You’ll need to use your 17-character Corporation Tax payment reference number. If you use the wrong one, your payment could be late and you’ll face a fine. 

Corporation tax: late penalties

If you're late submitting your return, paying your tax bill, or you've shared inaccurate information, HMRC has the power to fine you.

The company director can be held liable, so even if an accountant filled out and submitted your return, you'll be the one to pay the penalty.

HMRC has set out the following penalties for those who are late filing a company tax return:

• One day after your deadline: £100 fine.
• Three months after your deadline: Another £100 fine.
• Six months after your deadline: HMRC will estimate your bill and add a 10% penalty onto what it thinks your unpaid tax will be.
• 12 months after your deadline: another 10% is added to your estimated tax bill. You cannot appeal the estimated tax amount.

If your tax return is late three times in a row, HMRC will increase the £100 penalties to £500 each.

Late corporation tax payments

If you don't pay the tax on time, you'll be charged interest on the amount you owe and may also have to pay a penalty or surcharge.

HMRC has the power to carry out enforcement action to recover any money owed, which include:

• collecting owed payments through your earnings or pension
• asking debt collection agencies to collect the money
• selling things you own (in England, Wales or Northern Ireland)
• taking money from your bank or building society accounts (in England, Wales or Northern Ireland)
• taking you to court
• making you bankrupt or closing down your business.

If you can't afford to pay, HMRC suggests contacting them as soon as possible, as you may be able to set up a payment plan. This is called a ‘Time to Pay’ arrangement.

HMRC will ask you to explain how you’ll pay the bill as quickly as possible. They will examine your proposal to make sure it’s affordable. You have to clear as much debt as possible before you’ll be allowed a payment plan, for instance by releasing assets.

HMRC says it may also ask company directors to:

• put personal funds into the business
• accept lending
• extend credit

Alternatively, if you've simply missed your payment date, you should contact the Corporation tax helpline on 0300 200 3410. You’ll need your 10-digit Unique Tax Reference (UTR).

How to reduce your corporation tax bill

Corporation tax can mean a huge bill for some companies - so it's worth making sure you're not paying more tax than you need to.

Here are four ways you can legally reduce your corporation tax bill:

1. Claim your allowable expenses

All traders can deduct costs for expenses that have been incurred purely for use by the business. This can include things like tools, stationary, uniforms and even financial services and solicitor’s fees.

Other things you might be able to claim include travel between customers, marketing for new business, such as flyers or advertising in local papers, and even training.

If you have employees, salaries and employer National Insurance contributions also count as a business expense, and can be deducted from the company's taxable profits.

There are no rules on exactly what can and can't be claimed. You just need to make sure the item or service was used exclusively for business purposes.

By deducting the costs of these expenses from your business profit, you reduce the amount you'll have to pay tax on and ultimately lower your tax bill.

Remember to keep a record of your expenses. It’s not only good practice, it’s essential. Without a record, HMRC can refuse to accept your claim.

2. Pay yourself a salary

The profits earned by the company are not yours, even if you're the only person working for it. So, you may decide to pay yourself a salary.

Like with any other employee, your salary is a business expense, as are any National Insurance contributions the company makes on your behalf. This means you can reduce the company's taxable profits by paying yourself.

However, you'll need to pay income tax on these earnings, as well as make employee National Insurance contributions.

Because of this, it may make sense to keep your salary under the higher-rate threshold, or even below the personal allowance limit.

In addition, many owners of limited companies choose to pay themselves in dividends, as these tend to be taxed at a lower rate than income tax. But note that dividends cannot be deducted as a business expense.

3. Make employer pension contributions

If your business pays employer contributions into your pension, these are treated as a business expense and exempt from corporation tax. ]You’ll also save on national insurance.

You need to make sure that your employer and employee contributions do not exceed your annual allowance (currently £60,000) when added together. The good news is that you can usually carry forward allowances from the past three years, which may give you extra leeway. 

4. Make an early payment to HMRC

When it comes to corporation tax, fortune favours the organised. If you pay your tax bill earlier than expected, HMRC will repay you some of it as interest at a rate of 0.5%.

HMRC will usually pay interest from the date you pay your corporation tax up to the payment deadline. However, the earliest it will pay interest is from six months and 13 days after the start of your accounting period.