What is Corporation Tax and How Much Do UK Companies Pay?

Corporation Tax is a key part of the UK tax system that applies to the profits made by limited companies and certain other organisations. For many small business owners, such as those running a limited company for the first time or thinking about incorporating, it can seem daunting and overly complex at first glance.

There are different rules, rates, and reporting requirements to understand which can make it seem more complicated than other types of tax. However, at its core, Corporation Tax is simply a tax on company profits and understanding the basics, as well as having the right support in place, makes it much easier to manage and can even help to reduce the amount you have to pay.

What is Corporation Tax?

Corporation Tax is a tax levied on the profits made by limited companies, some foreign companies with a presence in the UK and some associations and clubs, irrespective of how much profit is made.

It doesn’t apply to sole traders or partnerships as they are taxed through income tax, but if you operate a limited company, it is a legal requirement to calculate, report and pay Corporation Tax to HMRC.

Corporation Tax is paid by the business itself rather than the directors and shareholders; they are taxed separately on any funds they receive from the business, such as salary and dividends.

What Are The Corporation Tax Rates?

The amount of Corporation Tax you pay is dependent on how much your taxable profit is. This determines which band you fall into, and therefore how much tax is due.

Prior to April 2023, all businesses paid Corporation Tax at 19% but the rules were then changed so more profitable companies paid more while smaller companies were shielded from paying higher rates.

• Small Profits Rate: 19% – Applies to companies with profits up to £50,000
• Marginal Relief: 19% – 25% – Companies with profits between £50,000 and £250,000 pay a rate between 19% and 25% on a sliding scale
• Main Rate: 25% – Applies to companies with profits over £250,000

Marginal Relief means that tax rate rises in line with profits, protecting qualifying businesses from jumping straight from 19% to 25%. It’s important to note that if you company has associated companies, the thresholds may be reduced as the limits are shared between them.

How Is Your Corporation Tax Liability Calculated?

Calculating Corporation Tax is much like calculating your liability for income tax. You need to determine your income, apply any relevant adjustments and then apply the tax rate to your taxable profit, although Corporation Tax becomes more complex if you fall within the Marginal Relief band.

1. Determine your total income for the accounting period
2. Deduct any allowable expenses
3. Apply any allowances, reliefs or losses carried forward
4. Calculate your taxable profit
5. Apply the relevant Corporation Tax rate

In the Marginal Relief band, the Corporation Tax you pay is determined by a set formula from HMRC which reduces your tax bill dependent on your profit level. Put simply, the closer your profits are to £50,000 the closer your tax rate will be to 19% and the closer profits are to £250,000, the closer the tax rate will be to 25%. These calculations can be complex which is why many businesses will work with an accountant to ensure their liability is calculated correctly and that all available reliefs are applied.

What Are The Corporation Tax Deadlines?

Companies have responsibility for calculating their Corporation Tax liability, submitting returns and paying what’s owed to HMRC so it’s important to understand the various deadlines to help ensure compliance.

• Registering for Corporation Tax: You must register for Corporation Tax with HMRC within 3 months of starting business activity as a limited company
• Filing a Company Tax Return (CT600): Within 12 months of the end of the accounting period, detailing business income, expenses and taxable profit
• Paying Your Corporation Tax Bill: Usually within 9 months and 1 day after the end of your accounting period

Penalties apply both for late filings and late payments and they can ramp up for repeated non-compliance.

What Corporation Tax Reliefs and Allowances Are Available?

There are various ways for limited companies to reduce the amount of Corporation Tax they pay and effective Corporation Tax planning is key to ensure that you maximise all available reliefs, allowances and deductions whilst remaining compliant with HMRC.

• Allowable Expenses: Costs incurred wholly and exclusively for the purposes of running your business, such as travel costs, subscriptions and professional fees, can be deducted to lower taxable profit and therefore the amount of Corporation tax payable
• Capital Allowances: You can deduct the cost of purchases of qualifying business assets such as vehicles, computers, and office furniture from your income to lower taxable profit
• Research & Development Tax Credits: If you’re investing in R&D to develop new products, processes or services, you could claim enhanced tax relief on qualifying costs which can reduce your Corporation Tax bill or, in some cases, result in a payable tax credit from HMRC
• Loss Relief: If your business made a loss in a previous accounting period, you could carry it forward and offset it against future profits to lower your taxable profit
• Annual Investment Allowance (AIA): Purchases of certain qualifying capital equipment such as vehicles or IT equipment can be deducted from taxable profit in the year the purchase was made, up to the annual limit of £1m
• Employer Pension Contributions: Employer’s pension contributions are tax deductible and can be claimed as a business expense to reduce taxable profit

Taking full advantage of all available reliefs and deductions can significantly lower the amount of Corporation Tax you pay.

How We Can Help With Your Corporation Tax Obligations

As a Gorilla Accounting client, you’ll work with your own dedicated accountant who will expertly manage your Corporation Tax obligations as part of our limited company accountancy service. They will ensure that all allowances and reliefs are claimed to help minimise your bill as well as keeping you fully compliant with accurate and on-time tax filings.

Our service is all-inclusive which means all your business and personal accountancy needs will be expertly handled with unlimited support, advice and guidance. You’ll also benefit from a same working day response to your queries thanks to our client service guarantee.

We also provide full access to industry standard FreeAgent or Xero cloud accounting software either inclusive or at a discounted rate saving you up to £330 a year. Accounting software makes it easy to manage your tax obligations, including Corporation Tax, with your tax returns calculated automatically in the background.

They can then be digitally submitted to HMRC ensuring that you’re compliant with your Making Tax Digital (MTD) obligations now and in the future. Powerful automation handles laborious tasks such as bank reconciliation giving you more time to focus on your day-to-day and your accountant more time to focus on strategic guidance to help grow your business and increase your take home.

If you have any queries about your Corporation Tax obligations or our limited company accounting service, request a callback to speak to an accountant or get an instant online quote.