If you’re running a limited company in the UK, one of the key financial responsibilities you’ll need to manage is Corporation Tax. Unlike sole traders and partnerships, limited companies are treated as separate legal entities and are therefore subject to Corporation Tax on their profits. Understanding the basics of Corporation Tax, how it works, and how to file your tax return is crucial to staying compliant with HMRC (Her Majesty’s Revenue and Customs) and avoiding penalties. In this post, we’ll explain everything you need to know about Corporation Tax in the UK.

What is Corporation Tax?

Corporation Tax is a tax that limited companies and other organisations (such as clubs and societies) must pay on their profits. The profits are calculated by deducting allowable expenses from your income, and the tax is paid based on the profit your company makes.

Corporation Tax applies to both UK-based businesses and foreign businesses that have a presence in the UK. It’s a direct tax on company profits, not income earned by individuals, so it’s not applicable to sole traders or partnerships.

When Do You Pay Corporation Tax?

Corporation Tax is due 9 months and 1 day after the end of your accounting period. The accounting period typically corresponds to your company’s financial year. For most companies, the financial year ends on the anniversary of your incorporation, but it can be set to any date that suits your business.

For example:

• If your company’s financial year ends on 31 December, your Corporation Tax will be due by 1 October of the following year.

It’s important to note that Corporation Tax is payable in a lump sum after you file your company’s Company Tax Return (CT600). The return is due within 12 months of the end of your accounting period.

How Much is Corporation Tax?

The rate of Corporation Tax in the UK depends on your company’s profits. For the 2024/2025 tax year, the standard Corporation Tax rate is 25% for companies making profits above £250,000. Companies making profits under £50,000 will pay a reduced rate of 19%.

There is a marginal relief for companies with profits between £50,000 and £250,000, where the tax rate gradually increases from 19% to 25%.

The government periodically reviews and adjusts these rates, so it’s essential to stay up to date on the latest rates for your tax year.

How to Calculate Corporation Tax

Corporation Tax is calculated based on the net profit of your company, which is the total income minus allowable business expenses. Here are some key factors to consider:

• Revenue: This is the total income your business generates, including sales and other income streams.
• Allowable Expenses: These can include things like employee salaries, office rent, business travel, and equipment. You can deduct these costs to reduce your taxable profit.
• Capital Allowances: Certain business assets like machinery, equipment, and buildings may also be eligible for capital allowances, which can further reduce your taxable profit.

Once you’ve calculated your taxable profits, you apply the relevant Corporation Tax rate to determine how much you owe.

How to File Your Corporation Tax Return

To file your Corporation Tax return, you’ll need to submit a Company Tax Return (CT600) to HMRC. This includes details of your profits, income, expenses, and tax payable.

You can submit your tax return online through the HMRC online services. HMRC will then calculate your Corporation Tax liability based on your submission.

It’s important to file on time to avoid penalties, as failure to submit your return or pay on time can lead to fines and interest on the outstanding amount.

Final Thought

Corporation Tax is an essential aspect of running a limited company in the UK. While it can seem complex, understanding the tax system, keeping accurate financial records, and meeting deadlines will help ensure you stay compliant and avoid costly penalties. If you’re unsure about any aspect of Corporation Tax, consider working with an accountant who can guide you through the process and ensure your tax affairs are in order.