What is Corporation Tax?

If you’re looking for a simple guide to Corporation Tax, you’ve come to the right place. Below, we break down some of the key points you need to know about Corporation Tax – from what it is to how it’s calculated, when it’s due and what you can do to legally reduce the amount you pay to HMRC.

What is Corporation Tax?

Corporation Tax is paid on the annual profits made by your business. As part of your year end accounts preparation, your company income, or turnover amount for the year will be reduced by any tax allowable expenditure you have put through your company, and what is left is your profit figure on which corporation tax will be calculated.

Tax deductible expenses include your salary, as this is a cost to your company, but not dividends, as these are paid after corporation tax has been calculated.

Contractors working via their own limited companies will need to pay Corporation Tax on their trading profits every year, along with profit made on investments or by selling assets – like technology, software, property or shares.

The main Corporation Tax rate for the 2022/23 tax year is still 19%, which was the rate set back in 2016, but this is subject to change from 1 April 2023.

Registering for Corporation Tax

Most of the time, businesses register for Corporation Tax when they incorporate their company by registering it with Companies House. To do this, you’ll be asked to provide three of the following:

• Town of birth
• Mother’s maiden name
• Father’s first name
• Phone number
• National Insurance number
• Passport number

If you registered your company by post, through an agent (an accountant) or using third-party software, you’ll need to register for Corporation Tax on the government website. But don’t worry, this is something that your accountant can do on your behalf.

Once you have registered, HMRC will send your company unique tax reference (UTR) number through the post, and you will need this when corresponding with HMRC, and also when you file and make payment for your CT each year.

What is the Corporation Tax rate?

Corporation Tax is currently 19%. But as we’ll explain, this isn’t the case for all companies and on 1st April 2023, the government plans to shake things up.

Corporation Tax changes

From April 2023, the government is introducing a variable rate of CT. Non-ring fenced businesses with profits over £250,000 will be subject to Corporation Tax of 25%. A small profits rate (SPR) will also be introduced, meaning companies with profits of £50,000 or less will continue to pay 19%.

If your profits sit between £50,000 and £250,000, your Corporation Tax rate will be 25% (the main rate), but could be reduced through something known as marginal relief and so will only gradually increase the rate paid from 19% to 25%.

What are the Corporation Tax allowances?

When working out your profits and therefore Corporation Tax, several allowable business expenses should be taken into account. These include:

• Salary
• Pension contributions
• Mileage
• Travel
• Subsistence
• Accounting fees
• Business insurance

There are lots of other legitimate business expenses, which will offset your Corporation Tax bill. You’ll find more details in our guide to contractor expenses.

Corporation Tax relief

Depending on your line of work, you might also find that your business is eligible for certain Corporation Tax reliefs. This could include:

• R&D tax credits: a government incentive to reward UK businesses for investing in innovative products and services
• Capital Allowances: tax relief on the purchase of assets such as equipment, machinery and business vehicles, which will be kept in the business

Company profit or loss

If you make a profit in your company in a year, then you will have CT to pay, but if you make a loss, not only do you not have CT to pay, but you may also be able to offset the loss against previous or future profits.

When is Corporation Tax due?

There are two deadlines to be aware of:

• Corporation Tax filing: to be filed 12 months after the end of the accounting period it covers. So if your company year ends on 31 March 2022, your CT return needs filing with HMRC by 31 March 2023.
• Corporation Tax bill: to be paid typically 9 months and 1 day after the end of your accounting period. So with the same company year end of 31 March 2022, your CT liability for that period will be due for payment to HMRC by 1 January 2023.

Your accounting period tends to be your company’s financial year, but if you are not sure, you can ask your accountant or check the Companies House register.

How to pay Corporation Tax

How you pay Corporation Tax might depend on how quickly you’d like to make the payment:

• Same day: pay via CHAPS, online or over the phone
• Three working days: BACs bank transfers (e.g. direct debit) or online with a credit or debit card usually takes up to three working days. The same goes for paying at the bank, Post Office or a building society
• Five working days: organising a direct debit or time to pay arrangement can take five days for HMRC to process

It is worth noting that although you can pay your Corporation Tax on behalf of your limited company by using a personal bank card, or from a personal bank account, HMRC will not accept payments made on a personal credit card. If you do have to make the payment personally, you would just reclaim it from the company, as Corporation Tax is a tax on your business, not you personally.

Do sole traders pay corporation tax?

No. Sole traders pay Income Tax via self-assessment, not Corporation Tax. This is because sole traders don’t trade through an incorporated company.

Find out more in our guide to sole trader tax.

Here to help

So to recap, Corporation Tax is currently 19% tax on the profit your business makes in a company year.

For more information and to make sure you’re claiming the full range of allowable business expenses and reliefs – which legally reduce your Corporation Tax liability – please contact us.