What is Corporation Tax
Corporation Tax explained. Find out more about who pays Corporation Tax, how it is calculated and when your small business will have to start paying it...
So how does Corporation Tax work, and why do you need to know about it? Basically, it’s the company equivalent of income tax but for registered companies.
Corporation Tax is based on the profits your business makes, and the rate depends on how much profit is generated.
The bad news is that you have to pay Corporation Tax early – but the good news is that the rate is preferable to income tax.
Registering for Corporation Tax
One of the first key tasks you need to do when setting up a company is to register for Corporation Tax. This must be completed within three months of trading. The government offers further advice on what constitutes trading or non-trading here.
Make sure you’re clued up as there could be a fine if you register late.
Who pays Corporation Tax?
The Corporation Tax rate is now standardised at 19% for all limited companies. Prior to April 2016, Corporation Tax was tailored to the size of a business’ profits.
For the majority of our readers, the most applicable rate would probably have been the small profits rate of 20%, tailored for companies with annual profits of £300,000 or less.
The other principle rate applied to firms with profits of £300,000 or more; and was known as the main rate.
In 2015, the government announced the rate would be kept at 19% until 2019 with plans to reduce to 18% in 2020, however in the 2016 Budget, a further planned reduction was announced that will see the rate drop to 17% by 2020.
If your profits fell between £300,000 and £1.5m prior to April 1 2015, you may be able to apply for marginal relief, which means that your corporation tax bill is reduced by a certain amount, depending on the precise amount of profit you make.
The formula for calculating marginal relief is extremely complicated, but thankfully HMRC provides a calculator on its website to help you work it out. Here’s the link.
When do you pay Corporation Tax?
This is the main problem with Corporation Tax – the payment deadline is different from other major taxes, such as income tax and VAT, and you have to pay corporation tax before you file your company tax return.
Invariably, you have to pay your corporation tax within nine months and one day of the end of the accounting period for your previous financial year. So, if, like many firms, your accounting period comes to an end on March 31, you must settle your corporation tax bill by January 1 the following year.
Confusingly, if you’re in your first year of trading, this may mean that you have two accounting periods.
For businesses with profits of over £1.5m, the process is different and you will need to pay in installments.
Additionally, it’s worth bearing in mind that even if your business is loss-making, while you won’t need to pay Corporation Tax, you will still need to declare that you have nothing to pay.
If you are late paying you may be penalised.
Corporation Tax allowances and relief
When calculating your profits, you are entitled to deduct any costs related to running your business before you file your company accounts. Bear in mind that some costs aren’t allowable expenses, such as entertaining clients.
How do I pay Corporation Tax?
All corporation tax payments now have to be made electronically, so if you’re used to paying by post you’ll have to find a new way of settling your bill.
Ways to pay
Debit or credit card
You can pay online, although bear in mind that a credit card will incur a charge. Any payments will take three working days to reach HMRC.
If you prefer a more traditional method, you can still pay at a local branch with cash or a cheque. This will also take three working days to clear. From 2018 you will no longer be able to use a personal credit card.
Alternatively you can pay by direct debit – all you need to do is register with HMRC Online Services, then the website will take you through the direct debit process step-by-step. As long as you can wait five days for the payment to go through, you shouldn’t have any problems. Once you have a direct debit in place, it will only take three days to clear.
Online banking (faster payments) or CHAPs
If you’re really up against it, and you need to make your corporation tax payment asap, you can use faster payments (depending on your bank and their transfer limit) or CHAPs to make a same-day payment. All you’ll need are HMRC’s bank details, as well as your corporation tax reference number. If you have to use CHAPs, this method may be expensive, but it’ll make sure the money reaches HMRC from your bank same-day.
Just remember that most banks only allow CHAPS payments within a certain time window – if you try and make a payment outside that window, you probably won’t have much joy.
No payment required
Finally, remember that you also need to declare if you have nothing to pay.
Once you’ve made a payment (if necessary), you can check your online HMRC account to ensure your payment has gone through (bearing in mind the timescales above).
Keeping on top of finances and red tape can be a difficult part of running a small business. Ultimately you may want to consider hiring an accountant.