What is corporation tax?
Do you run a company? Then you’ll need to know about corporation tax. Click here for the lowdown on what it is, how to pay it, and what happens when you don’t settle up
As the name suggests, corporation tax is the main tax paid by UK limited companies. It is paid on a company’s profits (minus their business expenses), and is an important source of revenue for the UK government – indeed, corporation tax receipts in 2018-19 totalled £55.1 billion. This money is spent on things like healthcare, transport infrastructure, policing, and education.
However, no one wants to pay more tax than they have to – and this guide will tell you everything you need to know. This includes how much corporate tax you need to pay, when you need to pay, how you go about paying, what happens when you don’t pay, and how you can legitimately reduce the amount of corporate tax you pay.
This guide includes the following sections:
What is corporation tax?
As stated above, corporation tax is the main tax paid by UK limited companies. Other taxes company owners need to worry about include VAT and national insurance. Overall, UK corporation tax receipts are equal to approximately 9% of the total tax receipts collected by HMRC.
It is paid on annual profits, but you are allowed to take away the cost of any expenses incurred as part of the running of your business, including salaries and investment.
Who pays corporation tax?
The main answer is simple – corporation tax is payable by all UK limited companies.
A limited company means that the company’s finances are separate from your individual finances, and you can’t be held personally responsible for the company’s debts.
Corporation tax also applies to organisations who are based in other countries, but operate in the UK – with these companies only needing to pay tax on their UK profits.
However, if your company is based in the UK but operates in multiple countries, then you need to pay tax on all profits generated (not just UK activities).
How much corporation tax do people pay?
This is one part of corporation tax that’s nice and straightforward. Every company liable for corporation tax pays a fixed rate of…
This rate has been fixed since April 2016, when previously it varied according to the amount of profit the company made. Unlike some taxes, there is no tax-free allowance for corporation tax, so any profit is taxable. However, you can take away business expenses to reduce the amount of profit you need to pay corporation tax on, and therefore reduce the amount of corporation tax you need to pay.
How do I pay corporation tax?
The official advice is clear – you have to register for corporation tax within three months of starting to do business.
You can do this online, but you’ll need to sign up for a government gateway log in. Get started by following the advice on this official government page.
However, when exactly you start to ‘do business’ is rather complex, and HMRC has extensive guidance on what counts as trading for tax purposes.
When you register your business with HMRC, you’ll need to provide the following details:
- Your company’s 10-digit Unique Taxpayer Reference (UTR) – this is posted to your company address by HMRC within 14 days of the company being registered with Companies House
- The date you began the business (this will be the start date for the company’s first accounting period)
- Company name and registration number (provided by Companies House when you incorporate)
- Main address of the company
- Type of business
- The date your annual accounts will be made up to
- The name(s) and home address(es) of the company director(s)
Once you’ve done this, HMRC will tell you your corporation tax deadline.
For corporation tax purposes, this tax return must show two things:
- Your company’s corporation tax profit or loss (this is not necessarily the same as your overall profit or loss)
- The amount of corporation tax you need to pay
If your company makes over £1.5m in profit, then different procedures apply – if this is the case, you’ll need to pay your corporation tax electronically and in instalments. Full details are given on this government page.
Corporation tax payment methods
Once you’ve worked out how much corporation tax you need to pay, you’ll then need to actually pay it. There are a variety of ways to do this, depending on how urgently you need to pay:
If you need the money to reach HRMC the same day or the next day:
- Use the Faster Payments service (either online or over the phone)
- Use CHAPS (Clearing House Automated Payment System)
If you need the money to reach HMRC within 3 working days:
- Use BACS (Bankers’ Automated Clearing Services)
- Use Direct Debit (if you’ve set one up before)
- Pay online by debit or corporate credit card
- Pay at your bank or building society
If you need the money to reach HMRC within 5 working days:
- Use Direct Debit (if you’re setting up a new direct debit to HMRC, this process takes 5 days)
Full instructions for the payment methods discussed above and HMRC account details are found on this page.
If your payment deadline is on a weekend day or a bank holiday, then your payment must reach HMRC by the last working day before your deadline.
(Please note that you can longer pay corporation tax by post, with a personal credit card, or at the post office.)
Corporation tax deadlines
There are two deadlines you need to remember in terms of corporation tax:
Your corporation tax must be paid 9 months and 1 day after the end of your accounting period
Your company tax return is due 12 months after the end of your accounting period (unless requested earlier by HMRC)
This process is a little different the first time you do it, as you will need to cover the period from the date your company is set up to the ‘accounting reference date’ (i.e. the date that Companies House sets for the end of your financial year, which is the last day of the month in which your company was set up).
As this period will almost certainly be longer than 12 months, you may need to file two tax returns and deal with two different deadlines. Whether you need to do this will depend on whether you began trading the same day you set up your company, or only began trading after your company was set up.
While, in theory, this looks like you could pay your corporation tax before filing the tax return that tells HMRC how much you owe, this rarely happens in practice. In fact, you’ll generally file and pay at the same time, so it’s wise to think of this as one deadline rather than two.
Corporation tax penalties
To encourage both prompt filing of corporate tax returns and prompt payment of amounts owed, HMRC imposes strict penalties on companies that don’t follow the rules.
These can be split into three categories:
- Penalties for late tax returns
- Penalties for inaccurate information
- Penalties for late corporation tax payments
Penalties for late tax returns
Miss your filing deadline by one day – £100 fine
Miss your deadline by three months – another £100 fine (£200 in total)
Miss your deadline by six months – HMRC will estimate your corporation tax bill and fine you an extra 10% of this amount
Miss your deadline by 12 months – HMRC will fine you another 10% of your estimated bill (i.e. you’ll pay an extra 20% in total)
If your tax return is late three times in a row, the £100 fines are increased to £500 each.
If you have a reasonable excuse (such as the death of a close relative or an unexpected stay in hospital), then you can appeal against a late filing penalty by writing to your company’s corporation tax office (found on recent tax forms or letters from HMRC).
Penalties for inaccurate information
If your company files a tax return that contains inaccurate information, then you may be fined.
The amount depends on whether HMRC believes the mistake was deliberate, whether you tried to hide it, and whether you admitted the mistake before it was spotted by HMRC.
If HMRC decides:
- You were careless (or showed a ‘lack of reasonable care’ in official terms) – you could be fined between 0% and 30% of the extra tax due if you own up to the error, or 15-30% if it’s found by HMRC.
- The inaccuracy was deliberate but not concealed – you could be fined between 20% and 70% of the extra tax due if you disclose the error, or 35-70% if you don’t.
- The inaccuracy was deliberate and concealed – you could be fined between 30% and 100% of the extra tax due if you admit the error, or 50-100% if the error is uncovered by HMRC.
You may also be able to reduce the fine by helping HMRC work out what extra tax is due, and/or giving HMRC access to check the figures.
Penalties for late corporation tax payments
If you fail to pay your corporation tax on time, you will be charged late payments interest of 3.25% from the day your tax should have been paid to the date you pay it. You may also have to pay a penalty or surcharge.
If you don’t pay, HMRC has strong enforcement powers, including:
- Collecting what you owe through your earnings or pension
- Asking debt collection agencies to collect the money
- Taking things you own and selling them (if you live in England, Wales, or Northern Ireland)
- Taking money directly from your bank or building society account (if you live in England, Wales, or Northern Ireland)
- Taking you to court
- Making you bankrupt or closing down your business
If you have nothing to pay
If you don’t have any corporation tax to pay (if your company made a loss, for example), you must still file your tax return and tell HMRC you have no corporation tax to pay.
You can do this in two ways:
- Fill in the online ‘nil to pay’ form
- Send back the payslip on the reminder from HMRC and mark it ‘NIL due’
How to lower your corporation tax bill
There are a number of ways to reduce the amount of corporation tax you pay, some of which we’ve detailed below:
This may seem obvious, but it really is the easiest way of reducing your corporation tax bill. The rules are simple: you can claim for any legitimate business expense that is necessary for the business, and which is used wholly by the business.
In practice, this means keeping track of every pack of paperclips, bus fare, and train ticket. They’re all deductible (i.e. you can take away the cost from your overall profit for tax purposes).
Buy a mobile through your company and you can also claim your phone bill, as well as mileage for any business vehicles, and the cost of any professional insurance. If you have employees, then make sure you also factor in the cost of their salaries and national insurance contributions.
Speaking of salaries, make sure you pay yourself one, as this is also tax deductible. However, it will be then be added to your personal tax statement and be eligible for income tax, so whether this is the right choice for you will depend on whether you have other sources of income.
You also need to carefully consider what level of salary to give yourself, as taking too much could push you into a higher income tax band. You can also pay dividends to shareholders (who, in the early stages at least, would be you and any other directors).
These are liable for dividend tax, but there is a tax-free allowance for this. Therefore, the most tax-efficient way to take money out of the business for yourself is likely to be a combination of a relatively low salary and dividends. Consult a tax expert for detailed guidance on this.
This one is a win-win. Pay into a pension pot through your company and you’ll not only be putting cash aside for your retirement, but you’ll also be able to deduct this amount from corporation tax. This is much more tax-efficient than withdrawing the money from your company and then paying into your personal pension, as you’d have to pay tax on the money withdrawn.
Annual Investment Allowance (AIA)
The AIA is designed to encourage investment in new equipment. It works like this: if you purchase equipment for your business (meaning anything from diggers to a new office printer), then you can deduct this cost from your corporation tax profit, thereby reducing the amount of corporation tax you pay.
The maximum amount that is deductible through the AIA varies – at the time of writing, it’s been temporarily increased to £1m (up to 31 December 2020), but it stood at just £200,000 from 1 January 2016 to 31 December 2018.
More guidance on what is and isn’t eligible for AIA is available here, but the primary exception is cars (vans and lorries are allowed, however). Business cars are eligible for writing down allowances, which deduct a percentage of the value of the item each year.
Tax reliefs work in a very similar way to the AIA – they’re designed to encourage investment in particular areas by allowing these expenses to be deductible for tax. Depending on which industry you operate in, a variety of reliefs are available, but one of the most widely used is research and development (R&D) tax relief.
More detail is given in this HMRC guide, but the basic idea is that investment in “work that advances overall knowledge or capability in a field of science or technology, and projects or activities that help resolve scientific or technological uncertainties” can be written off for tax purposes.
This covers both scientific research and design/engineering work that aims to overcome difficult technological problems, but does not cover pure product development that doesn’t make a significant contribution to scientific or technological knowledge.
Other reliefs available include:
- The Patent Box – (for companies that make profits from patented inventions)
- Creative Industry Tax Reliefs – (for companies that make profits from theatre, film, television, animation, or video games)
- Relief on goodwill and other relevant assets – (for intangible assets like customer relationships and unregistered trademarks)
- Relief on trading losses
As mentioned earlier in this guide, HMRC will pay you 0.5% interest on the amount of corporation tax paid by your company if you pay before the deadline. This is paid from the date you pay to your corporation tax deadline, with the earliest date HMRC are willing to accept being six months and 13 days after the start of your accounting period. It also gives you one less thing to worry about, and helps you focus on your future investment plans.
There’s one golden rule when it comes to corporation tax and dealing with HMRC – it pays to be organised. The tax rate may be straightforward, but making sure you don’t pay more than you need to is all about keeping track of your expenses and claiming for any applicable reliefs.
There are a wide variety of ways to pay, but do so on time and with care – the penalties for late submission or inaccurate information are severe, and best avoided.
If you have nothing to pay, or have difficulties paying or understanding the rules, make sure you contact HMRC – it’s much better to get things straight than risk a big fine later down the line. And if you really can’t get your head around any of it, you can always seek professional help from a qualified accountant or tax adviser.