1. What Is Corporation Tax?
Corporation tax is a tax that limited companies in the UK pay on their taxable profits. It is charged by HMRC and must be paid annually after submitting your company’s tax return.
2. Who Pays Corporation Tax?
Corporation tax is paid by:
- Limited companies (Ltd)
- Foreign companies with a UK branch or office
- Clubs, societies, and associations trading as corporate entities
Sole traders and partnerships do not pay corporation tax; they pay income tax instead.
3. What Do You Pay Corporation Tax On?
You pay corporation tax on the taxable profits from the following:
- Trading profits: Income from day-to-day business activities (sales minus allowable business expenses)
- Investment income: Profits from investments, dividends, interest
- Chargeable gains: Profits from selling company assets (like property, equipment, or shares)
4. Common Sources of Taxable Income
- Sales of goods or services
- Rent received (if the company lets property)
- Royalties or licensing income
- Interest from business bank accounts or loans
- Dividends from investments (with some exemptions)
5. What Can You Deduct Before Paying Corporation Tax?
Your company can deduct allowable business expenses from income before calculating tax. These include:
- Staff salaries and wages
- Office rent and utility bills
- Business travel and mileage
- Marketing and advertising
- Accountancy and legal fees
- Equipment, software, and tools
- Bank charges and insurance
This means you’re taxed only on net profits, not total income.
6. What Is Not Deductible?
You cannot deduct:
- Personal expenses
- Client entertainment
- Fines or penalties
- Depreciation (use capital allowances instead)
These are considered non-allowable expenses and must be added back to profit when calculating your tax liability.
7. How Is Corporation Tax Calculated?
As of 2024:
- 19% on profits up to £50,000 (small profits rate)
- 25% on profits over £250,000 (main rate)
- A tapered rate applies for profits between £50,001 and £250,000
The final tax bill = Taxable profit × Applicable rate
8. When Do You Pay Corporation Tax?
- Payment is due 9 months and 1 day after your accounting period ends
- Your company must also file a CT600 tax return within 12 months of the period end
Late payment leads to interest and potential penalties.
Frequently Asked Questions
Q1: Do all limited companies pay corporation tax?
Yes, if they make a profit. Loss-making companies pay £0 but must still file a return.
Q2: Is corporation tax paid on revenue or profit?
It is paid on taxable profits, not total revenue.
Q3: Can I deduct director salaries before tax?
Yes, director salaries are an allowable business expense.
Q4: Do I pay tax on dividends received by the company?
Usually, UK dividends are exempt, but foreign dividends may be taxable.
Q5: What happens if I miss the payment deadline?
HMRC charges interest on late payments and may apply penalties.
Q6: Can I reduce my corporation tax legally?
Yes—through tax reliefs, capital allowances, and pension contributions.
Conclusion
Corporation tax is charged on a company’s net taxable profits, including trading income, investment returns, and capital gains. Knowing what counts and what can be deducted helps ensure you only pay what’s due—and not a penny more.
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