1. Understanding Corporation Tax Payments on Account
Corporation tax payments on account are advance payments made towards a company’s expected corporation tax liability for the current accounting period. This system mainly applies to large companies to ensure HMRC receives tax in instalments rather than as a lump sum after year-end.
2. Who Needs to Make Payments on Account?
Not all companies are required to pay corporation tax in instalments. Generally, it applies if:
- Your company’s taxable profits exceed £1.5 million (reduced if you have associated companies).
- Smaller companies normally pay corporation tax nine months and one day after their accounting period ends.
3. Key Threshold Adjustments
The £1.5 million threshold is divided by the number of associated companies. For example, if a company has three associated companies, the threshold reduces to £500,000.
4. When Payments on Account Are Due
For companies within the instalment payment regime, payments are due quarterly:
- Month 7 of the accounting period
- Month 10 of the accounting period
- Month 13 (three months after the year-end)
- Month 16 (six months after the year-end)
5. How to Calculate Payments on Account
Payments are based on estimated corporation tax liability for the current accounting period. Each instalment is typically 25% of the estimated total liability, though adjustments may be required if profits fluctuate.
6. Example of Payments on Account
If a company expects £2 million in taxable profits and a 25% corporation tax liability (£500,000 tax due):
- Four instalments of £125,000 each are payable across the specified deadlines.
7. Adjustments for New or Growing Companies
- New companies may not fall into the instalments regime in their first year if profits are below the threshold.
- Companies with rapidly growing profits should monitor estimates closely and adjust payments if necessary.
8. How to Pay Corporation Tax on Account
Payments must be made electronically to HMRC. Accepted methods include:
- Direct Debit
- Faster Payments
- BACS or CHAPS transfers
- Online banking
9. Interest and Penalties
- Interest is charged on late or underpaid instalments.
- Credit interest may be applied if you overpay or pay early.
- Failure to pay on time can also lead to compliance issues with HMRC.
10. Strategies to Manage Payments on Account
- Prepare accurate tax forecasts.
- Monitor profits regularly during the year.
- Work with an accountant to reassess liability before each instalment.
- Avoid large unexpected adjustments by reviewing estimates quarterly.
Frequently Asked Questions
1. Do all companies have to make corporation tax payments on account?
No, only large companies with taxable profits above £1.5 million (adjusted for associated companies) are required.
2. How many instalments are required?
Usually four instalments, spread across the accounting period and shortly after year-end.
3. What happens if my profit estimate changes?
You should recalculate and adjust future instalments to avoid underpayment or overpayment.
4. Can I get a refund if I overpay?
Yes, HMRC will refund excess payments or apply them as credit towards future liabilities.
5. Do small businesses need to pay in instalments?
No, smaller companies pay their corporation tax in a single payment nine months and one day after the end of their accounting period.
6. Is interest charged on late payments?
Yes, HMRC charges daily interest on late payments, and this can add up significantly.
Conclusion
Corporation tax payments on account are designed to spread the tax burden for large companies across the year. While smaller businesses make a single payment after year-end, larger companies must carefully estimate their tax liability and pay quarterly instalments to HMRC. By planning ahead and monitoring profits, companies can stay compliant, avoid penalties, and manage cash flow effectively.