1. Understanding Corporation Tax
Corporation tax is a tax that limited companies in the UK pay on their taxable profits. Taxable profits include trading profits, investment income, and capital gains (profits from selling assets). Unlike income tax, there is no personal allowance — tax is due on all company profits.
2. Corporation Tax Rates
As of April 2023, the UK corporation tax system uses two main rates:
- Main Rate: 25% for companies with profits over £250,000.
- Small Profits Rate: 19% for companies with profits of £50,000 or less.
- Marginal Relief: For profits between £50,001 and £250,000, a tapered rate applies, meaning you pay slightly less than the full 25%.
These thresholds are adjusted if your company has associated companies, meaning the limits are divided between them.
3. Steps to Calculate Corporation Tax
- Work Out Total Profits: Add up all income from trading, investments, and asset sales.
- Deduct Allowable Expenses: Subtract costs such as salaries, rent, utilities, and business-related purchases.
- Deduct Capital Allowances: Claim relief on equipment, vehicles, and other qualifying assets.
- Apply Adjustments: Add back any non-deductible expenses (e.g., client entertainment).
- Calculate Taxable Profits: The result after adjustments is your taxable profit.
- Apply Corporation Tax Rate: Use the correct rate or marginal relief calculation to find your tax bill.
4. Example Calculation
If your company made £80,000 profit:
- Profits fall between £50,001 and £250,000, so you qualify for marginal relief.
- Start with 25% of £80,000 = £20,000.
- Apply marginal relief to slightly reduce this amount (HMRC provides a calculator for exact figures).
5. Payment and Deadlines
- You must file a Company Tax Return (CT600) with HMRC, usually within 12 months of your accounting period end.
- Payment is typically due 9 months and 1 day after the end of your accounting period.
Frequently Asked Questions
Do I pay corporation tax on all income?
Yes, you pay it on trading profits, investments, and gains, but after allowable expenses are deducted.
Can I reduce corporation tax legally?
Yes, through claiming all eligible expenses, capital allowances, R&D tax credits, and pension contributions.
What happens if I pay late?
HMRC charges interest on late payments, and penalties can apply for late filing.
Conclusion
Corporation tax in the UK is calculated by working out taxable profits, deducting allowable expenses and reliefs, and applying the correct tax rate. Accurate calculations and timely filing ensure compliance and help you avoid penalties.