Corporation Tax rates changed from 1 April 2023. No longer is there a single rate of Corporation Tax for companies, there are a variety of rates.
Corporation Tax is one of the main forms of tax for a limited company and it is important as a limited company owner that you understand how much Corporation Tax your company will be required to pay, and you understand ways you could minimise your Corporation Tax bills.
In this blog, we’ll cover the basics about Corporation Tax, Corporation Tax rates, how the levels of company profits will affect your Corporation Tax bill and importantly how to reduce your Corporation Tax bill.
What is Corporation Tax?
UK-based limited companies are required to pay Corporation Tax on their profits from both UK earnings and earnings from abroad.
Limited companies, foreign companies with a UK-based offices or branches, or a club or unincorporated association such as a sports centre or community groups are also liable to pay corporation tax.
Corporation tax is paid on taxable profits including money your company or association makes from:
- doing business (‘trading profits’)
- selling assets for more than they cost (‘chargeable gains’)
Your Corporation Tax responsibilities
There are specific things you must do to work out, pay and report your Corporation Tax to HMRC. HMRC do not send out Corporation Tax bills to companies so you must:
- 1. Register for Corporation Tax when you start a business or restart a dormant business. (Unincorporated associations must write to HMRC).
- 2. Keep accounting records and prepare a Company Tax Return to work out how much Corporation Tax to pay.
- 3. Pay Corporation Tax or report if you have nothing to pay by your deadline - this is usually 9 months and 1 day after the end of your ‘accounting period’.
- 4. File your Company Tax Return by the deadline - this is usually 12 months after the end of your accounting period.
Your accounting period is normally the same 12 months as the financial year covered by your annual accounts.
How much is Corporation Tax for a limited company?
How much Corporation Tax you pay will depend on the level of business profits in your company. From April 2023 the Corporation Tax system became more complex because of the introduction of marginal relief. This marginal relief provides a gradual increase in the effective Corporation Tax rate and you will need to try and forecast your annual profits for the coming year if you wish to understand your Corporation Tax bill in future.
Corporation Tax rates
Corporation Tax changes came into effect from 1 April 2023, meaning the Government placed another tax increase and tax burden on many small businesses.
Corporation Tax increased from 1 April 2023. For small companies with profits of less than £50,000, the rate is 19%. For businesses whose taxable profits exceed £250,000, the rate will increase to 25%. For companies in between there will be a sliding scale of rates.
Companies with taxable profits between £50,000 and £250,000 will pay tax at the 25% rate, but this will be reduced by a marginal relief meaning Corporation Tax rates of between 19% and 25%.
For those companies falling between the lower and upper Corporation Tax rate limits, more work will need to be done to calculate their marginal relief and tax liability to understand what they will pay.
For those with more than one limited company, your companies are known as associates. The thresholds of £50,000 and £250,000 are divided by the number of associated companies you have. For example, if you have two associated companies, the threshold of £50,000 and £250,000 will fall to £25,000 and £125,000 respectively. Meaning that you’ll pay 19% on profits below £25,000 and 25% on profits above £125,000 in Corporation Tax for either of your two companies.Profits Rates
- Up to £50,000 19%
- £50,000 - £250,000 25% and reduced by marginal relief
- Above £250,000 25%
Who cannot claim Marginal Relief?
You cannot claim Marginal Relief if:
- you’re a non-UK resident company.
- you’re a close investment holding company.
- your profits (including distributions from unrelated, unassociated companies ) go over £250,000.
Working out your Corporation Tax rate and marginal relief
The easiest way to calculate your Corporation Tax rate, is to speak to your accountant or use the Governments Marginal Relief Calculator.
The upper and lower limits for taxable profits are reduced depending on the number of ‘associated companies’, the taxable profit limits being divided equally among all the associated companies.
For example, if your company has two associated companies, the limits are divided by 3. The lower limit becomes £12,500 and the upper limit becomes £62,500.
Associated companies can be located anywhere provided they meet the ‘51% group company’ test. Dormant companies are exempt from this rule and holding companies may become exempt depending on the circumstances.Corporation Tax on chargeable gains
When selling or disposing of a business asset, you may need to pay Corporation Tax on any profits (or chargeable gains) that you make.
How to pay Corporation Tax
For companies with taxable profits up to £1.5 million, you must pay your Corporation Tax 9 months and 1 day after the end of your accounting period. Your accounting period is usually your financial year, but you may have 2 accounting periods in the year you set up your company.
If your taxable profits are more than £1.5 million, you must pay your Corporation Tax in instalments.
Check the rules and deadlines on the HMRC website here.
- if your taxable profits are between £1.5 million and £20 million
- if your taxable profits are more than £20 million
Paying Corporation Tax on time is imperative. If you do not pay your Corporation Tax bill on time, you may pay interest.
Ways to pay your Corporation Tax bill
You can pay your Corporation Tax bill via direct debit, online or telephone banking via Bacs or at your bank or building society.
What if you can’t pay your Corporation Tax bill?
If cannot pay your tax bill by the Corporation Tax deadline, you should contact HMRC immediately. If HMRC believes that you are financially able to pay, then you will be asked to pay in full. However, is HMRC believe you genuinely cant pay, they may suggest setting up a payment plan or ‘Time to Pay’ arrangement to spread the cost of your tax bill.
Corporation Tax allowances and reliefs
You can deduct the costs of running your business from your profits before tax when your accountant prepares your company’s accounts.
Some expenses are not allowed for Corporation Tax, for example entertaining clients - so these get added back into your profits when your accountant prepares your Company Tax Return.
How can I minimise my Corporation Tax?
There will be tax planning opportunities to minimise your corporation tax bill. Here at dns accountants, we have an experienced tax planning team, who can advise you specifically for your business.
How can I minimise my Corporation Tax?
- Increasing payments such as salary and pension which will reduce your profits in the year.
- Purchasing assets such as plant and machinery.
- Claiming all business expenses.
- Claiming business mileage.
- Using the work-from-home allowance.
- Claiming R&D Tax Relief.
- Claiming Patent Box Tax Relief.
- Offering share schemes to employees.
- Claiming all available loss reliefs.
- Paying for subscriptions and training costs.
- Paying for a staff party or event.
Always seek advice from our tax experts, who can advise you on ways in which you can minimise your Corporation Tax bill by considering things like timing of profits, making pension contributions, claiming all business expenses and making use of all other tax reliefs available to you.
For help and advice on Corporation Tax in the UK or any other tax planning queries, contact our team and book a call with us
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