What Is Corporation Tax?
Corporation tax is the tax that limited companies pay on their profits. It applies to income from trading, investments, and the sale of assets such as property or shares. In many ways, it is similar to income tax, but it applies to businesses rather than individuals.
One key difference is that companies do not receive a personal allowance. Corporation tax is charged on the entire amount of taxable profit, which means that accurate accounting and good financial planning are vital.
Who Needs to Pay Corporation Tax?
Corporation tax applies to all limited companies registered in the UK. It also applies to foreign companies with a UK branch or office that earns profits here, and to some non-profit organisations if they trade and make a profit.
If you are a sole trader or part of a partnership, you do not pay corporation tax. Instead, you pay income tax and National Insurance through the self-assessment process.Â
However, if your business is growing and you are thinking about becoming a limited company, it is important to understand how your tax responsibilities will change once you incorporate.
How Much Corporation Tax Will I Pay?
Since April 2023, the UK has had a two-tier system for corporation tax rates. Companies with annual profits of £50,000 or less pay the small profits rate of 19 percent. Companies with profits above £250,000 pay the main rate of 25 percent.
If your profits fall between £50,001 and £250,000, you may qualify for marginal relief. This means you will pay a gradually increasing rate between 19 and 25 percent.
For example, if your business makes a profit of £40,000, you will pay £7,600 in corporation tax. If your profit is £120,000, you will pay a slightly higher effective rate because of the marginal relief calculation.
This structure is designed to support smaller businesses by keeping the effective rate lower for those with smaller profits.
When and How Do You Pay Corporation Tax?
Corporation tax is paid differently from income tax. You must register for corporation tax with HMRC within three months of starting to trade. After your financial year ends, you will need to prepare your company accounts and a Corporation Tax Return, also known as a CT600.
Payment is normally due nine months and one day after the end of your accounting period. For example, if your financial year ends on 31 December, your corporation tax payment will usually be due by 1 October the following year.
All submissions and payments are made digitally through HMRC’s online system, which means that accurate bookkeeping throughout the year is essential.
What Counts as Taxable Profit?
Your corporation tax bill is based on your taxable profit, which may differ from your accounting profit. Certain adjustments are made for allowable expenses, reliefs, and capital allowances.
Allowable expenses include staff salaries, rent, utilities, professional fees, office supplies, business travel, and IT equipment. You can also claim capital allowances on larger purchases such as machinery, vehicles, or computers, which lets you spread the cost of those items over time.
Knowing which costs are deductible can reduce your tax bill significantly. Getting the right advice ensures that you claim everything you are entitled to while remaining compliant with HMRC rules.
Common Mistakes Small Businesses Make
Even experienced business owners can make errors when it comes to corporation tax. Some forget to register with HMRC within the required time frame, while others confuse personal and business expenses or leave filing and payment to the last minute.
Late filings or missed payments can lead to penalties and interest charges. The best way to avoid this is to plan ahead, maintain good records, and review your finances regularly.
How Wisteria Can Help
At Wisteria, we understand that tax compliance can feel complex, especially when you are focused on running your business. Our team of Chartered Accountants works with companies of all sizes to provide clear, tailored advice that goes beyond compliance.
We can help you understand your corporation tax obligations, identify eligible reliefs and expenses, manage deadlines, and plan for growth. Our goal is to simplify business tax in the UK so that you can concentrate on your success.
If you would like professional guidance on corporation tax for your small business, contact Wisteria today. Our specialists will help you stay compliant, save time, and approach your finances with confidence.