With numerous reforms over the years, understanding corporation tax in the UK can be difficult. Being one of the most important taxes your business has to calculate and pay, it can be stressful and overwhelming. It has never been more important to know how corporation tax impacts your business.
But what is corporation tax? How do you calculate it? What happens if you can’t pay corporation tax?
These are questions that many business owners are asking. That is why we’ve created this article, to bring companies a complete guide to corporation tax. So, let’s get started.
What Is Corporation Tax?
Calculated on annual profits, UK businesses pay corporation tax just like individuals pay income tax. It is a tax that is payable from all taxable profits, no matter where the profit was generated.
For companies based outside the UK, they must pay corporation tax on all taxable profits that were made in the UK. Since April 2016, the corporation tax rate has been 19%. Before this, the rate was based on company profits.
How Often Do You Pay Corporation Tax?
Businesses are required to pay corporation tax 9 months and 1 day after the end of their accounting period. In the year a business is set up, there may be 2 accounting periods, however, the accounting period is usually the financial year.
Do All Businesses Pay Corporation Tax?
All listed companies are required to pay corporation tax on profits. Every year, companies must accurately complete a CT600 form, the company corporation tax return.
How Do I Calculate My Corporation Tax?
To calculate your small business Corporation Tax, you’ll need some accurate bookkeeping skills, as well as accounting knowledge. It is also useful to have an understanding of what tax reliefs your business could benefit from to reduce your Corporation Tax bill.
We recommend seeking professional guidance and help from a business accountant to ensure you prepare an accurate tax return. Unless you have experience and skills in accounting, it is best to get help.
Step 1 – Calculate Your Sales And Income
First up, to calculate Corporation Tax, you’ll need to begin creating a profit and loss account. This will total up all the sales income that has been generated by your business, including interest earned, for example using a corporate savings account.
Let’s create a demo. So, we’ll say a small business has generated sales of £100,000, as well as the interest of £200 stored in a business bank account. The total income would be £100,200.
Step 2 – Calculate Your Overheads
Business expenses and overheads are deducted from your income to create the profit your company makes. To make sure you pay the accurate Corporation Tax bill, it is important to remember to claim all allowable expenses and deductions from your trading income.
However, we should note that businesses can only deduct allowable expenses for business use. This is what HMRC describe as being wholly and exclusively used for business purposes, something you don’t gain any personal use from.
Overheads will usually include:
- Cost of sales such as materials, packaging and postage, salaries,
- Accounting fees
- Travel costs
- Facility costs
- Insurance
Step 3 – Your Capital Allowances And Depreciation
Expenses that your business will incur when buying fixed assets are called capital allowances. Fixed assets are items that are intended to be part of your business for numerous years, such as equipment and furniture.
These assets will lose value and depreciate over time. For example, a computer that was bought for £3,000 may lose £1,000 in value every year for three years. In three years time, the computer will be worth £0. However, it needs to be added back into the tax calculation as depreciation is not an allowable expense.
The majority of capital asset purchases will qualify for Annual Investment Allowance tax relief. Each year, up to £200,000 of capital costs are effectively written off. They can then be used to reduce the amount of profit liable for Corporation Tax.
Step 4 – Entertaining Costs
These are costs that come with entertaining clients and suppliers. Entertaining costs can include:
- Gifts
- Free samples
- Business lunches
- Trips to sporting events
These are not tax-deductible, meaning you can’t claim VAT or tax relief on the costs of entertaining.
Step 5 – Calculating Your Corporation Tax
The last step. The calculate your corporation tax, you will add on depreciation and client entertaining costs to the profit before accounts total. Capital allowances are then subtracted to reach the profit value liable for Corporation Tax.
Tax is then due at the national rate of 19% on profits. So, simply divide the liable profit by 100, then multiply the resulting sum by 19 to arrive at the amount due.
What Ways Can I Pay Corporation Tax?
Firstly, you need to ensure your business pays Corporation Tax to HMRC by the deadline that is set. Otherwise, there may be penalties issued, which we will cover later on in the article. If you pay your tax early, HMRC will pay you interest. So, what ways can you pay?
| Same day or next day | 3 working days | 5 working days |
| Through your online bank account | Online via direct or corporate debit card | Direct Debit (if it has not previously been set up) |
| CHAPS | Bacs | |
| Online or telephone banking for faster payments | DirectDebit (if it has previously been set up) | |
| At your bank or building society |
Businesses can no longer make Corporation Tax payments at the post office and you cannot make payments via post.
Are Dividends Calculated After Corporation Tax?
When calculating your Corporation Tax, dividends cannot be counted as business costs. It is important to remember that your business can’t pay out more in dividends than its available profits from current and previous financial years.
Dividends must be paid to all shareholders and to declare the dividend, a directors’ meeting is held, with someone keeping minutes even if you’re the only director.
How Much Tax Will I Pay On Dividends?
In April 2016, the government introduced a tax-free dividend allowance of £2,000. For 2021/22, this allowance is still £2,000. Dividends that are in excess of this allowance will attract dividend tax. Your total income will determine the rate of dividend tax. Below are the rates for dividends:
| Rate | Description |
| Tax-free | The first £2,000 of dividends |
| 7.5% | Dividends that fall within the basic rate |
| 32.5% | Dividends that fall within higher rate tax – £50,270 for 2021/22 |
| 38.1% | Dividends that fall within the additional rate of tax |
What Happens If I Don’t Pay My Corporation Tax?
If you can pay your tax bill, we recommend doing it as soon as possible. You will avoid penalties and interest being added to your tax bill. If you cannot pay your tax bill, think you’ve missed a deadline or know you can’t pay on time, you should contact HM Revenue and Customs (HMRC) as soon as possible.
There are support options available. There is a Time to Pay arrangement where you pay what you owe in instalments. HMRC will charge your company interest if you make a late payment, do not pay enough or do not pay at all. Interest is charged from the day after the tax should have been paid and the current corporation tax late payment rate is set at 2.75%.
If you need to talk about your situation to someone at HMRC, call the BPSS (Business Payment Support Services) line on 0300 200 3835. For any general enquiries about Corporation Tax call 0300 200 3410.
Can I Delay Paying Corporation Tax?
If you think you’re not going to be able to meet the tax deadline, then we recommend contacting HMRC immediately. HMRC will ask you to provide cash flow forecasts and current management accounts.
This will establish how long you may need to pay the rest of the balance as well as how much of the tax liability you can pay straight away.
What About Tax Losses And Tax Funding?
Corporation tax losses are used then your business is not performing and HMRC are still asking you for payments on your previous year’s tax liability. If your business is having a tough time with cash flow and making trading losses, you may be able to claim relief from corporation tax.
You will receive this loss relief by offsetting it against other profits or gains in the same accounting period. Alternatively, the tax loss can be carried back against profits for the preceding 12 months.
Tax funding is where a lender will require security either against company assets or look to the directors’ to offer personal guarantees. This can be an expensive option as the rate of interest which the lender will charge is high. Your business will also need to show evidence that your cash flow will improve to repay the tax loan.