Want to learn more about copromotion tax in the UK? Then keep reading this guide.
What Is Corporation Tax?
A corporation tax is a tax that is imposed on the trading profits and gains from the sale of assets of a limited company or foreign companies with UK branches or offices. It is the main tax obligation for these types of businesses and is separate from income tax and capital gains tax. Usually, sole traders and partnerships are responsible for this and have to pay income tax.
The tax calculation is based on the profits derived from the company’s Profit and Loss statement. This reflects the total sales minus the expenses incurred by the business. However, not all expenses in the statement are deductible for corporation tax purposes.
Corporation tax is a source of revenue for the government that is paid directly to the HMRC by the businesses. It’s the company’s responsibility to ensure that the correct amount of corporation tax is paid in accordance with tax laws and regulations.
What Is The Corporation Tax Rate?
In the United Kingdom, corporation tax is levied on the annual profits of UK-resident companies and branches from overseas companies. Up until April 2023, the corporation tax rate was 19%. However, the current corporation tax rate is 25% for all limited companies.
The tax rate is determined based on the level of taxable profits. Companies with profits above £250,000 are subject to the 25% corporation tax main rate. On the other hand, those with profits of £50,000 or below pay a small profits rate of 19%.
Companies with profits between £50,000 – £250,000 pay corporation tax rates that are reduced by a marginal relief, which results in a gradual increase in the average corporation tax rate.
It’s important for businesses to maintain accurate company accounts and file a Company Tax Return by the specified deadline. Unlike income tax, corporations don’t receive a bill for corporation tax. Instead, they have specific responsibilities to calculate, pay, and report their tax liabilities.
When Is The Deadline For Paying Corporation Tax?
The timing of corporation tax payments depends on the taxable profits of the company. If a company’s profits are £1.5 million or less, the corporation tax must be paid within nine months and one day after the end of the accounting period. This corporation tax deadline usually applies to smaller businesses.
For companies with profits that exceed £1.5 million, the payment is usually made in instalments. You can find detailed information on the specific instalment payment schedule on the HMRC website.
The deadline for filing your corporation Company Tax Return is typically 12 months after the end of the accounting period covered by the return. This means that you have one year from the end of the accounting period to submit the return to the HMRC.
How Much Is Corporation Tax?
As of April 2023, there are two main rates of corporation tax. This includes the small business or small profits rate of 19%, which is applicable to taxable profits up to £50,000. The other tax rate applies to larger business profits that exceed £250,000 and sits at 25%.
If your profits fall between these two amounts, the corporation tax is usually calculated on a linear basis between 19% – 25%. Although your Company Tax Return will automatically calculate your corporation tax bill using these thresholds, you can calculate how much corporation tax you owe:
Corporation tax for small businesses (under £50,000):
Corporation tax = Profit x 19%
Corporation tax for businesses with profits between £50,000 and £250,000:
Corporation tax = 19 + ((Profit – £50,000) x 3 ÷ 10,000)
Corporation tax for large businesses (over £250,000):
Corporation tax = Profit x 25%
How Is Corporation Tax Paid?
To pay corporation tax, HMRC offers several payment methods, including through the Post Office, online, or through your bank.
It’s important to remember to keep the payment deadline in mind when choosing between these methods. This is because some methods may take longer than others to clear with HMRC. For example, telephonic payments are much quicker than direct debit payments.
If you miss the deadline, you may be subject to interest charges on the outstanding amount. However, if you pay your corporation tax early, HMRC will actually pay interest to your business.
No matter how you choose to pay, you must provide your 17-digit corporation tax reference number for the specific accounting period you’re making the payment for.
What is Ring Fence corporation tax?
Ring Fence corporation tax (RFCT) is a specific type of tax that is applicable to companies engaged in the production of oil and gas within the United Kingdom and the UK Continental Shelf. This includes areas such as the English Channel, North Sea, Irish Sea, and North Atlantic Ocean.
The RFCT main rate stands at 30% but also has a smaller profit rate that is set at 19%. These rates are superficially designed for companies operating within the ring fence. They are distinct from regular corporation tax rates that apply to other industries and sectors.
Are there any corporation tax allowances?
Similar to sole traders’ personal tax, companies can lower their corporation tax bill by deducting allowable business expenses. These include any costs incurred by the company exclusively for the purpose of running the business.
Some of the key tax allowances include:
- Purchasing raw materials
- Business insurance
- Stock purchased for resale
- Training fees
- Accountancy costs
- Employer pension contributions
- Salaries paid to all employees
To sum it up, corporation tax is a significant consideration for businesses in the UK. It’s a tax imposed on company profits, serving as a financial contribution to the government for public services and infrastructure.
By staying informed on allowable deductions and tax rates, businesses can optimize their tax liabilities while ensuring compliance with the necessary laws and regulations. Additionally, proactively adapting to any changes in tax policies and seeking professional advice from an accountant can help to empower businesses to effectively manage their tax obligations.