What is corporation tax?
Corporation Tax is a tax that limited companies and certain other organizations in the UK must pay on their profits, including foreign companies with a UK presence, clubs, cooperatives, and some unincorporated associations. As of the 2024-25 financial year, the main rate is 25% for profits exceeding £250,000, while a lower rate of 19% applies to profits below £50,000. Companies with profits between these thresholds can benefit from Marginal Relief, which gradually adjusts the tax rate.
Businesses must register for Corporation Tax within three months of starting to trade and file a Company Tax Return within 12 months after the end of their accounting period, even if they incur losses. Payment deadlines typically require companies with profits under £1.5 million to pay their tax nine months and one day after the accounting period ends, while larger companies must make quarterly payments based on their taxable profits.
Why is it Essential for Businesses?
Paying corporation tax is essential for businesses in the UK for several key reasons:
- Legal Obligation: Corporation tax is a statutory requirement for all UK-resident companies and certain unincorporated associations. Businesses must pay tax on their profits, similar to how individuals pay income tax on earnings.
- Contribution to Public Services: The revenue generated from corporation tax contributes significantly to public finances. This funding supports essential services such as healthcare, education, and infrastructure.
- Business Credibility: Timely payment of corporation tax enhances a company’s credibility with stakeholders, including investors, customers, and suppliers.
- Support for Growth: Corporation tax rates are structured to support businesses of varying sizes through tiered rates (e.g., 25% for profits over £250,000 and 19% for profits under £50,000).
Who Pays Corporation Tax?
- Limited Companies: All UK limited companies are required to pay corporation tax on their annual profits. This includes profits from trading activities, investments, and asset sales.
- Branches of Overseas Companies: Foreign companies operating in the UK through a branch or office must also pay corporation tax on their UK profits.
- Unincorporated Organizations: Certain unincorporated entities, such as co-operatives, trade and housing associations, and members’ clubs, may also be liable for corporation tax depending on their structure and activities.
- Charities and Other Entities: Some charities and societies can incur corporation tax liabilities if they engage in trading activities that generate profits.
Key Steps in Calculating Corporation Tax
Determine Total Income:
- Calculate all sources of income, including sales revenue and any interest earned.
- Example: If total sales income is £100,000 and interest income is £1,000, the total income would be £101,000.
Calculate Allowable Expenses:
- Deduct all business expenses from total income to arrive at the profit before tax. This includes costs like salaries, rent, and utilities.
- Note that certain expenses, such as entertainment costs, are not deductible for tax purposes and must be added back to the profit calculation.
Account for Capital Allowances
- Instead of deducting depreciation directly, companies can claim capital allowances on qualifying capital expenditures (e.g., machinery). This affects the taxable profit calculation.
- For example, if a company spends £1,200 on equipment eligible for capital allowances, this amount can be deducted from profits.
Calculate Taxable Profit
- The taxable profit is derived from:
- Taxable Profit=Total Income − Allowable Expenses + Non Deductible
Apply the Corporation Tax Rate:
The corporation tax rate depends on the level of taxable profits:
- 19% for profits up to £50,000.
- 25% for profits over £250,000.
- For profits between £50,000 and £250,000, a marginal relief applies to gradually increase the effective tax rate from 19% to 25%.
Example Calculation
Suppose a company has:
- Total Income: £100,000
- Allowable Expenses: £50,000
- Capital Allowances: £1,200
- Non-Deductible Entertainment Costs: £500
Calculation Steps:
1. Profit Before Tax:
100,000 − 50,000 + 500 = 50,500
2. Taxable Profit:
3. Corporation Tax Due (at 19%):
49,300×0.19=9,357
This structured approach ensures that all relevant factors are considered when calculating taxation for businesses liabilities in the UK.
Common Deductions and Reliefs Available to Businesses
Under UK corporation tax, businesses can benefit from many deductions and reliefs. Here are some of the most common ones:
- Annual Investment Allowance (AIA): The AIA allows businesses to claim a 100% deduction on qualifying capital expenditures up to £1 million in the year of purchase. This includes most types of plant and machinery.
- Full Expensing: It is introduced in the Finance Act 2024, full expensing allows businesses to deduct 100% of qualifying main pool plant and machinery costs in the first year. This replaces the previous super-deduction regime.
- First-Year Allowance (FYA): The FYA provides a 50% deduction for certain assets in the special rate pool, allowing businesses to write off a significant portion of capital expenditure in the first year.
- Intangible Assets: Companies can deduct amortization costs for intangible assets like patents, trademarks, and goodwill. A flat 4% deduction is available for non-amortized intangible assets.
- Research and Development (R&D) Relief: Enhanced relief is available for qualifying R&D expenditures, allowing companies to claim additional deductions for innovative projects. Companies can claim up to **27% of R&D tax credit** relief on qualifying expenses.
- Trading Losses: Businesses can carry forward trading losses to offset against future profits or carry them back to reclaim tax from previous years.
- Interest Expense Deductions: Interest expenses on loans are generally deductible, although restrictions apply under the Corporate Interest Restriction (CIR) rules, which limit deductions based on a fixed ratio of earnings.
- Capital Allowances: Businesses can claim capital allowances on certain types of capital expenditure, including plant and machinery, which allows them to write off the cost over time.
- Exemptions on Dividends: Most dividend income received by UK companies is exempt from Corporation Tax, as are capital gains from selling shares in trading subsidiaries held for at least one year.
Key Dates for Filing and Paying Corporation Tax
Corporation Tax Payment Due
- Deadline: 9 months and 1 day after the end of the accounting period.
- Example: For a company with a year-end of March 31, 2025, the payment is due by January 1, 2026.
Corporation Tax Return Due
- Deadline: 12 months after the end of the accounting period.
- Example: For the same company with a year-end of March 31, 2025, the return is due by March 31, 2026.
Key Monthly Deadlines (April 2024 – March 2025)
- April 1: Corporation tax due for companies with a June year-end.
- May 1: Corporation tax due for companies with a July year-end.
- June 1: Corporation tax due for companies with an August year-end.
- September 1: Corporation tax due for companies with a November year-end.
- October 1:Corporation tax due for companies with a December year-end.
- December 1: Corporation tax due for companies with a February year-end.
Consequences of Late Filing or Payment
As of the 2024-25 financial year, the consequences of late filing or payment of taxes in the UK are structured to encourage compliance and can result in significant penalties. Here’s a summary based on the most current information:
Penalties for Late Filing
- Initial Penalty: If your tax return is filed late, you will incur an [automatic penalty](https://www.gov.uk/company-tax-returns/penalties-for-late-filing) of £100 if it is one day late.
- Three Months Late: If your return is more than three months late, an additional penalty of £100 is charged.
- Six Months Late: At this point, HMRC will estimate your Corporate Tax liability bill and impose a penalty of 10% on any unpaid tax.
- Twelve Months Late: Another 10% penalty on any unpaid tax will apply.
- Repeated Late Filings: If your tax return is late three times in a row, the initial penalties of £100 are increased to £500 each for subsequent filings.
Penalties for Late Payment
- 30 Days Late: A penalty of 5% of the unpaid tax is charged if payment is not made within 30 days.
- Six Months Late: An additional 5% penalty applies to any outstanding amount after six months.
- Twelve Months Late: A further 5% penalty is charged on any unpaid tax after twelve months.
Interest Charges
In addition to penalties, HMRC charges interest on any outstanding tax from the due date until it is paid in full. This interest accrues daily and can add to the overall financial burden. These penalties highlight the importance of timely tax compliance to avoid escalating financial consequences and maintain good standing with HM Revenue and Customs (HMRC).
Read more about late payments/penalties.
Case Study: Avoiding Penalties through Effective Tax Planning
This case study looks at “GreenTech Ltd,” an environmental technology company in the UK. In 2023, GreenTech faced cash flow problems and missed its deadline for paying Corporation Tax. As a result, the company incurred penalties and interest on the overdue tax.To resolve this issue, GreenTech partnered with GM Professional Accountants. Together, they created a solid tax planning strategy. This plan helped GreenTech make timely tax payments and avoid penalties in 2024.
Strategies to Monitor and Reduce Corporation Tax
- Know the Tax Rates: The main corporation tax rate is 25% for profits over £250,000. If your profits are up to £50,000, you pay a lower rate of 19%. There’s a gradual increase for profits between these amounts.
- Keep Good Financial Records: Make sure to keep detailed records of all your income and expenses. Using accounting software can help make this easier and ensure you report everything correctly.
- Claim All Business Expenses: Don’t forget to claim all costs related to running your business, like salaries, rent, and utilities. You can also claim for things like equipment and property through capital allowances.
- Use Tax Reliefs and Credits: Look into available tax reliefs, such as Research and Development (R&D) tax credits, which can help lower your tax bill. A tax advisor can help you find out what reliefs apply to your business.
- Plan for Quarterly Payments: If your profits are over £1.5 million, you’ll need to pay corporation tax in four installments throughout the year. This helps manage cash flow so you’re not hit with a big payment at the end of the year.
Overview of Recent Changes in UK Corporation Tax Policies
As of April 1, 2024, the UK Corporation Tax rate structure has been updated, reflecting changes aimed at balancing revenue generation with support for businesses. Here are the key details:
Current Rates
Main Rate:
- 25% for profits exceeding £250,000.
Small Profits Rate:
- 19% for profits up to £50,000.
Marginal Relief:
- Available for companies with profits between £50,000 and £250,000, which effectively reduces their tax liability.
Timeline of Corporation Tax Rates
| Year | Small Profits Rate | Main Rate (Eligible for Marginal Relief) | Main Rate (Not Eligible for Marginal Relief) |
|---|---|---|---|
| 2024-25 | 19% | 25% | 25% |
| 2023-24 | 19% | 25% | 25% |
| 2022-23 | 19% | 19% | 19% |
| 2021-22 | 19% | 19% | 19% |
| 2020-21 | 19% | 19% | 19% |
Points to be noted:
- The main rate of Corporation Tax remains at 25%, applicable to companies with profits over £250,000.
- The small profits rate is set at 19%, benefiting smaller companies.
- Companies with profits between £50,000 and £250,000 can utilize marginal relief to lower their effective tax rate, calculated using a specific formula that considers their profit level.
A Comparison of Corporation Tax Systems
| Country | Main Corporation Tax Rate | Profit Thresholds |
|---|---|---|
| United Kingdom | 25% | – 19% for profits up to £50,000 – 25% for profits over £250,000 – Marginal relief for profits between £50,000 and £250,000 |
| United States | 21% | No specific thresholds; applies to all corporate income |
| India | 25% (for domestic companies) | – 25% for profits up to ₹1 crore – 30% for profits above ₹1 crore |
| Germany | 15% | Applies to all corporate profits |
| France | 25% | Applies to all corporate profits |
| Japan | 23.2% | Applies to all corporate profits |
FAQs
Who will pay the 25% corporation tax?
Companies with profits over £250,000 will pay the 25% corporation tax rate.
How much profit before corporation tax?
If your profits are up to £50,000, you pay a lower tax rate of 19%, and there’s a gradual increase for profits between £50,000 and £250,000.
Do you pay corporation tax if you make no profit?
No, if your company doesn’t make any profit, you don’t have to pay corporation tax.
Do dividends reduce corporation tax?
No, dividends are paid from profits after tax, so they don’t lower your corporation tax bill.
Can I pay myself a dividend every month?
Yes, you can pay yourself a dividend every month as long as your company has enough profits to cover it.
Parul is a dedicated writer and expert in the accounting industry, known for her insightful and well researched content. Her writing covers a wide range of topics, including tax regulations, financial reporting standards, and best practices for compliance. She is committed to producing content that not only informs but also empowers readers to make informed decisions.