Taxes are stressful to any business owner. And corporation tax is not an exception.
Are you a small business owner or an entrepreneur who has just launched a startup? If yes, then it becomes paramount for you to learn about corporation tax.
We know how complex it can be to understand all the tax regulations. It needs time, patience, and a lot of browsing through HMRC web portals. But you don’t have to do so because we’ve prepared this short guide for you.
Here, you will delve into everything about corporation tax, including how it is calculated and how it differs from income tax.
You will also learn some important tips for planning your next corporation tax and common mistakes that you should avoid making.
Let’s get started.
What Is Corporation Tax?
Corporation tax is the tax your company pays on its profits. It involves trading profits, chargeable gains, and investments minus the expenses your company has had.
In simple terms, your company pays taxes on the net profit after deducting allowable expenses.
This tax applies to limited companies, foreign companies whose offices or branches are in the UK, co-operatives, and associations.
What Are the Current Corporation Tax Rates?
Corporation tax is divided into three tax bands:
- Companies making £50,000 or less (known as the small profits rate) are subject to a 19% tax on their profit.
- Companies making over £250,000 are subject to a 25% tax on their profit.
- Companies whose profits range between £50,001 and £250,000 get marginal relief. These companies don’t jump straight to the 25% rate; instead, they pay a gradually increasing rate depending on their profits.
If you’re a small company or startup, it’s important to know where you fall in this structure to plan your finances accordingly.
One thing you must remember is that the government regularly amends tax-related regulations.
Therefore, it’s wiser to keep yourself informed about recent tax changes or consult a professional accountant to stay compliant with new tax laws.
How to Calculate Corporation Tax?
Many new business owners find tax calculations confusing at first. But it becomes a fairly straightforward process once you break it down. Let’s understand how you should calculate corporation tax.
Step 1: Calculate Your Taxable Profits
Start by determining your total income — this includes money from sales, services, investments, and any asset sales.
From that, subtract your allowable business expenses, which could include:
- Salaries and wages
- Office rent and utilities
- Professional services (accountants, legal fees)
- Marketing and advertising
- Business travel
- Equipment purchases
One thing you should keep in mind is that you can only deduct the expenses that were exclusively made for business purposes. Personal costs and certain items like client entertainment are not deductible.
Step 2: Apply Adjustments
Some expenses are disallowed, meaning they can’t reduce your taxable profit.
You’ll need to add these back in before applying the tax rate. Also, make sure to account for any tax reliefs or allowances.
Step 3: Apply the Correct Corporation Tax Rate
Once you’ve calculated your taxable profit, apply the correct rate:
Use 19% if profits are £50,000 or under.
Use 25% if profits are over £250,000.
Use marginal relief if profits fall between those amounts.
Step 4: Report and Pay
Once everything is ready, your next and final step is to report your corporation tax. You can do so by filing the CT600 Company Tax Return online on the HMRC website.
You need to pay your corporation tax within 9 months and 1 day after your accounting period ends.
You also need to file your company tax return within 12 months of the end of that same period.
If you miss either deadline, HMRC may charge you a penalty or add interest to the amount of tax you owe.
Corporation Tax vs Income Tax: What’s the Difference?
If you’ve just launched your own company, it’s easy to mix up corporation tax with income tax, as they both involve HMRC and money coming out of your earnings, after all.
But the two are quite different and apply in separate situations.
Corporation tax is what a limited company pays on its profits, whether that profit comes from day-to-day business, investments, or selling assets.
On the other hand, income tax is paid by individual on their personal income, like salaries, dividends, or freelance earnings.
I think the distinction may be clear now. If you run a limited company, the company itself pays corporation tax. And you pay income tax on your income.
Both taxes go to HMRC, but they follow different rules. For corporation tax, your company files a CT600 return.
For income tax, you complete a self-assessment return as an individual. Knowing which is which helps you avoid confusion and potential trouble down the line.
Corporation Tax Planning Tips To Save The Most
Smart planning can reduce your company’s tax burden. Here are several practical strategies that many UK business owners use to stay efficient:
Claim All Allowable expenses
Keep detailed records of every business-related cost. Even small expenses add up. Use software or work with a bookkeeper to ensure you’re claiming everything you’re entitled to.
Use Capital Allowances
You can claim capital allowances on purchasing equipment, vehicles, or machinery for your company. You should optimise the use of the Annual Investment Allowance, which currently gives full tax relief of up to £1m spent on assets and equipment.
Explore R&D Tax Credits
R&D tax relief allows businesses to claim tax exemptions if they work for innovation.
If your business develops new products, services, or processes, you may be eligible for Research and Development (R&D) relief.
Look Into Corporation Tax Reliefs
The UK offers various corporation tax reliefs for small companies, such as:
- Patent Box (reduced 10% tax on qualifying profits from patented inventions)
- Creative Industry Reliefs (for film, TV, and gaming companies)
- Loss Relief (you can carry losses forward or backwards to offset profits in other years)
Knowing what your company qualifies for can lead to significant savings.
Optimise How You Pay Yourself
Drawing a small salary (within personal allowance limits) and topping up with dividends is a common strategy among small business owners. Dividends are taxed at lower rates and avoid National Insurance contributions.
Common Corporation Tax Mistakes to Avoid
Mistakes with corporation tax aren’t just stressful, they can also be costly. Here are some of the most frequent errors UK business owners make:
- Filing or Paying Late
Delays lead to automatic penalties. Even if you don’t owe taxes, filing late can trigger fines. Set up calendar reminders or use an accountant to stay on schedule. - Poor Record-Keeping
If you don’t have detailed records of income and expenses, you might overpay or underpay, and both can be problematic. HMRC can investigate and impose fines if records are inadequate. - Missing Out on Relief
Some startups and small businesses don’t realise they’re eligible for corporation tax rates for startups or other reliefs like AIA or R&D credits. This means paying more tax than necessary. - Mixing Personal and Business Finances
Don’t use your company card for personal spending. It complicates your books and can raise red flags with HMRC. - Not Seeking Professional Help
Even if your company is small, an accountant can help you claim more relief, avoid errors, and plan for growth. Their fee often pays for itself in tax savings.
Final Thoughts
Navigating corporation tax can be complicated for small businesses and startups. But if you are struggling to figure it out yourself, we can be your tax advisor.
If you need any help with planning or filing your corporation tax, feel free to contact us at info@stellarwiz.com or +44 20 3985 1972. Let’s partner up and simplify corporation tax for your company.
