Corporation tax is something every limited companies needs to understand. No matter how small your business is, you need to pay corporation tax on any profit you make. If you’re not clued up on corporation tax, you could end up submitting the return late or miscalculating the amount. And you don’t want to get on the wrong side of HMRC when it comes to corporation tax. Even if you make a genuine mistake, you’ll still need to pay the fines and penalties and you’ll be charged interest on the amount you owe.
If you’ve ever had a question about corporation tax, this guide will probably answer it. We’ll explain what corporation tax is and how corporation is paid. Plus, we share how to register your business for corporation tax and how to reduce your corporation tax bill.
What is corporation tax?
Corporation tax is a tax paid by UK businesses. Think of it as being like an income tax for businesses. Every business owes a percentage of their yearly profits in corporation tax.
Businesses don't get a tax-free allowance and therefore all profits are taxable. However, there are a number of allowable expenses and deductions that can be claimed to reduce the bill.
Who pays corporation tax?
Every limited company in the UK needs to pay corporation tax. There are other organisations who need to pay corporation tax as well, even if they’re not incorporated. These include:
- All UK limited companies
- Any foreign company with a UK branch or office
- Trade and housing associations
- Groups of individuals carrying out a business e.g. co-operatives
- Other unincorporated associations e.g. community groups and sports clubs
Self-employed sole traders don’t pay corporation tax. They pay income tax on their profits which is calculated through a self-assessment tax return.
Registering for corporation tax
You need to tell HMRC within three months of trading that you have formed a limited company. For some businesses, it can be difficult to know exactly when they started ‘trading’, but you can check with HMRC that you’re compliant.
When you register with HMRC, you'll include the:
- date you started the business (this is used as the start date of the first accounting period)
- business name and address
- type of business
- registration number (this will be provided by Companies House when you incorporate)
- date you'll make your annual accounts up to
- name and home address of the company directors
Register for corporation tax with HMRC online - click here.
What is the corporation tax rate?
The corporation tax rate is 19% for all limited companies. It has been this rate since April 2016.
From April 2023, it is expected that corporation tax will increase for businesses with profits of more than £50,000.
Submitting a Company Tax Return
Company Tax Return (CT600) deadline
Businesses calculate their own corporation tax bill and must complete a Company Tax Return (CT600) every year. Your Company Tax Return is due either 12 months after the company year end, or three months after you receive a ‘notice to deliver’ from HMRC - whichever is latest.
Your Company Tax Return (CT600) must contain your:
- business name, registration number and address
- tax reference number
- turnover and profit for the period being reported
- tax calculation
- allowable expenses and reliefs
Submitting your accounts to Companies House
As well as submitting your Company Tax Return (CT600) to HMRC, you also need to submit your accounts to Companies House. You can submit the CT600 to HMRC and accounts to Companies House at the same time as long as they’re for the same accounting period.
The CT600 and accounts should be filed online which you can do here.
When does corporation tax have to be paid?
The deadline for corporation tax will be different for every business. It depends on when your business was incorporated and how much profit your business makes.
If your business profits are less than £1.5 million
- You need to pay corporation tax 9 months and 1 day after the company year end.
If your business profits are more than £1.5 million
- You need to pay corporation tax in instalments. Find out more about the rules and deadlines for paying in instalments here.
Corporation tax timeline
-
9 months and 1 day after the compnay year end - Corporation tax is due (if profits are less than £1.5 million)
-
12 months after the company year end - Company Tax Return is due
The timeline and deadlines for corporation tax can seem a bit confusing. Just remember, you’ll need to prepare your Company Tax Return to work out how much corporation you need to pay, even though the deadline to submit the return is later.
How is corporation tax paid?
There are several ways to pay corporation tax. Whichever method you choose, HMRC must receive the money by the deadline date or you could be fined. You’ll need to consider how long each method takes before paying your corporation tax.
|
Payment method |
How long it takes |
|
Online and telephone banking |
Same or next day |
|
Bank transfer (CHAPS) |
Same or next day |
|
Online by debit or business credit card |
3 working days |
|
In branch |
3working days |
|
Direct Debit (if you’ve already set one up) |
3 working days |
|
Bank transfer (BACS) |
3 working days |
|
Direct Debit (if you’ve never set one up before) |
5 working days |
Keep in mind: You can no longer pay with a personal credit card, so you'll need to use a corporate credit card
Fines and penalties for corporation tax
The company director is responsible for submitting the tax return and paying the bill on time. They also need to make sure the contents of the return are accurate and truthful. Even if the company uses an accountant, the company director is liable and will be the one left to pay HMRC’s penalties and fines.
HMRC can fine you for:
- Not telling HMRC you’re liable for corporation tax
- Submitting the return late
- Paying the bill late
- Including inaccurate information on the return
Not telling HMRC you’re liable for corporation tax
If your company is liable for Corporation Tax, you need to tell HMRC within 12 months of the company year end. If you don’t, your company could be charged a ‘failure to notify’ penalty. The penalty is based on the amount of tax you owe and whether the failure to notify was a careless mistake or deliberate.
Submitting the return late
HMRC has set penalties for those who are late submitting their Company Tax Return.
|
Days late |
Penalty |
|
1 |
£100 |
|
3 months |
Another £100 |
|
6 months |
10% of the expected tax bill |
|
12 months |
Another 10% of the expected tax bill |
Paying the bill late
If you don't pay your corporation tax bill when it’s due, you’ll be charged interest at 3% on the outstanding balance. HMRC also has the authority to carry out enforcement action to recover unpaid corporation tax. This can include taking you to court, passing the debt to a debt collection agency, making you bankrupt or closing your business. If you can't afford to pay, you should context HMRC as soon as possible – you might be able to set up a payment plan.
Including inaccurate information
HMRC can fine you if your Company Tax Return is found to be inaccurate. How much you need to pay depends on whether HMRC thinks the inaccurate information was a mistake or deliberate. The penalty will be less if you tell HMRC about the error before they find it.
Learn more about corporation tax penalties and fines here.
How to avoid overpaying on corporation tax
Corporation tax can be a big expense for small companies, so you want to make sure you’re not paying more than you need to.
Deducting allowable expenses
You can deduct business expenses from your company profits which will reduce the amount of tax you need to pay. That’s why knowing exactly what you can and can’t claim is really important. You can deduct any business expense as long as it’s used exclusively for business purposes. This can include things like equipment and stationery, employee wages, trade tools and machinery - and even petty cash for office snacks.
Paying yourself a salary
If you pay yourself a salary as an employee, you can deduct that cost as an allowable expense from your company profits. You still need to pay personal income tax on the earnings so be mindful of how much you pay yourself as it could take you above the higher-rate taxpayer threshold.
Some small business owners choose to pay themselves in dividends as they tend to be taxed at a lower rate than income tax. However, you need to keep in mind that dividends can’t be deducted as an allowable business expense.
Find out more about allowable expenses for limited companies here.
If you still have questions about corporation tax, AXA recommend speaking to an accountant or contacting HMRC.
