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Corporation Tax is a crucial aspect of running a limited company in the UK. It’s the tax levied on your company’s profits, and understanding the system is essential for financial planning and compliance. This blog post will demystify the UK’s Corporation Tax system, covering the key elements you need to know.
What is Corporation Tax?
Corporation Tax is a tax on the profits made by limited companies and some other organizations, such as clubs and associations. It’s calculated based on your company’s taxable profits, which are your profits after deducting allowable expenses.
Who Pays Corporation Tax?
All limited companies registered in the UK are liable to pay Corporation Tax. This includes:
- Limited companies
- Foreign companies with a UK branch or office
- Clubs, societies, and associations that carry on a trade
Current Corporation Tax Rates (2024/25)
- Main Rate: 25% (for profits over £250,000)
- Small Profits Rate: 19% (for profits up to £50,000)
- Marginal Relief: Applies for profits between £50,000 and £250,000, tapering the tax rate between 19% and 25%
Calculating Corporation Tax:
1.Calculate Taxable Profits:
- Start with your company’s total profits.
- Deduct allowable business expenses, such as:
- Salaries and wages
- Rent and utilities
- Office supplies
- Marketing and advertising
- Interest payments
- Capital allowances
2. Apply the Corporation Tax Rate:
- The main rate of Corporation Tax in the UK is currently 25%.
- Prior to this there was a small profits rate for companies with lower profits.
3. Pay the Tax:
- You must pay your Corporation Tax liability to HMRC (HM Revenue & Customs).
- The payment deadline is usually 9 months and 1 day after the end of your company’s accounting period.
Allowable Deductions & Reliefs
Businesses can reduce their corporation tax liability through various deductions and reliefs, including:
- Business Expenses: Costs that are “wholly and exclusively” for business purposes are deductible (e.g., salaries, rent, marketing expenses).
- Capital Allowances: Businesses can claim capital allowances on equipment, machinery, and vehicles.
- R&D Tax Credits: Encourages innovation by offering tax relief for qualifying research and development expenses.
- Annual Investment Allowance (AIA): Allows businesses to deduct 100% of qualifying plant and machinery costs (up to a limit).
- Loss Relief: Businesses can offset trading losses against past or future profits to reduce tax bills.
Filing & Payment Deadlines
- Corporation tax is due nine months and one day after the end of a company’s financial year.
- Companies must file their Company Tax Return (CT600) within 12 months of their accounting period’s end.
- Businesses making over £1.5 million in profits must pay tax in quarterly instalments.
Penalties for Late Payments & Non-Compliance
Failing to meet tax deadlines can result in penalties, including:
- Late filing penalties ranging from £100 to £1,500.
- Interest on unpaid tax.
- Potential investigations from HMRC for serious breaches.
Key Considerations:
- Allowable Expenses: Ensure you understand which expenses are allowable for Corporation Tax purposes.
- Capital Allowances: You may be able to claim capital allowances for certain capital expenditures, such as equipment and machinery.
- Loss Relief: If your company makes a loss, you may be able to carry it forward or back to reduce your Corporation Tax liability in other accounting periods.
- Small Profits Rate: Be aware of the rates of corporation tax, and how profits effect the amount due.
- Record Keeping: Maintain accurate records of your company’s income and expenses.
- HMRC Compliance: Adhere to all HMRC deadlines and regulations to avoid penalties.
Tips for Managing Corporation Tax:
- Accurate Accounting: Maintain accurate and up-to-date accounting records.
- Tax Planning: Engage in proactive tax planning to minimize your Corporation Tax liability.
- Utilize Allowances and Reliefs: Take advantage of all available allowances and reliefs.
- Seek Professional Advice: Consult with an accountant or tax advisor for expert guidance.
- Stay Updated: Keep up-to-date with changes in Corporation Tax legislation.
Final Thoughts
Understanding corporation tax rules can help businesses manage their tax liability effectively. Seeking professional tax advice can ensure compliance while taking advantage of available reliefs and deductions.
Need help optimizing your corporation tax strategy? Speak to a tax professional today!
Let CBM accounting be your trusted partner!
