If you are a limited company business owner and want to know more about corporation tax, this guide is for you. Stay tuned until the end, as we'll also provide some valuable tips on reducing your corporation tax bill effectively.
What is Corporation Tax?
In the UK, a limited company operates as its own legal entity, separate from its owners. This status brings certain responsibilities, one of which is paying taxes on the company's profits. Corporation tax is essentially a levy on the profits earned by limited companies. Just as individuals are required to pay income tax, limited companies must also pay corporation tax.
Each company must submit a company tax return, known as the CT600, to HMRC. This submission is in addition to the company's annual accounts. It's crucial to understand that the profit shown in your company's financial accounts is not necessarily the same as the taxable profit. These figures can be similar or significantly different, depending on various factors within your business. When discussing corporation tax, we focus on the taxable profit rather than the profit indicated in your accounts.
Deadlines for Filing and Paying Corporation Tax
HMRC has set different deadlines for filing your tax return and paying corporation tax, which can be confusing. To simplify matters, we recommend focusing on the earliest deadline, which is 9 months and one day after your company’s financial year-end.
More than 50% of limited companies in the UK have a financial year-end in either December or March. If your year-end is in December, your corporation tax payment is due by October 1st of the following year. If your year-end is in March, your payment is due by January 1st of the subsequent year.
How Much Corporation Tax Do You Have to Pay?
The amount of corporation tax your company owes is determined by government policy and current legislation. Up until March 2023, there was a flat rate of 19% for all businesses. However, from April 1, 2023, this system was revised to include two different rates:
- Small business rate: 19% for taxable profits up to £50,000.
- Main rate: 25% for taxable profits over £250,000.
For profits between £50,000 and £250,000, the calculation is more complex, involving a marginal rate of 26.5%. Although 26.5% seems higher than the main rate of 25%, the effective rate averages out due to the progressive nature of the tax brackets.
Example Calculation:
1. Profits up to £50,000: 19% tax rate.
2. Profits between £50,000 and £250,000: 26.5% tax rate.
3. Profits over £250,000: 25% flat rate.
This blended approach ensures that the effective tax rate gradually increases as profits rise, with a maximum cap of 25%.
Paying Corporation Tax to HMRC
Once your tax return is filed, HMRC will send a statement specifying the amount due, the payment deadline, and a unique 17-digit reference number for your company. This reference number is crucial for ensuring your payment is correctly allocated.
To make the payment, you can use several methods:
- Bank transfer
- Online account payment via debit or credit card
- Direct payment from your banking app
Avoid using direct debit as it requires setting up and updating references annually. If you cannot locate the 17-digit reference number, use your Unique Tax Reference (UTR) or corporation tax number. Although HMRC can identify the company using these numbers, incorrect referencing may lead to misallocation and potential fines or interest charges.
Strategies for Reducing Your Corporation Tax Bill
While it is essential to pay the taxes that are fair and due, there are several legitimate strategies to reduce your corporation tax bill:
1. Annual Investment Allowance (AIA):
The AIA allows businesses to deduct the full value of qualifying capital expenditures from their profits before tax. This can significantly reduce your taxable profits for the year, although over a period (typically five years), the total tax paid remains the same. This strategy can be particularly beneficial for reducing this year's tax liability. For more details, check out this [video on the annual investment allowance](#).
2. Maintain Accurate and Detailed Records:
Keeping meticulous records is crucial. For many small businesses, the lines between personal and business finances can blur. Ensure you log every business expense, even those paid out of personal accounts or credit cards. Regularly updating your financial records helps claim all possible deductions and reduces your taxable profit. If you’re unsure whether certain expenses can be claimed, consult your accountant.
3. Utilize a Proactive Accountant:
Having a proactive accountant can make a significant difference in your tax planning. A good accountant should not only process your tax returns but also provide strategic advice on reducing your tax bill. They should be aware of all potential deductions and expenses relevant to your industry. If your accountant merely compiles your information and submits your tax return without offering additional insights, it might be time to look for a more proactive professional.
4. Increase Your Tax Knowledge:
While your primary focus should be on growing your business, having a basic understanding of tax regulations can be immensely beneficial. This knowledge enables you to make informed decisions and challenge your accountant when necessary. Staying updated with tax laws ensures you are aware of all legitimate means to minimize your tax liability.
Conclusion
Managing corporation tax is a critical aspect of running a limited company. By understanding the basics of what corporation tax entails, keeping track of deadlines, knowing how much tax you need to pay, and employing strategies to reduce your tax bill, you can effectively manage your business finances. Remember to stay proactive, maintain good records, and seek professional advice when needed. Don't forget to subscribe for more valuable tips on managing your business successfully.
Comments