When it comes to paying tax as a business, it’s important to know what you need to pay and when. One form of tax that a lot of businesses need to pay is Corporation Tax. In this blog, we have taken a look at what Corporation Tax is, how much you need to pay and the reliefs available.
What is Corporation Tax?
If you are doing business as a limited company, a foreign company with a UK office or branch, a club, co-operative or unincorporated association – such as a community group or sports club – you must pay Corporation Tax on your profits. The profits you have to pay Corporation Tax on can come from doing business, investing and selling assets for more than they cost. If your company isn’t based in the UK but has a branch of office here, you only have to pay Corporation Tax on profits from your dealings in the UK. If your company is based in the UK, it has to pay Corporation Tax on all profits, including those from dealings abroad.
One of the key things to remember about Corporation Tax is that you don’t get a bill telling you what to pay. You need to work out how much you owe, pay it and then report it yourself. Corporation Tax is imposed by HMRC and it’s not optional. As is the case with other types of tax in the UK, companies are responsible for meeting their Corporation Tax obligations, including filing accurate and timely tax returns, making tax payments on time and keeping appropriate records. Failure to comply with tax regulations may result in penalties and interest charges.
How Do I Know How Much to Pay?
The rate of Corporation Tax in the UK is set by the government, and it varies slightly depending on how much profit you made during the financial year. This rate has recently changed, so it’s important to keep on top of how much you are likely to owe. As of 2023, the rate of Corporation Tax for companies with annual profits up to £50,000 is 19%. This is referred to as the Small Profits Rate. This rate rises to 25% for companies with profits over £250,000, which is called the Main Rate.
If your company has profits between £50,000 and £250,000 and doesn’t fall into either category, you will pay Corporation Tax at the main rate, but it will be reduced by a Marginal Relief. The Marginal Relief depends on a number of factors, but the government has a calculator to help you determine what you are entitled to. There is also a special rate of 20% for unit trusts and open ended investment companies.
If you are a ‘ring fence’ company – a company that makes profits from oil extractions or oil rights in the UK – there are different Corporation Tax rates for you to be aware of. As of 1st April 2023, Marginal Relief is available for ring fence companies with profits between £50,000 and £250,000. Before this date, it could be claimed by companies with profits between £300,000 and £1.5 billion.
How Do I Pay Corporation Tax?
There are a number of ways to pay Corporation Tax, but the majority of businesses choose to pay online. You can’t pay Corporation Tax by post, but you can pay by Direct Debit, by telephone banking, by online banking via BACS, CHAPS or Faster Payments. It can be paid by debit card or credit card. The deadline for paying your Corporation Tax depends on your taxable profits. If you have taxable profits of less than £1.5 million, you have nine months and one day from the end of your accounting period to pay. This is likely to be at the end of the tax year, but some businesses have a different accounting period. If you have table profits of more than £1.5 million, you must pay your Corporation Tax bill in instalments.
Are There Any Reliefs?
There are a handful of reliefs you can benefit from, which will reduce the amount of Corporation Tax that you have to pay. It’s important to know what reliefs are available and what you are entitled to, as you don’t want to end up paying more Corporation Tax than you need to. You can deduct the costs of running your business from your profits before tax, and you can claim capital allowances if you buy assets that you keep to use as part of your business. This includes equipment, business vehicles and machinery.
You could also be eligible to make a claim for R&D (Research and Development) Relief, trading losses and property income losses. The Patent Box is also a form of relief that could be claimed if your company makes a profit from patented inventions. CITT (reliefs for creative industries) is also an option if your business makes a profit from film, TV, animation, video games or theatre. Disincorporation Relief can be claimed if you’re closing your company and becoming a limited partnership, sole trader or ordinary business partnership. Also, as we mentioned above, you might be entitled to Marginal Relief if your taxable profits are between £50,000 and £250,000.
It can be difficult to know which reliefs you are eligible for and how Corporation Tax works, but there is a lot of help online to guide you through the process.
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