A Complete Guide to Corporation Tax in the UK
A Complete Guide to Corporation Tax in the UK
Corporation tax is an essential consideration for businesses operating in the UK. Understanding how it works, when it is due, and how to pay it can help ensure compliance and tax efficiency. In this blog, we cover everything you need to know about corporation tax, split into five key sections.
What is corporation tax?
Corporation tax UK is a tax levied on the profits of limited companies and other organisations, including clubs and associations. This tax is charged on taxable profits, which are determined after making certain adjustments to the company’s financial accounts.
Limited companies in the UK must file a limited company tax return to HMRC, typically nine months after their financial year-end. This ensures that the company’s taxable profits are accurately reported and the correct amount of corporation tax is paid. Filing a limited company tax return is a mandatory requirement, and failing to meet this deadline can result in penalties and interest charges. Therefore, maintaining accurate records and timely filing is essential for staying compliant with HMRC regulations.
How much is corporation tax UK?
The UK corporate tax rate has changed recently, and it’s essential to understand the new corporation tax rates for 2023/24.
Before 1 April 2023, the corporation tax percentage was a flat 19% for all companies. However, from 1 April 2023, the tax rates have been adjusted:
- Companies with taxable profits below the lower threshold of £50,000 continue to pay 19% corporation tax.
- Companies with taxable profits above the upper threshold of £250,000 pay a corporation tax rate of 25%.
- For profits between £50,000 and £250,000, the corporation tax rate is 25%, but marginal relief corporation tax applies.
What is marginal relief?
Marginal Relief helps UK companies with profits between the upper and lower threshold pay a lower effective Corporation Tax rate. Instead of jumping straight to the main 25% rate, businesses in this range benefit from a gradual increase from the lower 19% rate. The relief is calculated using a formula that reduces the overall tax burden, ensuring companies don’t face a sudden rise in tax as profits grow.
What happens if part of the accounting period falls under the old corporation tax rate?
In such cases, taxable profits must be time apportioned. For example, if a company’s accounting period straddles 1 April 2023, profits will need to be split so that part of them is taxed at 19% and the remainder at the new rates. This ensures fair application of the tax laws, reflecting the different rates applicable during the accounting period.
How is corporation tax calculated?
Corporation tax is calculated based on the company’s taxable profits, which are derived from its financial accounts after making specific adjustments.
Adjustments to profits include:
- Non-deductible expenses: Certain expenses, such as client entertainment that is not for employees, must be added back to the profits. Other examples of non-deductible expenses include fines and penalties incurred by the business.
- Depreciation: While depreciation is not tax-deductible, companies can claim capital allowances on qualifying assets to reduce taxable profits. These allowances include the annual investment allowance (AIA) and first-year allowances, which can significantly lower the taxable amount.
- Other adjustments: Examples include adding back private expenses or non-business-related costs. For instance, if a director’s personal expenses are recorded as a business cost, these must be excluded when calculating taxable profits.
Once these adjustments are made, the taxable profits are determined. The corporation tax rates (as outlined earlier) are then applied based on the company’s profit level. If the company has associated companies, it’s crucial to adjust the lower and upper thresholds accordingly, as these thresholds are shared between associated companies. Accurate determination of thresholds ensures the correct application of marginal relief and avoids under- or overpaying tax.
When is corporation tax due?
The timeline for paying corporation tax and filing a corporation tax return depends on the size of the company.
- Small companies: Corporation tax payment is due nine months and one day after the end of the accounting period. The corporation tax return must be filed within 12 months of the accounting period’s end.
- Large companies: Corporation tax payment must be made in quarterly instalments, starting during the accounting period. Large companies are typically defined based on their annual taxable profits exceeding a specific threshold.
Timely compliance is crucial to avoid penalties. Companies should ensure that they file corporation tax return submissions and make payments on time to maintain a good standing with HMRC. Companies that fail to pay or file on time risk penalties, which can escalate depending on the length and severity of the delay.
How to pay corporation tax?
Companies can make their corporation tax payment online via HMRC’s portal. Here’s a step-by-step guide on how to pay corporation tax online:
- Log in to your HMRC online account.
- Select the option for corporation tax payment.
- Enter your unique taxpayer reference (UTR).
- Choose the payment method, such as direct debit, bank transfer, or credit/debit card.
- Confirm and submit the payment.
If your company is unable to pay the full amount in one instalment, you can contact the HMRC corporation tax helpline to arrange an instalment plan. The HMRC helpline provides support for companies facing cash flow challenges, enabling them to meet their obligations without undue strain on their finances.
It is vital to ensure that your company’s tax return is accurate and submitted by a qualified accountant to maximise tax efficiency. Tax advisors can provide expert guidance, ensuring compliance and minimising unnecessary tax liabilities. At the same time, they can offer advice on tax planning strategies to help your business thrive.
As ACCA-qualified accountants, we pride ourselves on delivering reliable and professional services tailored to your business needs. Our expertise ensures that your corporation tax calculations are accurate and that you are taking full advantage of any reliefs and allowances available to you. Many of our clients have benefited from our proactive tax advisory services, saving both time and money.
If you have further questions or would like to discuss your company’s corporation taxes, contact us today or book a free consultation. We would be more than happy to assist you!
Example Breakdown with Detailed Explanations
Example 1: Taxed at Flat Rate of 19%
In this case, the company’s profits are relatively small, below the lower threshold of £50,000. The taxable profits begin with the profits per accounts (£45,000) but require adjustments for disallowable expenses. Disallowable expenses are those costs that cannot be deducted from profits for tax purposes. Here, two such expenses are added back:
- Depreciation (£2,500): While depreciation is accounted for in financial statements, it is not allowed as a deduction for tax purposes. Instead, capital allowances are used if applicable.
- Client entertainment (£500): Expenses related to entertaining clients are not tax-deductible.
After these adjustments, the taxable profits total £48,000. Since this is below the £50,000 threshold, the company is taxed at a flat rate of 19%. This means:
- Corporation tax due: 19% of £48,000, which equals £9,120.
This is a straightforward calculation because the profits fall within the lowest band, where no marginal relief or additional complexity applies.
Example 1
Profits per accounts:
45,000
Add back disallowable expenses:
Depreciation:
2,500
Client entertainment:
500
Non UK charities:
100
Less capital allowances:
-2,500
Corporation tax @ 19%:
11,400
Less marginal relief:
0
Corporation tax payable:
11,400
Example 2
Profits per accounts:
125,000
Add back disallowable expenses:
Depreciation:
8,500
Client entertainment:
12,000
Non UK charities:
900
Less capital allowances:
-8,500
Corporation tax @ 25%:
31,775
Less marginal relief:
-1,844
Corporation tax payable:
29,932
Example 2: Marginal Relief Available
In this example, the company’s profits are moderate and fall between the lower threshold (£50,000) and the upper threshold (£250,000). As a result, the company qualifies for marginal relief, which reduces the overall tax burden for businesses in this range.
The taxable profits are calculated by starting with profits per accounts (£125,000) and adding back disallowable expenses:
- Depreciation (£8,500): Added back because it is not deductible for tax purposes.
- Client entertainment (£1,200): Added back because it is not an allowable business expense.
The total taxable profits amount to £134,700. Since these profits fall between £50,000 and £250,000, the company initially faces the upper corporation tax rate of 25%. However, marginal relief applies, reducing the effective tax rate.
How marginal relief is calculated:
- The formula for marginal relief is:
MarginalRelief=(UpperLimit−TaxableProfits)×3200Marginal Relief = (Upper Limit – Taxable Profits) \times \frac{3}{200}MarginalRelief=(UpperLimit−TaxableProfits)×2003
- Here, the upper limit is £250,000, and the taxable profits are £134,700.
- The difference between the upper limit and the profits is £115,300.
- Multiplying this by the fraction 3200\frac{3}{200}2003, we get: MarginalRelief=£115,300×0.015=£1,729.50Marginal Relief = £115,300 \times 0.015 = £1,729.50MarginalRelief=£115,300×0.015=£1,729.50
- To calculate the corporation tax:
- Start with the tax liability at 25%: £134,700 × 25% = £33,675.
- Subtract the marginal relief: £33,675 – £1,729.50 = £31,945.50.
- Start with the tax liability at 25%: £134,700 × 25% = £33,675.
- Subtract the marginal relief: £33,675 – £1,729.50 = £31,945.50.
Thus, the marginal relief reduces the company’s tax liability, creating an effective rate between 19% and 25%.
Example 3: Taxed at 25% (No Marginal Relief)
In this final example, the company’s taxable profits are well above the upper threshold of £250,000, so the tax calculation is more straightforward. Starting with the profits per accounts (£285,000), disallowable expenses are added back:
- Depreciation (£15,000): Not tax-deductible but may be offset using capital allowances.
- Client entertainment (£2,000): Another non-deductible expense.
The total taxable profits are £302,000. Because these profits exceed the upper threshold, the company is taxed at the flat rate of 25%, with no marginal relief available.
The tax liability is calculated as:
- Corporation tax due: 25% of £302,000, which equals £75,500.
Example 3
Profits per accounts:
285,000
Add back disallowable expenses:
Depreciation:
15,000
Client entertainment:
2,000
Non UK charities:
1,200
Less capital allowances:
-15,000
Corporation tax @ 25%:
72,050
Less marginal relief:
0
Corporation tax payable:
72,050
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