Corporation tax in the UK for small businesses

Understanding Corporation Tax in the UK for Small Businesses

If you own a small business in the UK, you may be required to pay corporation tax. Corporation tax is a tax levied on the profits of limited companies and other organisations such as clubs, societies, and associations. In this blog, we will provide an overview of corporation tax in the UK and its implications for small businesses. Before diving deep into the details here first here is a general overview of corporation tax.

Corporation Tax:

Corporation tax is a tax levied on the profits of limited companies, associations, clubs, and societies. The tax is payable on profits generated from business activities, such as sales of goods or services, and any income received from investments. The tax is based on the profits earned during a company’s financial year and is calculated after deducting allowable expenses, such as wages, rent, and other overheads.

Corporation Tax Rates:

The rate of corporation tax in the UK is determined by the government and can change each year. As of 2022-23, the corporation tax rate is 19% for all businesses, regardless of their size or the level of profits generated. However, it is important to note that from April 2023, the corporation tax rate will increase to 25% for businesses with profits of £50,000 or more, while small businesses with profits below £50,000 will continue to pay the 19% corporation tax rate.

Corporation Tax Deadlines:

As a small business owner, it is important to be aware of the corporation tax deadlines to avoid any penalties or fines. The corporation tax payment deadline is nine months and one day after the end of the company’s financial year. The tax return filing deadline is 12 months after the end of the company’s financial year. It is important to note that penalties can be imposed for late payment or filing of tax returns.

Corporation Tax Exemptions and Allowances:

There are some exemptions and allowances available that can help reduce a company’s corporation tax liability. For example, a company can claim tax relief on research and development (R&D) costs, capital allowances on certain investments such as plant and machinery, and relief on losses incurred in previous years.

Implications for Small Businesses:

The increase in corporation tax rate to 25% from April 2023, is set to affect businesses with profits of £50,000 or more, meaning they may pay more tax. Small businesses with profits below £50,000 will continue to pay the 19% corporation tax rate. The government has introduced this change to fund public services, including health and social care. Small businesses will need to consider the implications of the increased corporation tax rate on their profits, cash flow, and financial planning.

Planning for Corporation Tax:

Small businesses can take proactive steps to manage their corporation tax liabilities effectively. One approach is to ensure that their tax returns are filed accurately and on time, and that all available exemptions and allowances are claimed. This can help reduce their corporation tax liability and ensure compliance with tax laws and regulations.

Another approach is to seek advice from tax specialists who can help small businesses navigate the complex tax system and maximize their tax benefits. Tax specialists can provide advice on tax planning, business structure, tax reliefs, and other areas of tax that are relevant to small businesses.

Conclusion:

Corporation tax is a tax levied on the profits of limited companies, clubs, societies, and associations. Small businesses need to be aware of their corporation tax obligations, deadlines, and entitlements to avoid any penalties and manage their tax liabilities effectively. The increase in corporation tax rate to 25% from April 2023, will have implications for businesses with profits of £50,000 or more. Small businesses with profits below £50,000 will continue to pay the 19% corporation tax rate. To manage their corporation tax effectively, small businesses can seek advice from tax specialists and take proactive steps such as accurate and timely filing of tax returns and claiming all available exemptions and allowances.

In summary, understanding corporation tax is crucial for small business owners in the UK. By being aware of their obligations, deadlines, and entitlements, small businesses can manage their tax liabilities effectively and maximize their tax benefits. Seeking advice from tax specialists can also be helpful in navigating the complex tax system and planning for corporation tax. As the corporation tax rate is set to increase from April 2023, small businesses will need to consider the implications of this change on their profits, cash flow, and financial planning.

FAQS

What is corporation tax?

Corporation tax is a tax on the profits of companies and other types of businesses in the UK. It is a form of direct tax that is paid by businesses on their taxable profits.

Who needs to pay corporation tax?

All companies and other forms of businesses in the UK need to pay corporation tax on their taxable profits. This includes limited companies, foreign companies with a UK branch or office, and clubs, societies, and other unincorporated associations that generate income.

How is corporation tax calculated?

Corporation tax is calculated on the taxable profits of a business, which is the income received minus allowable expenses and deductions. The current corporation tax rate is 19%, but this is set to increase to 25% for businesses with profits of £250,000 or more from April 2023.

When is corporation tax due?

Corporation tax is usually due nine months and one day after the end of a company’s accounting period. For example, if a company’s accounting period ends on 31 December, its corporation tax payment is due on 1 October of the following year.

What happens if I miss the corporation tax deadline?

If a business misses the corporation tax deadline, it may face penalties and interest charges from HM Revenue and Customs (HMRC). The amount of penalty and interest depends on how late the payment is and the size of the business.

How can I reduce my corporation tax liability?

Small businesses can reduce their corporation tax liability by claiming all available allowances and exemptions, such as capital allowances, research and development relief, and employee benefit expenses. It is important to keep accurate and timely records to support these claims.

Should I seek professional advice for corporation tax?

It is advisable for small businesses to seek professional advice from tax specialists to help manage their corporation tax liabilities effectively. Tax specialists can provide guidance on tax planning, compliance, and claiming available tax reliefs and exemptions.