Corporation Tax – A Quick Primer

 In General

Any limited company, no matter how small, is liable for Corporation Tax. This quick guide will help you understand the basic principles behind this tax and what the implications may be for your business.

At this point it is worth noting that sole traders, traditional partnerships and LLPs are not subject to Corporation Tax requirements. Instead these businesses will need to complete a standard Self Assessment return.

What is Corporation Tax?

At the most basic level, Corporation Tax is a levy placed on the profits of every limited company registered in the UK. There are two Corporation Tax bands – the lower rate which applies to businesses with annual profits of £300,000 or less, and the upper rate which is levied on profits between £300,001 and £1.5 million. The lower rate of Corporation Tax is currently set at 20%.

It is your duty to inform HMRC that you are liable for Corporation Tax. You cannot assume that this is a standard part of creating a registered limited company.

When is it payable?

Corporation Tax is paid annually on all profits. In many cases you will need to pay your Corporation Tax bill before filing your annual company accounts because the deadlines for each are different. You will need to ensure HMRC receives payment of your Corporation Tax bill within nine months and one day of the end of your tax accounting period – this will usually coincide with your financial year end.

Your tax return and payment will need to be submitted electronically according to a specific data format. If you use a modern accounts package like Xero you will be able to send your submission at the click of a button.

How is it calculated?

Corporation Tax is calculated on a self-assessment basis. You will need to check your total annual profits and calculate the applicable percentage based on which tax rate applies.

How can I reduce my Corporation Tax obligations?

Your business may be able to claim Marginal Relief helping to reduce overall costs based on various factors. HMRC have a free Marginal Rate Relief calculator which should be able to confirm your eligibility and the amount of tax you must pay HMRC for the selected period.

Consult an accountant

To ensure your business is paying the right amount of Corporation Tax you should seek the assistance of a small business accountant. You should also consult with a suitably-qualified expert to see whether your business is liable for Corporation Tax or not.

Securing professional advice will help you:

  • Accurately calculate your profits and ensure all applicable business expenses have been deducted.
  • Assess whether any of your trading activities are exempt from Corporation Tax.
  • Identify whether any relief is available to help further reduce your tax bill.
  • Assist with submitting your return and completing payment of your bill.

You can also choose to have your accountant deal with HMRC directly on your behalf, helping to reduce your administrative burden.

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