What is corporation tax? Rates, calculations and how to pay

Published • 01/07/2024 | Updated • 01/07/2024

Taxes

What is corporation tax? Rates, calculations and how to pay

Published • 01/07/2024 | Updated • 01/07/2024

Taxes

When you start working for yourself, one of your first big decisions will be choosing the legal structure of your enterprise. Whether you become a sole trader, enter a partnership, or form a limited company, each type of business entity comes with unique responsibilities which will impact the way you operate.

For example, setting up a limited company requires you to keep accurate records, file a company tax return, and pay corporation tax on your company profits.

Staying on top of corporation tax ensures you won’t incur penalties and gives you a clearer picture of how your business is doing, which can really help when you’re planning what’s next. 

If you’re wondering “What is corporation tax?”, we’ve got you covered in this guide. We’ll also talk through corporation tax registration, corporation tax rates 2024 and how to pay corporation tax, plus we’ll delve into small business tax tips to help you keep more of your earnings.

Corporation tax isn’t just for limited companies. Foreign companies with a UK branch, as well as clubs and cooperatives – even your local sports club or community group – need to handle corporation tax too.

What is corporation tax?

The corporation tax definition is straightforward: it’s the tax your company must pay on its profits, after deducting expenses like wages and raw material costs

It’s important to note that corporation tax doesn’t just apply to profits made from core business activities like the sale of products or provision of services. It also encompasses financial gains from the sale of assets like shares, property, or land. 

Sole traders and partnerships don’t pay corporation tax, as these entities don’t involve the creation of a legally distinct company which is taxable in its own right. 

As a result, entrepreneurs working as sole traders or partners only have to concern themselves with income tax, National Insurance Contributions, VAT for small business, and capital gains tax.

How much is corporation tax?

Corporation tax rates 2024 are as follows:

  • 19% small profits rate – For businesses with profits under £50,000.

  • 25% main rate – For businesses with profits over £250,000.

If your profits fall between £50,000 and £250,000, corporation tax marginal relief reduces the rate you pay on a sliding scale. 

How is corporation tax calculated?

All taxable limited companies must pay corporation tax on profits, and the responsibility of company directors to work out how much is owed. 

Calculating corporation tax can seem a bit tricky at first, but taking a methodical approach makes it more straightforward. These are the steps involved in working out what to pay to HMRC:

  1. Figure out your taxable profits

  2. Apply capital allowances

  3. Apply other reliefs

  4. Apply the correct tax rate

Let’s look at each of these in more detail.

1. Figure out your taxable profit

Start by determining your business’s total gross income for the year, which includes everything earned from sales, services, and other sources. Don’t forget to include any chargeable gains from the sale of business assets.

From this combined total, subtract all allowable expenses. The list of such tax deductibles is long, but essentially, if it’s a cost necessary to run your business, you can likely deduct it. Here are some of the main allowable expenses:

Startup costs

Covers costs to meet the legal requirements for starting a small business, like company registration fees and domain names to match your business name ideas. If it took a while to launch your business, you can also claim pre-trading expenses (going back 7 years).

Office or shop space and utilities

Rent and utility bills are deductible from your business profits. Additionally, directors working from home can claim £6 tax relief weekly without receipts, which counts as an allowable expense. Be sure to look into additional schemes for more potential savings.

Paying your team

Trim profits by deducting salaries and health insurance. Gifts under the value of £50, such as that festive bottle of Champagne at Christmas, can be included, which is ideal if you’re thinking about how to motivate employees. Investing in training employees is also smart; relevant courses sharpen skills and are a tax-deductible expense.

Materials and stock

Whether you’re exploring things to make and sell through an online store or stocking the shelves of a retail outlet on the high street, you can deduct the cost of the raw materials or inventory that keep your business running from your taxable profits.

Marketing and advertising

Money spent on promotions is tax deductible, ideal if you’re looking to boost customer acquisition or customer loyalty rates through proactive marketing strategies, or perhaps looking to understand your sector better by way of market research.

Travel for work

Costs associated with business travel like transport, hotels, and meals are allowed. This is useful if you attend small business networking events or trade fairs outside your local area, or if you have to travel to meet with clients.

Professional services, insurance, and software

Deduct costs like accountancy and legal fees, insurance policies like small business risk management cover, and expenses relating to software and professional memberships. These deductions lower your bill while putting expert advice, protection, and tools close at hand.

Interest payments or finance costs

If you finance new assets for your business, like a self-service kiosk for your bar, you can deduct interest payments or finance costs from your profits (the cost of the asset itself comes under capital allowances).

Depreciation

This is the wear and tear on physical assets like machinery and office equipment. To calculate it, you can use either a straight-line method, where you spread the cost of the asset evenly over its useful life, or the reducing balance method, which speeds up depreciation in earlier years.

Everyday costs and equipment

Another simple way to reduce your tax bill is to keep track of smaller expenses like stationery or coffee for your team. These smaller costs may seem insignificant but add up over time.

Bad debt

If you have invoices that haven’t been paid and you can’t collect the money, you may be able to write off these amounts as bad debts.

Reduce the risk of bad debt

Make it simpler for clients to pay you on time with SumUp Invoices. This smart invoicing software automates the creation of these crucial documents and offers various payment options so your customers can pay anytime, anywhere they’re online. Send invoices on the go through the SumUp app, and we’ll let you know the minute your money arrives.

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2. Apply capital allowances

Capital allowances are a form of tax relief for your business. They allow you to subtract some or all the value of equipment, machinery and fixed assets you intend to use on a long term basis.

Capital allowances are available on:

  • Equipment like card machines and point-of-sale systems

  • Machinery such as commercial kitchen equipment for a food and drink business

  • Business vehicles like vans or cars

Until March 2026, the full expensing initiative lets businesses claim 100% capital allowances on these kinds of capital asset investments. This tax break can save you up to 25p for every pound invested, and can be a motivating factor if you’re planning to purchase equipment to help advance your business growth strategies.

3. Apply other reliefs

There are various other ways to secure tax cuts based on your business activities. Depending on your enterprise, you may be able to claim for:

  • Research and development (R&D) relief – Great if your business is cooking up something new. Doing a SWOT analysis might help you spot areas where your business has potential to innovate.

  • Relief for creative industries – For businesses in animation, film, television, theatre, or video games.

  • The Patent Box – Benefits companies earning from patented inventions.

  • Relief on goodwill – Useful if your business has acquired goodwill through a merger or acquisition.

  • Disincorporation relief – You can use this if you’re closing your business to become a sole trader or form a partnership.

  • Losses – Relief is available on trading losses, as well as on losses from things like property income or the sale of an asset.

Had a year in the red? You can often carry forward this loss to knock down profits in the future or offset future profits. This move not only reduces your tax bill but can also help keep things stable as you work on how to scale your business.

4. Apply the correct tax rate

The last stage in working out your corporation tax bill is to apply the appropriate tax rate to your taxable profit.

Remember, if you’re only just thinking about how to start a business, the small profits rate of 19% will likely apply as you get your venture underway. For profits sitting above £50,000 but below the £250,000 main rate threshold, you can find out the percentage that applies to your business using the HMRC marginal relief calculator.

Corporation tax example

So far there’s been a lot to digest regarding the various factors affecting corporation tax calculations. So let’s now clarify the process by looking at how a hypothetical business might pay corporation tax.

Imagine you’re exploring how to make extra money and decide to start a part-time consultancy offering small business cyber security solutions. You register as a limited company rather than a sole trader to present a more professional image to potential major clients.

After accounting for overheads like travelling for client meetings and investing in the necessary software, your business earns a pre-tax profit of £23,000. Since this amount is below the £50,000 threshold, you can use the small profits rate of 19%, leading to a corporation tax bill of £4,370. After taxes, the net profit stands at £18,630.

Remember, a limited company’s profits belong to the business. However, as the owner, you typically decide how to use them. For instance, you might reinvest some profit into advertising, or perhaps a new portable card reader which will allow you to accept payments from your customers on the spot.

If you decide to take money out for yourself, such as by paying yourself salary and dividends, then income tax and National Insurance Contributions will typically be due.

How to register for corporation tax

Businesses usually sign up for corporation tax at the same time as registering with Companies House. This can be done online and costs £50 by debit or credit card. You can also use this service to register as an employer for PAYE.

When you register, you’ll need to provide personal info about yourself and any shareholders or guarantors. In return, you get a certificate of incorporation with your new company’s registration number and date of formation. Your 10-digit UTR (unique taxpayer reference) follows by post.

You must create new Government Gateway credentials when you register a business; any existing personal login details won’t work for this.

You can also register new businesses by post, through an agent, or with third-party software. However, the costs for these services can vary, and using them means you’ll have to do a separate corporation tax registration.

Alternative registration process

If you do need to sign up for corporation tax separately, say if you’ve registered your new business by post, there’s a slightly different procedure to follow.

In this case, you register through your business tax account. Access to the Government Gateway will be needed to create this account, as well as your UTR.

You’ll also need:

  • Your company registration number

  • The date you started doing business

  • The date your business’s annual accounts are due

  • Corporation tax registration deadline

The deadline for registering your business for corporation tax is three months after starting any business activities. This includes not just selling products or services, but also activities like buying stock, advertising, or hiring employees.

What happens after you register?

After you register, you’ll get your corporation tax activation code in the post, along with instructions for how to get set up for the corporation tax online service.

A dedicated business account

Another key step at the start of your entrepreneurial journey is opening a business account so your finances can be clearly tracked. Set up quickly from your phone, the SumUp business account offers three free ATM withdrawals monthly, unlimited free GBP transfers, and a Mastercard for day-to-day spending. There are no set up costs or monthly charges to worry about either.

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How to file your corporation tax return

You won’t receive a bill for corporation tax. Instead, HMRC sends you a notice to deliver a company tax return. It’s down to a company’s directors to ensure this task is completed accurately and on time.

Unless you have a reasonable excuse to use a paper form, or want to file your return in Welsh, company tax returns are filed online. You’ll need access to HMRC online services and should have details of your taxable profits to hand. This is a task many entrepreneurs prefer to leave to accountants.

Corporation tax return deadline

The deadline for submitting your company tax return (form CT600) is 12 months after your accounting period ends. This is usually the same 12 months covered by your business’s annual accounts.

For example, if your business’s financial year runs from 1 June to 31 May, your deadline would be 31 May the following year. You must file a company tax return even if your business makes a loss or has no corporation tax to pay.

To keep things streamlined when you file corporation tax returns, you can tick off another legal requirement for your business by submitting your annual accounts at the same time.

Just keep in mind that the deadline to submit annual accounts is a bit shorter than for tax returns. Annual accounts must be filed nine months after your business’s financial year ends, or 21 months from the date you signed up with Companies House if it’s your first time.

How to pay corporation tax

Next, let’s look at how to pay your corporation tax. There are several payment options, including:

  • Direct Debit

  • Online bank account

  • Online or telephone banking (Bacs, Faster Payments, and CHAPS)

  • Debit or corporate credit card

If you have a paying-in slip, you can also pay at your bank or building society (cash or cheque only). Corporation tax can’t be paid by post.

With all options, you must use the correct corporation tax payment reference number. This is sometimes called a corporation tax UTR but shouldn’t be confused with your regular UTR. Corporation tax payment reference numbers have 17 characters and change with each accounting period, meaning you’ll use a different one for each bill.

You can find the correct reference number in your HMRC online account and on your notice to deliver your tax return, as well as on any reminders you get from HMRC.

Remember to leave enough time for payments to process – some options take a few days. And if you have nothing to pay – for example, if your business has made a loss –  you should let HMRC know by submitting a nil to pay form. This is on top of submitting your tax return and should ideally be done beforehand.

Corporation tax payment deadline

For most small businesses (those with taxable profits up to £1.5 million), the corporation tax due date is nine months and one day after the end of their accounting period. If you’re just kicking things off, you might deal with two accounting periods in your first year.

Just a heads up: while this deadline roughly matches when you need to submit your annual accounts, it lands three months before your corporation tax return is due. It’s a bit awkward, so keeping your books tidy is key – not just to avoid last-minute headaches, but also because HMRC will tack on interest if you’re late on payments.

For businesses with taxable profits over £1.5 million, the rules are different. These larger businesses pay corporation tax in installments.

How to manage corporation tax

Getting a handle on corporation tax is really important for any business owner. While there are no magic solutions for reducing how much you have to pay, good financial management and a bit of strategy can go a long way. 

Here are some tips to help put your business on the right path.

Directly pay business expenses

Always use a business account for covering expenses. It helps make bookkeeping for small businesses easier and working out tax payments simpler.

Use accounting software

Accounting tools for small businesses offer varied features that can make life a lot easier for entrepreneurs, whether you’re looking for technological assistance when working out how to do a payroll, or you’re tracking different tax relief measures you’re entitled to.

Stay current with bookkeeping

Whether you’re getting one of your side hustle ideas off the ground or launching into a whole new career, up-to-date records will make managing tax easier. Remember, corporation tax payments come before your return deadline, so staying organised is essential.

Plan for tax payments

Some business owners end up using tax funds to boost working capital during slower times. However, to avoid falling short when the tax deadline approaches, you could consider setting up a separate account to keep this money aside. You might also settle your tax bill early; HMRC typically pays interest if you do.

Review finances regularly

Set time aside to go over your small business finances often. This practice isn’t just about preparing for corporation tax; it helps you keep on top of cash flow and spot business opportunities or challenges early.

Bring in the experts

If managing corporation tax seems daunting, you might consider hiring employees with finance skills. That said, many small business owners opt to hire an accountant or tax advisor to ensure compliance and identify ways to reduce bills, from smart pricing strategies to charitable donations.

A cost-cutting subscription

Another way to keep business costs down while maximising efficiency is via a SumUp One subscription. This plan can save over 40% on payment transaction fees, provide heavily discounted card readers, and access to smart invoicing software. Plus, all payments are guaranteed to be with you by 7am the next day, even on weekends and public holidays.

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Disclaimer: The contents of this page are intended for informational purposes only and should not be construed as professional advice. For matters requiring legal or financial expertise, it’s recommended to seek guidance from qualified professionals.

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