Two people sat in an office talking | How to calculate Corporation Tax

Contents

  1. 1. How to calculate Corporation Tax
  2. 2. Corporation Tax rates and thresholds from April 2023

How to calculate Corporation Tax

March 7, 2023
If you’ve previously set up as a sole trader, you’ll know that the Income Tax payable to HM Revenue and Customs (HMRC) is based on the information submitted in your Self Assessment tax return.However, as a limited company, you’ll instead need to submit a company tax return, or Corporation Tax return, after your Corporation Tax payment deadline. As a result, working out how much Corporation Tax you owe is down to you.In this guide, we’ll break down how to calculate Corporation Tax, Corporation Tax thresholds and how you can use reliefs to offset this business tax and reduce your Corporation Tax liability.

How to calculate Corporation Tax

You can calculate Corporation Tax using the formula below:
Taxable Profit (Total Profit - Allowable Expenses - Capital Allowances - Losses - Depreciation) x Corporation Tax rate | How to calculate Corporation Tax
Where:
    Total profit is the company's profit for the accounting period before any business expenses are deducted. Allowable expenses are overhead expenses that the company can deduct from its profit. Capital allowances are deductions for the cost of assets known as plant and machinery that the company uses in its business, such as machinery or equipment. Losses carried forward are losses from previous accounting periods that can be used to offset profits in more profitable years. Current year losses are losses incurred in the current accounting period that can be used to offset taxable profits. Corporation Tax rate, which is currently set at 19%.

Calculate total profit

To work out how much profit your small business has made — if any — you’ll need to take a look at your profit and loss account.In doing so, you’ll find the total of all your business income, including sales income and interest on your savings.

Calculate business expenses

Your business expenses, or allowable expenses, are those that you can expect to use in your business on a daily basis.

In order for these to be considered tax deductible allowable expenses by HMRC, they must be used wholly and exclusively for business purposes.These business expenses are what you would typically classify as overheads, and include:
    Company formation costsRent and business ratesUtilities, including gas, water and electricOffice costs, such as stationery and office equipmentLegal and financial costsAdvertising, marketing and PR
div>If you’re not sure what you can claim as an allowable expense, get in touch with an Ember accountant for expert support.

Capital allowances

Capital allowances are tax reliefs on investments in equipment intended for long-term use. By claiming capital allowances, you can deduct part or all of an item’s value from your taxable profits before you pay Corporation Tax on them.

It’s important to note that you can only claim capital allowances on items deemed eligible on GOV.UK, such as:

    Items classified as plant and machineryRenovating business premises in disadvantaged areas in the UKExtracting mineralsResearch and development‘Know-how’, or intellectual property about industrial techniquesPatent rightsDredging allowancesStructures and buildings
While business vehicles are classified as plant and machinery, the rules for claiming capital allowances on cars are a little different. You can find out more about it in our guide to claiming capital allowances on cars.

Losses

If your company makes a loss from trading, the sale or disposal of a capital asset, or on property tax, it’s not all bad news — you can use these losses to claim relief from Corporation Tax.Your trading profit or loss is worked out by making tax adjustments to your profit and loss accounts, taking the following into consideration:
    Capital allowances, as these increase the lossBalancing charges, as these reduce the lossNot include any losses or gains that might be made on the sale or disposal of assetsInclude certain annuities and charitable donations, known as trade charges
Losses can be used to offset your Corporation Tax bill for the same year, but can be carried back to earlier accounting periods, or carried forward to offset future profits.
You can find out more about carrying back or carrying forward trading losses from previous years over at GOV.UK, or simply let Ember calculate your Corporation Tax in the most tax-efficient way for you.

Corporation Tax rates and thresholds from April 2023

As of 1st April 2023, the main rate of Corporation Tax is increasing from 19% to 25%.However, it’s worth noting that the 25% rate will only be apply to profits over £250,000. The small profits rate (SPR) is set to be introduced at the same time, where companies earning £50,000 or less will continue to pay Corporation Tax at a 19% rate.For companies earning between these two benchmarks, the main rate of Corporation Tax — 25% — will apply, but will be reduced a by marginal relief up until this £250,000 threshold.
Rate20232022
Small profits rate (companies with profits under £50,000)19%N/A
Main rate (companies with profits over £250,00025%N/A>
Main rate (all profits except ring fence profits)N/A19%
Marginal Relief lower limit£50,000N/A>
Marginal Relief upper limit£250,000N/A>
Standard fraction3/200N/A
Special rate for unit trusts and open-ended investment companies20%20%
Source: GOV.UK

Rachel Cameron-Potter
Rachel Cameron-PotterContent Marketer

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