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How to pay Corporation Tax

November 28, 2022The type of tax you pay depends on the business structure you register your small business as. Sole traders typically have less paperwork to worry about than limited companies, but for growing businesses operating as a limited company may prove to be more tax efficient in the long run.A lot of this comes down to the type of tax and the set rate for each tax type. For instance, sole traders earning above the top rate can pay up to 45% in Income Tax on their earnings, whereas limited companies only need to pay Corporation Tax on their profits.In this article, we’ll be explaining what the Corporation Tax is, who needs to pay it and how to reduce your total tax bill.

What is Corporation Tax?

Corporation Tax is a type of business tax paid by limited companies at the end of the company’s financial year.The Corporation Tax rate is currently set at 19% of a company’s taxable profit. This is the company’s total profit minus any allowable expenses and capital allowances.As a business owner, you’ll need to file a Corporation Tax return to declare your income and business expenses to calculate your Corporation Tax bill.When you need to file your company tax return, as well as your annual accounts, depends on your accounting period. This is the period of time your accounts covers and is typically 12 months, but can be up to 18 months depending on when you start your company.While your Corporation Tax return is due 12 months after the end of your company’s accounting period, payment is due 9 months and 1 day after the end of the accounting period.This means that your Corporation Tax payment is due before your tax return, so it’s good practice to prepare the return in advance to know how much you owe. The due date can vary, however, based on the amount you earn — more on that later.

How do I register for Corporation Tax?

If you’re setting up your first small business, you’ll need to register your new company with Companies House. At the same time, you’ll be registered for Corporation Tax. You’ll need to do this within 3 months of setting up your business.

How to pay Corporation Tax

To pay your Corporation Tax, HM Revenue & Customs (HMRC) gives you the choice from from any of these payment methods:

Direct debitBank transfer or BACS using your debit or credit card (online, telephone banking or at your bank)CHAPS (a faster payment method)Cheque at your post office

To avoid any late payment penalties, be sure to factor in how long it takes for each payment method to clear. Typically this is a few working days, so if you’re short on time CHAPS might be your best bet, as the payment can clear in a matter of hours.

What should I do if I don’t have any Corporation Tax to pay?

Even if you don’t have any Corporation Tax to pay, you still have to file a company tax return to HMRC.The process for informing HMRC of this is pretty straightforward. Here are your two options:

Fill out what is known as the ‘nil to pay’ formWrite ‘NIL due’ on the payslip HMRC would have sent you

Who needs to pay Corporation Tax?

All UK-based limited companies that operate in the UK must pay Corporation Tax, including those headquartered outside the UK but generate revenue from branches based in the UK. In this instance, these companies will only need to pay Corporation Tax on their UK profits.However, if your company is UK-based but has offices across the globe, you’ll need to pay Corporation Tax on all your profits — not just your UK one.Self-employed sole traders are exempt from paying Corporation Tax and instead need to file a Self Assessment tax return by 31st January to work out their tax bill. This is set to be replaced by Making Tax Digital for Income Tax in April 2024.

How to reduce your Corporation Tax bill

To help businesses reduce their Corporation Tax bill, the government has a number of tax reliefs in place that business owners can claim.These aim to reduce your taxable profit by increasing your total business expenditure. With these reliefs, you can deduct the business expenses from your company’s profit, lowering your taxable profit — and as a result, the 19% you need to pay. Here’s just some of the reliefs you can claim as a small business:

Allowable expenses

These are business costs that go towards the day-to-day running of your business, ranging from salaries, pension contributions and utility bills.

Capital allowances

When is my Corporation Tax due?

Here’s how to calculate your business’ Corporation Tax due date:

Can I pay my Corporation Tax early?

Paying your Corporation Tax early is not only possible, but actually encouraged. What’s more, you actually get a thank you in the form of a 0.5% interest when you pay your Corporation Tax early.

What happens if I submit a payment late?

As you’ve guessed by now, there are indeed penalties for Corporation Tax late payments. The penalty will be 3.25% of the amount due, and is payable for each day that passed after the deadline, until HMRC finally receives your Corporation Tax.In addition to penalties for late filing of Corporation Taxes, there are also penalties for inaccurate information and late filings of tax returns. These penalties vary, with the lowest one being £100, and the highest being 20% of the amount due. So it’s in your best interest to set yourself a reminder so you don’t miss your deadline. Better yet, sign up with Ember and we’ll do it for you.