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What is Corporate Tax?

July 16, 2021
As of 2020, there are 1.6 million companies in the UK that are eligible to pay Corporate Tax. If you own a limited company or are about to start one, you'll need to register for the tax too. Corporate Tax, otherwise known as Corporation Tax, is one of the most important taxes you'll pay as a limited company. Similar to how Income Tax deducts money from employees' salaries, Corporate Tax is deducted from companies' profits. In this guide, we'll talk you through what Corporate Tax is, how much you have to pay, where the money goes and how you can avoid any unnecessary penalties.  

What is Corporate Tax?

Corporate Tax, also called Corporation Tax, is a tax rate that companies pay on their profits. The rate is currently set at 19% for all companies, but it is expected to increase in 2023. Registering for Corporate Tax is one of the first things you must do after forming as a limited company. The tax is self-assessed, so make sure you study your company's profit receipts. Get comfortable as we delve into the world of Corporate Tax. 

Who pays Corporate Tax?

Limited companies and non-incorporated groups, such as societies and community groups, who turn a profit must pay Corporate Tax in accordance with UK laws.Foreign companies that have a UK office or branch also have to pay Corporate Tax. If your company only has a UK office or branch but is based elsewhere, you will only pay Corporate Tax on UK earnings.  This type of tax is not based on a profit margin or the size of a business.Your taxable profits will come from doing business, investments or assets that sell for more than they cost. The tax does not apply to self-employed individuals, sole traders, trusts or partnerships. Any business expenses from your company are also excluded from the tax, such as running costs and assets like equipment or machinery. Research and Development (R&D) projects are eligible for tax relief if they work in innovative areas such as science and technology. Charities are usually exempt from Corporation Tax, but they may have to pay if they have income that is not being used for charitable purposes. Even companies that don't have Corporation Tax to pay will still need to declare this via a 'nil to pay' form. HMRC will continue to send you reminders about payments otherwise. 

Why do I have to pay Corporate Tax?

Corporation Tax makes up over £50 billion of the government's annual £820 billion receipt income. Companies are required to pay tax on their profits to help the government with economic growth and development.Corporate Tax rates can work out cheaper than Income Tax, which is why many businesses find operating as a limited company more tax efficient.

When do I have to pay Corporate Tax?

Your business must register for Corporate Tax when registering as a limited company. This will need to be done within 3 months of when you commence business. The form for Corporate Tax registration is on the government's website. Before you start, you will need to have your company's Unique Taxpayer Reference, the date you began to do business and the date your annual accounts are made up to.  The tax period is aligned with your company's financial year. HMRC will tell you what the payment deadline is, although it is usually nine months and one day after the end of the accounting period of the financial year. New businesses may have 2 accounting periods in the year that it is set up. Businesses with more than £1.5 million in profits have to pay the tax in instalments.All companies are required to pay Corporation Tax electronically. It's important to pay by the deadline, otherwise you might incur a fine of up to 100% of the total amount of taxable income that is owed. The processing period will vary depending on the method you pay. Online or phone banking is the fastest and should occur on the same or the next day. Automated payments such as direct debit usually take up to 3 days, but it's worth checking your bank's individual processing time.

What is the difference between Income Tax and Corporate Tax?

How much is Corporate Tax?

The tax rate is currently set at 19% of your company's profits. The rate used to vary depending on the company size or income, but it has stayed almost stationary since 2017. A further reduction was announced at Budget talks in 2016, when the 19% was lowered to 17% for the financial year beginning 1 April 2020.Corporation Tax rates are set to change again in 2023. The rate will once again be based on a company's profit margin, rather than a flat rate for all.If your business' profit falls in the lower limit and makes under £50,000 per financial year, you will still be taxed 19%. However, if your business' profit is within the upper limit and makes a profit of £250,000 or more, you will be taxed 25%.Ring fence companies (businesses that make profits from oil or oil rights) are taxed at a rate of 30%. They can claim marginal tax relief on profits between £300,000 and £15 million.

Marginal relief

Companies that fall between £50,000 and £250,000 will have to pay 26.5% on their taxable profits. However, they will also be able to claim marginal relief. This rate will effectively bridge the gap between the lower and upper limits and will provide a gradual Corporation Tax increase.The profit limits are divided if your company has one or more associated companies. An associated company is defined as belonging to another company at any given time. You must divide the thresholds by the number of associated companies and the company they belong to. For example, if your company owns two others, you should divide the threshold by three. The lower limit would be £300,000 divided by three to become £100,000 and the upper limit would be £15 million divided by three to become £500,000. 

Penalties

You may face penalties if you don't meet the HMRC deadlines or requirements. HMRC will be more lenient if this was an accidental error on your part, rather than a deliberate action. There are instances where you may be excused from a penalty if you have a reasonable excuse. Examples of excuses can range from bereavement, serious illness and events outside of reasonable control. If you notice you have made a mistake with the tax payments, you must notify HMRC as soon as possible. The penalty is based on the reason for the late payment, which subsequently determines the percentage of the tax that you owe. If the late payment was non-deliberate, you will be charged a maximum of 30% of the potential lost revenue. If the delay was deliberate but you did not attempt to conceal it, you will be charged a maximum of 70% of the lost revenue. If the delay was deliberate and you attempted to conceal it, you will be charged 100% of the lost revenue.Interest charges can't be appealed but if you feel the penalty is a mistake, you can write to HMRC with an interest objection. You will usually have 30 days to raise a dispute via this form, stating what you don't agree with and why. HMRC will ask for detailed background information to assist their investigation into the objection and your company's circumstances. If you took reasonable care but still made a mistake, HMRC won't charge a penalty. It will also work in your favour if you tell HMRC about your error before they notice it. Your company must keep sufficient business records to help you calculate tax returns.

Repayments

What happens if I can't pay Corporation Tax?

If you are struggling to pay your tax bill in one go and it is less than £30,000, you can speak to HMRC. They will then try and arrange a Self Assessment payment plan for your company. You would be expected to pay in monthly instalments over a period of 12 months via direct debit, including the interest that is accrued. The payment plan isn't an option if you have other tax debts. The plan is also a one-off to give extra support to companies that are struggling. It is important to keep up with the monthly payments, otherwise, HMRC will cancel the plan and take legal action. If HMRC believes that you will be able to make the full payment, they will charge you the full amount as soon as you call them.Taxes can be time consuming, but they're easier to do if you stay on top of them. Take some of the pressure off by letting Ember help you with fuss-free tax management.
Daniel Hogan
Daniel HoganCOO & Co-Founder

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