How much is corporation tax and what are the reliefs?

What is corporation tax?

Corporation tax is the main tax a limited company, a foreign company with a UK branch or office, or a club, co-operative or other unincorporated association, must pay.

It must be paid both on the company’s profits, investments and on any gains from selling assets (e.g. land, property or shares) that have increased in value.

Sole traders and partnerships don’t pay corporation tax but instead, pay income tax on business profits and capital gains tax (on any gain from the sale of assets).

You are responsible for paying the right amount of tax, so you must keep accurate company accounts and file a company tax return by your deadline.

What is the corporation tax rate?

Your company will pay corporation tax at the rates in its accounting period – that is, the money it makes in that accounting period, minus any overheads and expenses.

The rate of corporation tax may change from time to time, so you must ensure that you pay the correct rate that applies for your accounting period.

You can check the dates of your accounting period on your financial statements or on the government's website.

The latest corporation tax rates are as follows:

• Profits of £250,000 or more - Main rate of 25%
• Profits of £50,000 or less - Small profits rate of 19%

If your profits were between £50,000 and £250,000, you may be entitled to marginal relief.

Registering to pay corporation tax

You’ll need to register for corporation tax when you set up as a limited company (within three months of starting to trade).

Note that ‘trading’ may be any business activity from buying stock to placing an advert – it doesn’t have to involve making money.

Therefore you should register for corporation tax as early as possible to avoid a penalty.

Can I reduce my corporation tax bill?

You can lower your corporation tax bill in many ways, such as by claiming allowable expenses.

There are also various corporation tax reliefs available that can lower your final bill, if you qualify for them.

Corporation tax allowances

As with personal income tax for sole traders, there are certain allowable business expenses for a company that can reduce its corporation tax bill.

Any cost the company incurs solely to run the business should be deducted from the company’s profits before tax.

A long list of expenses qualify, including

• Purchase of raw materials
• Salaries of all employees
• Employers’ national insurance contributions (NICs)
• Employer pension contributions
• Business insurance
• Business-related travel and accommodation
• Training fees
• Accountancy costs

This is just a partial list. Expenses must be ‘wholly and exclusively’ for business reasons, without any personal use.

The company can’t claim for equipment you buy and keep for the business, as these are known as capital assets.

However, you may be able to claim capital allowances on these.

Corporation tax reliefs

Your company may also qualify for certain corporation tax reliefs.

Reliefs may be available on:

• Research and development costs
• Profit from patents
• Production of some creative media (e.g. TV, films, theatrical productions and video games)
• Losses that your business makes
• Disincorporation (if your company changes its structure to sole trader or partnership and needs to transfer assets to shareholders).

Find out more about making your business tax-efficient.

When is the corporation tax deadline?

If your taxable profits are £1.5 million or less, you must pay your corporation tax within nine months and one day of the end of your accounting period.

If your taxable profits exceed this, you will pay in instalments. See the HMRC website for more information on this.

Why you need to prepare your company tax return early

It’s important to note the deadline for paying corporation tax comes before the deadline for filing your company tax return, which is 12 months after the end of your accounting period.

You will need to prepare your company tax return well in advance of the deadline so that you know how much corporation tax to pay.

How to pay your corporation tax bill

HMRC accepts several payment methods for corporation tax.

Some take longer than others, so allow enough time if the deadline is near.

You can pay online, over the phone, via CHAPS or Bacs, your bank or building society or via a Direct Debit, but you may need up to five working days for the last option.