Corporation tax is a key consideration for any limited company in the UK, as it affects the amount of profits retained within the business and the company's overall financial health. Understanding how much corporation tax you need to pay, how it's calculated, and the applicable rates is essential for effective business planning and compliance. In this blog, we will explore the corporation tax rates for limited companies, how it's calculated, and the important aspects that UK business owners need to be aware of.
What is Corporation Tax?
Corporation tax is a tax levied on the profits made by companies and other organizations, including limited companies, unincorporated associations, and certain clubs. For limited companies in the UK, corporation tax applies to the following:
- Trading profits: Profits from doing business or providing services.
- Investments: Income from selling investments or any property owned by the company.
- Chargeable gains: Gains from selling assets such as equipment, property, or shares.
Corporation tax is calculated on profits before dividends are paid to shareholders, meaning the company pays this tax directly on its earnings.
Corporation Tax Rates for a Limited Company
The rate of corporation tax for a limited company in the UK depends on its profits. As of the 2024/2025 tax year, the main corporation tax rate is 25%. However, the rate varies depending on the company's profit level due to the introduction of the "small profits rate."
- Small Profits Rate: Companies with profits of £50,000 or less are subject to a lower rate of 19%.
- Main Rate: Companies with profits over £250,000 are subject to the 25% rate.
- Marginal Rate: For companies with profits between £50,001 and £250,000, the rate is tapered between 19% and 25%. This creates a marginal tax rate, and companies in this range will pay an effective rate somewhere between the two.
How Corporation Tax is Calculated
Corporation tax is calculated based on a company’s taxable profits. This includes revenue from business activities, minus allowable expenses and any deductions. Let’s break down the steps involved in calculating your corporation tax:
- Determine Taxable Profits: Calculate the company’s total income, which includes revenue from trading, investments, and chargeable gains. From this, deduct any allowable expenses such as operating costs, salaries, business expenses, and pension contributions.
- Apply Reliefs and Allowances: The UK government allows certain reliefs and allowances that can reduce your corporation tax liability. These include:
- Capital allowances: Deductions for investments in plant, machinery, and equipment.
- R&D tax credits: Relief for businesses involved in research and development.
- Losses: If your company has made losses in previous years, these can sometimes be carried forward or back to reduce future or past profits, which could lower your tax bill.
- Calculate Tax Payable: Once your taxable profits are determined and applicable reliefs are accounted for, apply the relevant corporation tax rate based on your company’s profit bracket.
Payment and Deadlines
Corporation tax must be paid 9 months and 1 day after the end of your company’s accounting period. For example, if your company’s accounting period ends on March 31st, your corporation tax is due by January 1st of the following year.
It’s crucial for companies to ensure that they make timely payments to avoid penalties. HMRC (Her Majesty's Revenue and Customs) also expects limited companies to file their corporation tax returns online. The deadline for filing is 12 months after the end of the accounting period, but it’s always recommended to file as early as possible to avoid complications or fines.
Marginal Relief for Companies with Intermediate Profits
Companies with profits between £50,001 and £250,000 can benefit from marginal relief. This reduces the amount of tax payable for companies that fall between the small profits rate and the main rate. Marginal relief works by gradually increasing the tax rate as profits increase, so a company with profits close to £50,000 will pay slightly more than 19%, but less than 25%.
The marginal relief formula can be complex, but HMRC provides calculators to help companies determine how much relief they can claim.
Important Considerations for Limited Companies
- Tax Planning: Effective tax planning can help reduce your corporation tax liability. For example, making use of capital allowances and R&D relief can lower the amount of taxable profit.
- Dividends: Corporation tax is charged on profits before dividends are distributed to shareholders, meaning dividends are paid after the company has paid its corporation tax bill.
- Record-Keeping: Keeping accurate financial records is essential to ensure that all allowable expenses and deductions are correctly recorded. This helps in reducing taxable profits and ensuring you don’t overpay on corporation tax.
Final Thoughts
Corporation tax is a significant factor for any limited company in the UK. While the standard rate is 25% for profits above £250,000, smaller companies can benefit from a lower rate of 19%. Understanding how corporation tax is calculated, the rates applicable, and when payments are due is crucial to staying compliant with HMRC regulations. Suppose you're uncertain about your company's tax obligations. In that case, it’s always advisable to seek advice from an accountant or tax specialist to ensure you’re paying the correct amount and taking advantage of all available reliefs.