A Guide to Corporation Tax for your Company
The simplest way to explain corporation tax is to say that it is the equivalent of income tax for your company. Where we as individuals pay HMRC income tax on our earnings each year, your company will pay corporation tax instead.
Depending on how much profit your company makes in a financial year, your company will be charged at a certain rate. However, corporation tax is set at a more favourable rate than income tax rates for individuals.
Does my business need to register for Corporation Tax?
You can set up and run a business without registering it as a limited company with Companies House. In this case, you don’t need to register for corporation tax as this tax only applies to registered companies. However, if you are running a profitable business, there are certain benefits to going through the company formations procedure to turn your business into a limited company.
It would pay you to read up about Limited Company Advantages and Disadvantages if you are thinking about forming a company. You will see that going down this route can help to protect your personal assets should anything go wrong with your business. This benefit alone is well worth considering registering your business as a limited company.
Registering for Corporation Tax
One of the first major tasks you will need to do once you have formed your company is to register for corporation tax. It is imperative that you register your company for corporation tax within three months of when you start trading. If you fail to register on time you could end up facing a severe financial penalty, so it is important that you don’t delay registering.
To register for corporation tax you will first need to have your company’s 10-digit Unique Taxpayer Reference (UTR) handy. You need to have this number before you can register online for corporation tax.
You get your UTR number sent to you from HMRC within a few working days of your company registration with Companies House. If you cannot find your UTR, you can ask for your UTR online or you can call the HMRC helpline directly to request it on: 0300 200 3410 or Outside UK: +44 151 268 0571.
When contacting HMRC to register for corporation tax you will need the following information to hand:
- your company’s registration number (UTR)
- the date you started to do business (your company’s first accounting period will start from this date)
- the date your annual accounts are made up to
How much is corporation tax?
For all companies paying corporation tax, the current rate stands at 19%. The government made a pledge to reduce the rate of corporation tax year on year with a target of lowering the rate to 17% by 2020. There is a special rate for unit trusts and open-ended investment companies of 20%.
You can check the current rate of corporation tax online to keep up with all the latest rate changes.
When should my company pay corporation tax?
What most new company owners find confusing is that corporation tax rules means they have different payment deadlines than other business taxes, such as VAT and income tax. You also need to pay corporation tax before your file your company tax returns.
The rules for paying your corporation tax is to pay within nine months and one day of the end of your accounting period for the previous financial year. In most cases, a company accounting period will end on the 31st March. This means that you are required to pay your corporation tax by the 1st January the following year.
For brand new companies, this could mean that you end up having two accounting periods within your first year of trading, which can be confusing to understand.
If you run a business that has profits exceeding £1.5 million, then you will be required to pay your corporation tax in instalments.
Other corporation tax rules to note
Should your company not make any profit, or is actually loss-making, you will not be required to pay any corporation tax because the tax is based on profits. However, you will still need to declare to HMRC that you have nothing to pay to keep them updated of your financial position.
Make sure that you keep your accounts up to date and pay your corporation tax on time otherwise you will face a penalty from HMRC.
Does my company qualify for any allowances?
As a registered company, you are entitled to certain allowances, such as offsetting costs related to running your company against your profits. There are certain expenses that are allowed and others that are not. Only genuine expenses are allowed that have been incurred wholly, exclusively and necessarily in the course of running your company.
This means that you are not allowed to claim for expenses with a dual purpose, such as for personal and business use. Make sure that you keep all of your invoices and receipts so that you can prove your legitimate claims and expenses.
An example of some of the main company expenses that you can set off against your corporation tax include:
- Accommodation costs when away from the normal place of business
- Advertising and marketing costs for your business
- Authorised bank charges
- Business insurance
- Company car expenses
- Computer equipment and software
- Employers’ national insurance contributions (NICs) payable on salaries paid to company employees
- Executive pension contributions
- Hire purchase agreements in the company name
- Mobile and Smartphones registered in the company name
- Professional fees, such as accountant or solicitor
- Stationery, postage, and printing costs
- Telephone and broadband packages registered in the company name
- Training course fees relevant to your business
- Travel and parking costs, mileage allowance if using own vehicle
How do I pay my Corporation Tax?
You can pay your corporation tax online through the HMRC website. You can pay by debit or corporate credit card, however, there’s a fee if you pay by corporate credit card. You cannot pay with a personal credit card.
You will need your 17-character Corporation Tax payslip reference for the accounting period you’re paying. You can find this on any payslip that HM Revenue and Customs (HMRC) sent you
through your company’s HMRC online account.
You can also set up a direct debit to pay your corporation tax by registering for HMRC online services and setting up a direct debit directly with them online. You can also pay through online banking faster payments. This can be helpful if it is getting close to your corporation tax deadline. You will need your corporation tax reference number and HMRC’s bank details.
The best advice is to make sure you pay your corporation tax on time. If you are struggling to manage this by yourself, then it makes sense to keep on top of your company finances by hiring an accountant to manage your business finances and do your tax and VAT submissions for you.