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What is corporation tax?

Corporation Tax is based on the income of your business, and the rate depends on how much profit is generated.

The good news is that the rate is preferable to income tax; however the bad news is that you have to pay Corporation Tax early.

  • When do I need to pay Corporation Tax?

This is the main problem with Corporation Tax – the payment deadlines differs from other major taxes, such as VAT and income tax, and you need to pay corporation tax prior to filling your company tax return.

However, you have to pay your corporation tax within 9 months of the end of the accounting period for your earlier fiscal year. Therefore if, like various firms, your period of accounting ends on March 31, you have to reconcile your corporation tax bill by January 1 the subsequent year.

  • What is the Corporation Tax rate for a small business?

The Corporation Tax rate which is likely relevant to you is the small 20% profit rate. This relates to businesses with a yearly maximum profit of £300,000.

Another principle rate relates to organisations with at least £1.5m profit; this is described as the major rate, and it stands at 21% though set to change in 2015 to 20%).

Should your profits fall between the range of £300,000 and £1.5m, you’ll have to pay the main rate. Nevertheless, you can apply for marginal relief that is your corporation tax bill is reduced by a specific rate, which is based on the exact amount of profit made.

The method for estimating trivial relief is extremely difficult but thankfully, HMRC offers a calculator on its site to assist you determine it.

  • How do I pay Corporation Tax?

Currently, all payments in respect of corporation tax have to be made electronically – should you be used to paying by post you’ll have to find an alternative way of paying your bill.

Should you be desperate to hang on to the old way of doing things, and want to pay by cheque, you can still do so; however now you have to deposit the cheque using your building society or bank – HMRC categorise this as a digital payment.

Otherwise, you can make payment by direct debit – all you have to do is enrol for the online services of HMRC, then the site will take you through the direct debit procedure step-by-step. Provided you can wait for five days for the payment to go through, you shouldn’t have any problems.

Payment can also be made via debit or credit card – Although, to do so, you will need to go by means of BillPay, the service offered by Santander Corporate Banking.

A transaction fee of 1.4% will be incurred while making payment with credit card. Also it is important to note that Diners cards and American Express are unacceptable.

Paying through BillPay, you must have your debit or credit card number to hand, together with the reference number of corporation tax. This method of payment usually takes only three days. It is quicker to some extent than direct debit.

Should you choose to use your telephone banking service or internet, or BACS, to make the payment, then this is also okay.  All you need are your corporation tax reference number together with your HMRC’s bank details. Again, this’ll take around three working days to go through.

However, if you are really up against it and it is urgent you make your corporation tax payment, you have a method known as CHAPS. This approach may be costly, but it will guarantee the money gets to HMRC from your bank the same day.

Do bear in mind that the majority of financial banks only permit CHAPS payments within a specific time frame – should you endeavour  to pay outside that frame, it is likely you will not have much joy.

  • Is the Corporation Tax rate for small companies falling?

Yes, it’s coming down. Chancellor George Osborne declared a 2% reduction in the major Corporation Tax rate in his 2013 Budget. As planned for further reductions, the major rate will reduce in 2015 to 20%, uniting the rates of Corporation Tax.

What is corporation tax? Your Company Formations

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What is corporation tax? Your Company Formations

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