What is corporation tax?

Corporation tax is a tax that companies pay on their profits. Yep, it’s as straightforward as that. If your business makes a profit (and fingers crossed it does), you’ll need to pay a portion of that profit to the government. This tax applies to all UK-based companies, including limited companies, clubs, societies, associations, and even some charities.

How much is Corporation Tax?

The standard corporation tax rate in the UK depends on a few factors it's between 19% and 25%. However, this rate can change, so it’s always good to keep an eye on the latest updates from HM Revenue and Customs (HMRC).

What counts as profit?

Profits include the money your company makes from doing business (trading profits), investments, and selling assets for more than they cost (chargeable gains). Basically, if it’s money coming in and staying in, it’s likely part of your taxable profit.

How do you pay corporation tax?

• Calculate Your Taxable Profits: Start by working out your company’s profits for the accounting period.

• File a Company Tax Return: You’ll need to file this with HMRC, typically within 12 months of the end of your accounting period.

• Pay the Tax: You must pay your corporation tax within 9 months and 1 day after the end of your accounting period. Late payments can result in hefty fines, so set a reminder!

How to reduce your corporation tax bill

There are deductions and allowances that you can take into account to reduce your corporation tax bill legally. These include:

• Business Expenses: Running costs like office supplies, salaries, and rent can be deducted from your profits.

• Capital Allowances: Claim for the depreciation of assets like machinery or equipment.

• Research and Development (R&D) Relief: If your company works on innovative projects, you might be eligible for R&D tax relief.

It's worth noting that not all expenses are equal, see our article on capital purchases for more information.

Final thoughts

Paying taxes isn’t the most exciting part of running a business, but understanding corporation tax and keeping on top of it can save you a lot of stress—and potentially money—in the long run. Keep good records, know your deadlines, and don’t hesitate to get professional advice if you need it.