As a business owner, you need to understand the tax implications on the profits you make. To continue operating your business, you must calculate your taxable income and pay the tax you owe on time. If you are running a small business, then you should know which corporation tax rate applies to it. This guide will cover everything you need to know about how to calculate corporation tax for a small business.
First, let us discuss the definition of corporation tax. Then we can move on to its calculations.
What is Corporation Tax?
In the UK, a tax applies to the annual profits that limited companies generate. This is called Corporation Tax. Not only do you owe tax on the profits of the company but also on any gains that you make by selling assets. For example, property, land, and shares. These are all assets that increase in value with time.
When sole traders and partnerships make profits, they owe income tax on them instead of Corporation Tax. Moreover, they must pay capital gains tax on any gain they make by selling assets.
It is crucial to maintain accurate company accounts and submit a Company Tax return by the deadline. Please note that it is your responsibility to pay the correct amount of tax.
What is the Corporation Tax Rate 2024?
For all limited companies, the UK Corporation Ta rate currently stands at 25%. This is an increase from the previous 19% tax rate, which was applicable until April 2023.
Any company that makes taxable profits of £250,000 or above, must pay a Corporation Tax at 25%. If a small business makes taxable profits of £50,000 or less, they must pay Corporation Tax at 19% only. If your company makes taxable profits between £50,000 and £250,000, then marginal relief applies. This causes a gradual increase in the average CT rate. That is why it is important to know how to calculate corporation tax.
The table below shows the current Corporation Tax rates:
|Taxable Profit Level
|£250,000 or more
|£50,000 or less
|Between £50,000 and £250,000
|Marginal relief may apply
Who Needs to Pay Corporation Tax?
Annual profits of every taxable UK limited company are subject to Corporation Tax. However, unincorporated organisations can also owe Corporation Tax. For example, trade and housing associations, clubs, members, and co-operatives.
The responsibility to ensure the filing of Corporation Tax return with HMRC lies with the company director. They must see to it that payment of taxes is made by the deadline. To prepare their Corporation Tax returns, companies can hire tax specialist accountants. Nevertheless, it is still the company director’s legal responsibility to deal with it.
How to Pay Corporation Tax
You can pay Corporation Tax electronically. It is possible to do so at a post office or at a bank. There are various options such as paying by CHAPS, over the phone, or online. This is in case it is necessary to make the payment on the same day. It typically takes three working days for direct debits, Bacs transfers, and credit or debit card payments. If you require full instructions, you can visit the government website.
How to Calculate Corporation Tax for Small Business
You require accounting skills and comprehension of what tax reliefs your business can qualify for to calculate corporation tax. Please note that it is ideal to reach to a business accountant to help complete your corporate tax return correctly.
Calculate Your Sales and Income
First, to figure out how much you owe, you must create a profit and loss account. Adding up all sales income that your business generates is necessary. Additionally, you must add any interest you earned. For example, interest on a business savings account.
Calculate Your Overheads
Next, you must calculate your overheads along with any other business expenses. To work out the profit your business generates, you need to deduct them from your trading income.
Moreover, to make sure you do not pay more tax than you owe, you should claim all allowable expenses from the trading income. More on allowable expenses later.
Write Off Capital Allowances and Add Depreciation
Any money you spend on fixed assets you keep in the business for multiple years is called capital expenditure. For example, plant equipment, furniture, and computing equipment.
Over time, the assets’ value will depreciate. Therefore, they are not expensed in your accounts directly. Rather, it will take several years to write off the costs of these items in the accounts.
Nevertheless, you must add it back to your taxable profit calculation as it is not an allowable expense. This means you cannot claim it. Therefore, it is crucial to know how to calculate corporation tax.
Add Entertainment Expenses
On any costs that relate to entertaining clients and suppliers, you cannot claim VAT or tax relief. Trips to events, gifts, and business lunches are all examples as such.
Example of a Corporation Tax Calculation
Here is an example to elaborate:
Suppose the total income from your business is £120,000. Furthermore, your business bought capital equipment worth £2,000 over the past year. This equipment will depreciate at £600 a year over three years. Additionally, your entertainment costs are £700.
To calculate your corporation tax, you must add back entertaining costs and depreciation to the profits. Afterwards, you need to deduct any capital allowances. Then, you will arrive at the profit value that is subject to corporation tax.
Total income = £120,000 (total sales plus interest income) Total overheads = £70,000 Profit before accounts = £50,000 (£120,000 - £70,000) Add back: Depreciation = £600 Client entertaining = £700 Add 700+600 = 1300, 50,000+1300 = 51,300 – 2000 = 49,300 Capital allowances = £2,000 Profit liable to corporation tax = £49,300 Tax due = 19% of £49,300 = £9,367
Since it is a small business that made a profit of £50,000 (or less), a 19% rate applies to it. Now, you know how to calculate corporation tax for a small business.
Do You Need to Register to Pay Corporation Tax?
Yes, you must register for corporation tax when setting up a limited company. You must do so within three months of beginning to trade. What does trading entail? Well, it is any business activity including placing an advert and buying stock. Making money is not a necessity. To avoid facing a penalty, it is ideal to register for corporation tax as soon as you can.
When is the Deadline for Paying Corporation Tax?
Typically, you must submit your Corporation Tax return within 12 months after the end of the accounting period, which the tax return covers.
However, it is important to note that the deadline to pay your Corporation Tax bill is different. The last day to pay your CT bill is 9 months and one day after the end of the accounting period. For large companies, it is possible to owe CT in instalments. Therefore, some of these payments can be due in the accounting year rather than the end of the year. It is vital that you know how to calculate corporation tax.
If you miss the deadlines, you will face penalties.
What are the Penalties for Missing the Deadline?
When you file your Corporation Tax return late, the following penalties apply:
|Missed the Deadline By
|Over 3 months
|Over 6 months
|10% in addition to your unpaid CT
|Over 9 months
|Additional 10% of any outstanding CT
Furthermore, the £100 increase to £500 when your Corporation Tax return is late three times consecutively. For more information, you can visit gov.uk.
What If You Submit Your Corporation Tax Return with Incorrect Information?
You must deal with the consequences of submitting a corporation tax return with inaccurate information. Fines are simply the starting point.
HMRC perceives your errors in various ways. Therefore, the severity of the inaccuracy of information determines the penalty. This includes your intentions, such as deliberation and attempt to conceal. Furthermore, it is crucial to understand the methods to calculate corporation tax.
Suppose there are accidental errors in your Corporation Tax return, and you inform HMRC. Then, you will face a fine. This fine is between 0-30% of the total amount of your CT bill. Whereas if you do not inform HMRC about these accidental errors, then you owe a fine of at least 15% if HMRC finds out.
In case you make deliberate unconcealed inaccuracies and inform HMRC regarding them, you owe a fine between 20-70%. However, if you fail to disclose them, you will end up paying a fine of 35-70% when HMRC finds out.
The most serious type of inaccuracy is the one you make deliberately and conceal. This can lead to you paying a fine between 30-100%. This is if you inform HMRC. If you hide it and HMRC still finds out, then you owe a fine between 50-100%.
You owe higher penalties in case the inaccuracies relate to offshore issues.
Therefore, it is of utmost importance that you pay attention to every detail when completing your Corporation Tax return. Also, you need to clearly understand the information which you are submitting to HMRC.
To make sure your Corporation Tax return is accurate and free of mistakes, you can hire business tax accountants.
How to Reduce Your Corporation Tax Bill
Fortunately, there are various methods to lower the Corporation Tax bill you owe. You can do so by claiming certain allowable expenses. Furthermore, if you are eligible for tax reliefs, they can also help reduce the amount of corporation tax bill.
What are the Corporation Tax Allowances?
Just as sole traders can reduce the amount of income tax they owe, companies can also lower their corporation tax bill. They can do so with the help of allowable business expenses. Undoubtedly, you must comprehend how to calculate corporation tax for a small business.
These allowable expenses include any cost that your company deals with for business purposes only. You should deduct these costs from the profit of the company before tax. Fortunately, there is a long list of allowable expenses, including:
- Employers’ National Insurance Contributions (NICs).
- Stock purchased for reselling purposes.
- Business insurance.
- Acquisition of raw materials.
- Earnings of all employees.
- Accountancy expenditure.
- Employer pension contributions.
- Accommodation and travel for business purposes.
- Training fees.
Please note that this list is incomplete. It is vital that the expenses you incur are solely for business purposes and not for your personal use. Certainly, you must know how to calculate corporation tax.
Your company cannot claim for any plant or equipment that it purchases and keeps for the business. This is because they are capital assets. Nevertheless, it is possible to claim capital allowances on them.
What are the Corporation Tax Reliefs?
Additionally, your company can reduce its corporation tax bill if it qualifies for certain tax reliefs. Reliefs can apply to the following:
- The revenue from patents.
- Development and research expenses.
- The creation of certain artistic mediums, such as video games, TV shows, movies, and theatre productions.
- Disincorporation (if your business needs to transfer assets to shareholders after changing to a sole proprietorship or partnership structure).
- Losses incurred by your company.
To summarise, depending on how much profit your business generates, corporation tax will apply. It is important to register your business and file your corporation tax return with HMRC. Make sure that your tax return is accurate. Otherwise, you can end up paying penalties. Please note that there is deadline for submission. Fortunately, there are ways to lower your corporation tax bill, such as claiming allowable expenses and qualifying for tax reliefs.