What is Corporation Tax?

Corporation tax is paid by all businesses big and small on any profits they make. Find out what corporation tax is, how it affects businesses and how to pay it
What is Corporation Tax?

Corporation tax makes up about 9% of the income the government generates. It’s an essential tax that the majority of businesses must pay on their profits.

Corporation tax is paid by all businesses big and small on any profits they make. Much like income tax, it goes towards funding essential services like education and healthcare. Regardless of how much profit you make, you have to pay corporation tax. Here’s everything you need to know about calculating and paying corporation tax.

What is corporation tax?

Corporation tax is a tax on certain types of businesses. It’s like the business equivalent of income tax but you don’t have a personal allowance where a threshold of your profits are tax-free.

Corporation business tax applies to limited companies, any foreign company that has a UK branch or office, or a club, co-operative or unincorporated association.

It’s charged on any profits you make from trading, profits made from investments, or profits made from selling assets. You don’t pay corporation tax on any business expenses. For example if your revenue was £50,000 and you had £10,000 in expenses, you would pay a 19% tax rate on the remaining £40,000 which works out at £7,600.

Corporation tax rates have been very steady for the last six years, peaking at 23% in 2013-14. In previous years, higher profit margins were subjected to higher rates of tax. However now any profits are taxed at 19% regardless of how much you make. From 2020, the corporation tax rate will be reduced to 17%.

How does corporation tax affect a business?

An increase in corporation business tax naturally affects the amount of profit you take home. As with other taxes, expenses can be deducted from your overall profits. However these expenses have to be ‘wholly and exclusively’ essential to the running of your business like travel or training.

It’s often a political issue as some politicians seek to lower UK corporation tax rates to make the country more appealing and competitive. Currently, Ireland has a corporation tax rate of 12.5% which is one of the lowest in Western Europe.

Corporation tax is a controversial topic. Often major technology firms hit the headlines when they release their financials as many people feel they don’t pay enough tax. This is because corporation tax rates are a flat rate. So the likes of Facebook and Amazon pay the same tax rates as your local independent corner shop.

It’s important to note that even if your business doesn’t make a profit, you need to notify HMRC that you have nothing to pay.

How to pay corporation tax

As with some other business taxes, you don’t receive a bill for corporation tax. Instead, you have to figure out how much you owe.

Before you work out your bill, you first need to register for corporation tax with HMRC. You can do this easily through the website.

Throughout the year you need to maintain good accounting records and make a note of what’s been expensed to figure out profit. Make sure you keep all of your expense receipts and process them correctly.

Corporation tax works differently to other tax returns in that you pay it nine months and one day after your end of year. So if you follow the tax year and your end day is 31st March, your corporation tax is due by January 1st. If your profits are more than £1.5 million, you pay corporation tax in instalments.

You can pay corporation tax through direct debit, bank transfer, or by paying directly through your bank in cash or a cheque.

You can pay corporation tax online through the government's website.

You then have to file your normal tax return a maximum of 12 months after your end of year.

It’s important to stay organised

Keeping track of your finances can quickly become difficult if you don’t stay organised. In order to file a corporation tax return, you need to know your expenses and profit. The easiest way to track this is to hire an accountant to do it for you.

Once you get into the routine of saving receipts, logging profit, and staying on top of your financial obligations, corporation tax bills will quickly become part and parcel of owning a business.

How can Esme help?

If you’re looking for a business loan to hire an expert accountant or just help with cash flow in preparation for paying your corporation tax, get in touch with Esme today. We offer online business loans from £10,000* to £250,000 which can be repaid over a 1 to 5 year period. Why not get an instant quote to find out more.

*£25,500 for sole traders