How to Calculate Corporation Tax

Read on to find out more.

Updated: April 8, 2024
Matt Crabtree

Written By

Matt Crabtree

 
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Starting a small business is an entrepreneur’s dream. However, it is also a substantial responsibility that should not be entered into lightly. 

As a limited company, you will need to pay a range of taxes such as National Insurance Contributions, Income Tax (PAYE), Value Added Tax and Corporation Tax. 

Company profits are significantly impacted when you pay business rates, although if you do not pay tax, you will face financial penalties. 

In this article, we will find out how to calculate small business Corporation Tax.

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What Is Corporation Tax?

Corporation Tax is a tax that some businesses pay on their profits. The rate of Corporation Tax payable depends on the amount of profit your business makes. 

Your business profits are the money you have earned from the business after costs have been deducted.

Do Small Businesses Pay Corporation Tax in the UK?

If your UK business is a limited company, you must pay Corporation Tax every year to HMRC. HMRC stands for His Majesty’s Revenue & Customs.

A limited company is a business whose legal structure limits the liability faced by the shareholders, considering the business as a separate legal entity.

Other small business types include sole traders and partnerships. A sole trader is an exclusive business owner who is liable for all debts but entitled to retain all profits. A partnership is two or more business owners who share profits and liabilities.

If your business is a sole trader or a partnership, you do not possess a Corporation Tax liability. Instead, you must complete a Self Assessment Form each year and calculate the amount of tax you owe, before sending it to HMRC.

When Should Corporation Tax be Paid?

Pay Corporation Tax to HMRC within nine months of your financial year-end date, also referred to as your accounting period. You must calculate the amount owed yourself and pay it before sending your Company Tax Return (CT600) to HMRC. 

Your Company Tax Return must be filed within 12 months of your financial year end date, providing slim opportunities to complete all paperwork. 

So, if your financial year runs between 1st February to 31st January each year, your Corporation Tax must be paid by 1st November and your Company Tax Return must be filed by 31st January.

What Is the Corporation Tax Rate for Small Businesses in 2023/2024?

From April 2023, Corporation Tax rose from 19% to 25%. This is applicable for businesses reaching £250,000 in taxable profits.

A small profit rate applies to businesses with a taxable profit of under £50,000, however. This means that eligible businesses will only pay 19% Corporation Tax.

Any businesses achieving a taxable profit of more than £50,000 but less than £250,000 will receive marginal relief. Marginal relief provides a reduction of the Corporation Tax payable, depending on your level of taxable profits.

However, during short accounting periods, lower and upper limits may be reduced, amending the thresholds for paying Corporation Tax amounts.

Why Has Corporation Tax Increased in 2023/2024?

The rate of Corporation Tax increased from April 2023 as a response to post-pandemic government budgets. 

Due to the substantial help many businesses received from the UK government during the pandemic, Corporation Tax was raised to recoup funds back into the system. Businesses have enjoyed a 19% Corporation Tax rate in the UK for several years and so an increase to a 25% rate is quite significant for UK businesses.

Is 25% the Highest Corporation Tax Rate Seen in the UK?

Corporation tax was charged at a rate of 28% before 2010, so an even higher rate than the current Corporation Tax rise. 

However, a 28% Corporation Tax rise seems tame in contrast with historical statistics. The highest ever rate was a staggering 52% Corporate Tax rate which was charged to businesses for almost a decade from 1973 as a standard rate of tax.

Does the UK Charge the Highest Corporation Tax Rate in Europe?

At a 25% Corporation Tax rate, the UK charges businesses one of the highest Corporation Tax rates in Europe, along with Austria, Spain and Belgium. 

However, at a 35% Corporation Tax rate, Malta currently charges the highest rate to businesses in Europe. Intriguing, the Isle of Man charges businesses a 0% Corporation Tax rate. The most common Corporate Tax rate falls in line with the UK’s new Corporation Tax rates at 25%.

How Do I Calculate Corporation Tax?

To calculate Corporation Tax, follow these steps:

1. Register

You must register for Corporation Tax once your business has started to operate. This must also be completed if you have re-started a previously dormant business, and include any associated companies.

2. Keep Records

Maintain detailed accounting records during your financial year. Your financial year is the 12 months from the date your business began trading. If your accounting records are inaccurate or omit vital information, you might pay an incorrect amount of Corporation Tax and face repercussions later on. 

3. Company Tax Return

Using your accounting records, complete a Company Tax Return. As long as you use the correct information, the Company Tax Return should calculate the exact amount of Corporation Tax that you need to pay. 

Typically, Company Tax Returns are completed online and you may ask a qualified accountant to complete the document for you.

This is a result of HMRC’s Making Tax Digital initiative and will ensure that all information is accurate and that the Company Tax Return has been completed correctly. It also means that you have more time on your hands to focus on the business.

4. Paying Tax

You will have a deadline of 9 months after your accounting period date to pay the amount of Corporation Tax you owe. So, if your financial year runs between 1st February to 31st January each year, your Corporation Tax must be paid by 1st November.

5. File Your Return

Whilst you have 9 months from the end of your financial year or accounting period, to pay your Corporation Tax bill, you have an extra 3 months after this date to file your Company Tax Return to HMRC.

So, with a financial year between 1st February to 31st January, your Corporation Tax must be paid by 1st November and your Company Tax Return must be filed by 31st January, of the following year. 

Once again, some businesses will choose to ask an accountant to prepare and file their Company Tax returns. This will cost your business a fee, although it is one less job for you to do. It also ensures that all documentation is correct.

What Happens if I Miss a Company Tax Return Deadline?

If your Company Tax Return is filed late you will face a penalty. Just missing your deadline by 1 day can result in a penalty of £100, followed by another £100 in 3 months after your missed deadline.

Corporation Tax Penalty
Image: ODAccountants

However, after 6 months, you will pay a penalty of 10% of your unpaid tax bill. So, if you owe HMRC £100,000, you will need to pay a penalty of £10,000. This is in addition to the previous penalties of £100 each, respectively. 

However, a further 10% of unpaid tax will be charged after 12 months of the missed deadline. This will amount to substantial penalties for your business.

Final Thoughts

Running a business is a huge undertaking that requires a depth of knowledge and understanding of taxation and liability. Employing an accountant to take care of your finances is an option, yet their fees will soon mount up.

Taking advantage of accounting software can save you money over time and improve your own accounting and IT skills.

You can manage your business finances in real-time and know exactly where you are and what needs to be paid. Calculating and paying your Corporation Tax bill will be an easy task to complete.

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