How to Pay Corporation Tax

Paying your Corporation Tax is an essential component of your business to prevent incurring substantial penalties with HMRC. 

Updated: June 5, 2024
Matt Crabtree

Written By

Matt Crabtree

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When starting a small business, money will be at the centre of almost every decision. You will need to calculate start-up costs, organise business banking, and perhaps apply for a business loan and business credit card.

However, you must also think into the future about the taxes that will need to be paid. One tax your business may need to pay is Corporation Tax, which comes with stringent payment deadlines and penalties if you fail to pay.

In this article, we will explore paying Corporation tax effortlessly without being penalised for late or missing payments.

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What Is Corporation Tax?

Corporation Tax is a tax payable on taxable profits for some businesses. Your business’s taxable profits are the money made by the business once all costs have been paid.

However, the Corporation Tax rate you will need to pay depends on the amount of taxable profits generated by your business. This is your Corporation Tax liability.

Which Businesses Pay Corporation Tax?

Limited companies pay Corporation Tax in the UK. A limited company is a business whose legal structure ensures restricted liability for the business shareholders. 

The business is a separate legal entity and a shareholder will not be personally liable for business debts.

Which Businesses Do Not Pay Corporation Tax?

Sole traders and partnerships do not pay Corporation Tax in the UK. Instead, sole traders and partnerships must complete a yearly Self Assessment Form to calculate the tax they owe. 

The Self Assessment Form must be submitted to HMRC each year and the tax owed must be subsequently paid.

A sole trader is a business where the owner keeps all business profits themselves yet are liable for all debts. 

A partnership is a business of two or more business owners who each share profits and share debts and liabilities.

What Is the Current Corporation Tax Rate?

The current Corporation Tax rate in the UK is 25%. This rate applies to limited companies who achieve £250,000 per year in taxable profits and is relevant from April 2023. Before this date, Corporation Tax in the UK was only 19%.

However, a small profit rate is applicable if your business has a taxable profit of under £50,000. If your business is eligible for the small profit rate, you will pay a Corporation Tax rate of 19%.

If your business is not eligible for the small profit rate, you could apply for marginal relief. Marginal relief is a reduced rate of Corporation Tax for businesses whose taxable profits fall between £50,000 and £250,000 per year. 

You will pay a rate of between 19% and 25% depending on the exact amount of taxable profit achieved.

Why Did UK Corporation Tax Rise in April 2023?

Corporation Tax was increased to 25% from April 2023 in the UK as a government response to clawing back finances in a post-pandemic budget.

The UK government provided an unprecedented amount of financial help and support to businesses during the pandemic and so an increase in Corporation Tax was inevitable. 

However, the 25% Corporation Tax rate is a common figure across the majority of Europe, despite a European average of 21.5%.

Corporate Income Tax Rates in Europe
Image: Tax Foundation

However, before 2010, the Corporation Tax rate in the UK was a steady 28%, fluctuating across higher rates from 1973’s 52% Corporation Tax rate.

How Do I Pay Corporation Tax?

To pay Corporation Tax, you must file a Company Tax Return with HMRC. Follow these easy steps to pay your Corporation Tax:

  • Registration — as soon as your business is due to operate, register for Corporation Tax. 

Remember, if you are a sole trader or if you are in a partnership, you do not need to pay Corporation Tax so instead you must register for Self-Assessment with HMRC.

  • Records — throughout the accounting period, you must keep records of all money that enters and leaves your business. You will need this information to complete your Company Tax Return.
  • Company Tax Return — complete a Company Tax Return using your accounting records. You could complete this yourself with the use of accounting software, or you could pay an accountant to complete the return for you. 

Company Tax Returns are completed online due to HMRC’s Making Tax Digital initiative and should help you to produce accurate and timely documentation.

  • Pay Corporation Tax — you will need to pay your Corporation Tax within 9 months of your accounting period end date. So, if your financial year runs between 1st April to 31st March each year, you will need to pay your Corporation Tax by 1st January. 

You will pay HMRC directly, usually online through your HMRC login or through online or telephone banking. Remember to record your Corporation Tax payment reference number for future reference, however.

Corporation Tax payments are sometimes paid by direct debit or through online banking for faster payments, although you may be able to pay at a local Post Office. Be aware of impacts of an upcoming Bank Holiday, however, as your payment may take longer to reach HMRC.

  • Filing Company Tax Returns — Company Tax Returns must be filed with HMRC within 12 months of your accounting period end date. So, in the example above, you must file your Company Tax Return by 31st March.

What Happens if I Fail to Pay Corporation Tax?

Failing to pay Corporation Tax will result in a penalty. You will be penalised £100 as soon as the deadline is missed, followed by another £100 if the Corporation Tax is not paid within 3 months.

Corporation Tax Penalty
Image: ODAccountants

You will face a 10% fine if you have not paid the Corporation tax amount within 6 months, however. So, if your Corporation Tax bill is £100,000, you will be fined £10,000. A further 10% of the balance will be added to your account if you still have failed to pay within 12 months.

Can I Use Accounting Software for Corporation Tax?

Investing in accounting software for your business is a wise decision and can help you to calculate and pay your Corporation tax. The cost of the accounting software is minimal in comparison to regular accountancy fees.

Here are the top accounting software products you can purchase for your business:

1. Xero Accounting Software — Great for Small Businesses

✔️ Free trial.

✔️ A range of packages from £5 to £13.75 per month.

Xero offers web-based accounting software with a free trial so you can decide if this is the product for you. A range of packages are available from £5, containing a range of features to use in your business.

You can use Xero web-based accounting software to record your spending, claim expenses, pay bills, and complete your returns. You can receive alerts so you never miss a payment.

2. Sage Accounting Software — Great for Tailored Packages

✔️ 50% off your first 3 months of subscription.

✔️ Small business Accountancy packages from £14 per month.

✔️ Additional Payroll and HR add-ons.

✔️ Medium businesses receive a tailored package and quote.

Sage accounting software has been around for many years and has adapted to utilise the latest technology.

Small and medium businesses receive the exact type of accounting packages they need, with a 50% discount available on the first 3 months of subscription.

3. Quickbooks Accounting Software — Great for Growth

✔️ Free for 3 months.

✔️ Self-employed packages from £10 per month.

✔️ Limited company packages from £14 per month.

Quickbooks provides accounting software tailored to your business, whether it is a self-employed business or a limited company.

You can access a range of packages to suit your business type, whilst securing a free 3 months trial for any package you choose.

Final Thoughts

Paying your Corporation Tax is an essential component of your business to prevent incurring substantial penalties with HMRC. 

Providing accurate information to your Company Tax Return can be complicated, resulting in many businesses employing accountancy services to take care of Corporation Tax for them.

However, accounting software can make paying your Corporation Tax easy. You will reduce your costs in the long term whilst ensuring all information in your Company Tax Return is precise.

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