What is Corporation Tax? Guide for small companies

If you set up a business via a limited company, your annual profits will be subject to Corporation Tax.

Dealing with your corporation tax issues is one of your accountant’s key tasks. However, it is ultimately the directors of a limited who are responsible for ensuring that a company’s tax affairs are in order.

As a director of a limited company, you therefore need to make sure that your company’s corporation tax liability is accurate, your corporation tax return (form CT600) is filed with HMRC on time, and that you pay the corporation tax to HMRC when it falls due.

If you are setting up a limited company for the first time, here is a handy overview of how to comply with the corporation tax rules for UK companies, including details on the 2023 tax hike.

Who pays Corporation Tax?

All UK limited companies are subject to Corporation Tax. The tax is charged as a percentage of the annual profits made by a company.

Corporation Tax is not paid by businesses operating as sole traders or partnerships. The individuals running such businesses are classed as self-employed and will pay tax on their business profits through the annual self assessment system.

For more details on the self-employment route, read our guides on How to set up as a sole trader and Tax for the self-employed

Corporation Tax does apply to the following organisations, even if they are not incorporated:

  • Members’ clubs, societies and associations
  • Trade associations
  • Housing associations
  • Groups of individuals carrying on a business but not as a partnership, (for example, co-operatives.)

Registering your new business

You are legally obliged to inform HMRC that your new limited company has been formed as soon as you have completed the incorporation process.

Once you appoint your accountant, you will need to authorise them to deal with your tax affairs on behalf of your new company. You can do this with HMRC online, or with the relevant paper forms which you can download from this page of the HMRC website.

Corporation tax self assessment – CT600

Each year, your company is required to complete a corporation tax return (Form CT600). All corporation tax returns must now be filed with HMRC online.

Corporation Tax form CT600

Although your accountant will prepare and submit the CT600 and supporting documents, ensuring the information is correct is one of the responsibilities and duties of a limited company director.

Each CT600 return must contain your;

  • Company name
  • Company registration number
  • Your registered office and
  • Tax reference number (you’ll find this on the notice to deliver a company tax return)
  • Turnover and profit for the period
  • The tax calculation
  • Details of any allowances e.g. capital allowances, and reliefs claimed

In total, the CT600 form runs to 11 pages and asks for hundreds of pieces of financial information, but your accountant only completes the sections that are relevant to your company.

Accounting periods

Most businesses have a 12 month accounting period, although it is possible to set a shorter period. Your accountant can also apply to change your year end date so that it ties in with other statutory deadlines.

What are the current Corporation Tax rates?

Historically, there were two different rates of UK Corporation Tax; the ‘small profits rate’ and the ‘main rate’. Companies making profits of up to £300,000, were charged at the ‘small profits rate’ which was typically a few percentage points lower than the ‘main rate’ of corporation tax.

Companies with profits of £1.5 million and above paid the main rate of corporation tax, with ‘marginal relief’ being applied to profits between these two figures.

However, this was simplified in April 2015, when the ‘small profits rate’ and ‘main rate’ of Corporation Tax were aligned, giving the UK a single rate of Corporation Tax. This simplification removes the need for marginal relief calculations for tax years beginning after April 2015.

The current rate for UK Corporation Tax is 19% (2020/21). Check the latest rates here.

Corporation Tax rise from April 2023

At the March 2021 Budget, the Chancellor announced that the rate of CT would be increased to 25% from April 2023.

Significantly, companies with profits of between £50,000 and £250,000 will be taxed under a new taper relief system, which means that if your company has profits of £50,000 or less, it will still pay the current rate of 19%.

The Chancellor stated that only 10% of companies would pay more tax under the new rules, and 70% would still pay the current 19% rate.

Read the official HM Treasury guide to the CT tax changes.

Corporation Tax deadlines and penalties

Your accountant can submit your CT600 return any time between the date of your company year end your statutory filing date. This is typically the latest of 12 months after the end of your year end, or 3 months after you get a notice to deliver a return.

If you submit your corporation tax return late, or the contents are inaccurate, you – and not your accountant – will be charged a penalty.

If your company has made a taxable profit of up to £1.5 million, the corporation tax must be paid by 9 months and 1 day after the end of your accounting year.

For example, if your accounting year end is 31st December, then your corporation tax payment will be due by 1st October of the following year.

You must pay your company’s corporation tax liability to HMRC electronically. If you are late paying, you will be charged interest.

Keeping tax records

By law, you must keep all company records for at least 6 years, and it is probably sensible to maintain your records for longer if you can afford the space! Records include all receipts, workings, invoices and tax-related paperwork.

HMRC says it is acceptable to keep records in a legible alternative such as an optical imaging system, where documents are scanned into a computer. These days, online accounting makes storing tax records a doddle.

Last updated - 3rd March, 2021

Bytestart Limited info@ByteStart.co.uk

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