What is Corporation Tax?

Essentially Corporation Tax is a tax on profits made by Limited Companies.

Correct at the time of posting, March 1, 2023

It extends to foreign companies that have branches or offices in the UK, as well as sporting Clubs or Community Groups. Foreign companies are only liable to pay Corporation Tax on profits made by UK offices or branches.

If you start up a Limited Company (or restart a previously dormant one), there are certain actions that you must immediately take. 

  1. you must register the business for Corporation Tax, as you don’t automatically get sent a Corporation Tax bill
  2. you must keep company accounts and prepare a Company Tax Return, through which you will be able to work out your Corporation Tax liability
  3. pay your Corporation Tax (or report that you have nothing to pay), by the deadline. The deadline for payment is normally 9 months and 1 day after the end of your Accounting Period. Your Accounting Period is normally the same period, of one Year, as that covered by your annual accounts
  4. Your Company Tax Return must be filed by the stated deadline, which is usually 12 months after the end of the Accounting Period

What do I pay Corporation Tax on?

Corporation Tax is payable on all taxable profits made by the business. This is usually going to be mainly on trading profits from doing business (e.g. Sales, Consultancy, etc.). However, it also includes any other income from which the business derived profit, such as investment income, or profits made from selling assets for more than they cost.

For UK-based companies, Corporation Tax is payable on profits from all activity or sales, whether that be in the UK or overseas.  But, if your Company doesn’t have a Head Office that’s based in the UK, it only needs to pay Corporation Tax on the profits made by the UK-based offices, outlets or branches.

How much is Corporation Tax?

The current rate of Corporation Tax, that you are liable to pay on business profits, is 19% (for Tax Year 2022-23).

From April 2023 (2023-24) the Corporation Tax main rate will be 25%, with marginal relief available for small companies who have profits of less than £250,000. Companies with profits of less than £50,000 will continue to pay 19% Corporation Tax, provided they have no associated companies.

You may be able to claim allowances or reliefs against your overall profit, by deducting:

Expenses. Any reimbursements that you make to yourself or your employees, for essential business costs: travel, accommodation, fuel/mileage, etc. However, costs for entertaining clients is not allowable And, any money spent on items that you or your employees get personal use from, must be listed as Benefits and are not admissible.

Capital Allowances. This includes capital expenditure on items of equipment or machinery, as well as the purchase or hire of vehicles necessary for doing business, such as cars, vans, lorries etc. If a car is purchased for use on Company business, but is also used for personal use, it must be written down as a Benefit to the user.

Reliefs. There are a number of reliefs that may be claimable, including Research and Development (R&D). It’s a detailed area and you may be better served checking with HMRC or talking to your Accountant.