Many contractors who are starting their own businesses for the first time will be surprised by all the new taxes they have to deal with. As a Limited Company (or alternatively as a society, club or association that is classed as an unincorporated) businesses are required to pay something called Corporation Tax. It is important to get Corporation right from the start as all companies must pay it and failure to do so can result in fines from HMRC. This article will provide a basic overview of Corporation Tax:
What Is Corporation Tax?
Corporation tax is simply a tax on the taxable profits made by a company. Any organisation or company that is UK based and makes profits has to pay Corporation Tax on its taxable profits, regardless of whether those profits come from selling products in other countries or in the UK. On the other hand should you have a company that is not based in the UK but which operates its business in the UK, you would then have to pay Corporation tax only on the taxable profits that come from the UK part of your business.
In a nutshell then, Corporation Tax is akin to an income tax for companies. How much Corporation Tax a company pays will depend on how much income and profits the company makes.
What Do I Do About Corporation Tax When Starting My Business?
The first thing you need to do when starting your business is simply let HMRC know you will be starting a Limited Company. This must be done in the first three months after you form your company. In order to let HMRC know about your company you need to fill in HMRC form CT41G
When Does My Company Need to Pay Corporation Tax?
This is one of the trickiest issues as the deadline for payment is always different to most of the other major taxes you will pay both personally and as a business (such as VAT or income tax). The ‘normal due date’ will vary depending on how much the company makes in taxable profit. If the company makes taxable profits of less than £1.5 million them your Corporation Tax will be due 9 months after the close of your financial year. Because most small businesses end their financial year on the 31st March, for most companies Corporation Tax will be due by 31st December. If your company’s taxable profits are in excess of £1.5 million then your Corporation Tax can be paid in instalments. The most important thing to remember is that your deadline for paying Corporation Tax is always going to be ahead of the deadline for filing your Company’s Tax Returns. That’s because those tax returns have to be paid within 12 months of the end of the financial year, meaning you have an extra 3 months on them.
How Much Will My Company Need to Pay?
When it comes to calculating your company’s Corporation Tax and taxable profits the starting point is the company’s pre-tax profit. To calculate your taxable profits you must then:
- Take off your capital allowances
- Add on the depreciation charges that were included in your accounts
- Add on other income or gains that might be relevant
- Take off other losses, allowances, reliefs and deductions.
Once you have done all of this you can calculate your Corporation Tax from this figure:
- First you need to apply the tax rate to work out your Corporation Tax that is payable
- Then take off any tax credits or income tax that has already been deducted from the income your company receives
- Lastly take off any Corporation Tax that has already been paid (you might have made an early payment).
What Rate Will a Small Business be Charged?
The rate for businesses with small profits currently sits at 20%. This small profits rate applies to companies with annual profits that are less than £300,000. The next step up in rate, known as the Main Rate is for companies with profits in excess of £1.5 million and is set at 23%. Should your company earn more than £300,000 but less than £1.5 million you have to pay the main rate, but you can then apply for something called marginal relief. Marginal relief will reduce your Corporation Tax bill by a percentage that relates to how much profit you have made between £300,000 and £1.5 million. To work out the exact rate, go here (http://www.hmrc.gov.uk/calcs/mrr.htm).