Are you responsible for accounting in a company?
Then you need to get on track with corporation tax: its definition, how to pay, and what happens when you don’t settle balances.
According to figures from Investopedia (Source: KPMG), the highest corporation taxes on Earth are paid by the United Arab Emirates (UAE), which has a 2021 top tax rate of 55%.
Another is Suriname at a 36% CT rate— while Iraq, Malta, St Maarten, Zambia and others have 35%. Just beneath them are Brazil and Venezuela (34%). That doesn’t mean Brits get off scot-free.
Glance: What is Corporation Tax? (UK) 📉
This portion of the guide will speedily review the topic. As we always say, we don’t expect to tell you everything you need to know in this guide but we’ve overall tried to explore the most mission-critical data as efficiently as possible, in order to help you along your journey. At a glance, here are a few characteristics of UK corporation tax and those of other countries:
- ✔️ Ten countries that have the lowest corporation tax are Anguilla, Isle of Man, Bahamas, Bermuda, Cayman Islands, Bahrain, Guernsey, Jersey, Turks & Caicos Island, and Vanuatu—each of these is at zero per cent!
- ✔️ You might have noticed that Britain isn’t on that list. Nevertheless, the EU has on average the lowest average corporate tax rate; the lowest among these are Hungary and Montenegro at 9 per cent
- ✔️ As mentioned in the intro, the UAE is the highest (55%)— but there are very close by competitors, such as Venezuela, Brazil, and Malta. These have some of the world’s highest rates of corporate tax.
- ✔️ Corporation tax itself is the way that countries tax the profits of businesses. Regardless of what kind of company you have in the UK, even if you only hire one person, you will need to pay corporation tax on your profits.
- ✔️ A central difference between income tax and corporation tax is that it is only chargeable for businesses that are making a profit, not for revenue (receiving a wage) or your general income. And you also do not get any tax credits or personal allowances, so corporation tax charges are simply a set (%) deduction of the profits you make annually—for one year. Read on HMRC.
What is Corporation Tax? (UK)
As per the name, corporation tax is a central tax that British limited companies need to pay. These visitors are charged based on their profits (anything that isn’t part of your expenses), and this is a vital stream of revenue that the British government earns—in fact, corporation tax receipts for the tax year up to 2019 was over £50 billion. The British government uses this to support vital infrastructure like healthcare, education and police.
But there are other expenses that British businesses need to be concerned with. These include National Insurance and VAT. corporation tax receipts amount to roughly 9% of the gross tax receipts that HMRC Plex in any given year. While these are based on your yearly profits, you are able to deduct any expenses that you incurred while operating your business, including investments and salaries.
Who Has To Pay British Corporation Tax?
Simply put, corporation taxes are paid by any British Ltd company. A limited company means a business whose finances are individuated from your personal finances, which means that you are not personally responsible for any debts incurred. For this reason, people running big businesses are able to go bankrupt without personally going into extreme debt.
But corporation tax is also payable by organisations who are headquartered in other countries, but who are actually operating their business in the UK these companies only need to pay taxes on profits made from British consumers.
Keep in mind, however, if your company is a British-based operation that runs in multiple companies, then there is a weird glitch where you need to pay taxes on all of your profits (not just the profits made from UK consumers).
Cost of UK Corporation Tax in 2022-25 (And How to Reduce It. 📉
To answer the question what is corporation tax, let’s have a look at how much corporation taxes are in Britain currently. There are a lot of strange things happening in the country, not to mention extraordinary inflation—with a growing amount of tension between the working class and wealthy elites, this may mean radical changes to corporations and general taxes for companies and those of high net worth.
At the time of this writing, we’re going to review what UK corporation taxes. At present, will begin with the most simplistic aspect of corporation tax. This is where every company is liable to pay a fixed rate of corporation tax that is…
Did you know that this was the rate of corporation tax since April 2016? Indeed, compared to other kinds of taxes, there were no personal allowances with corporation tax. Every pure profit gets taxed. The silver lining is that businesses are able to deduct any business expenses that are deemed pertinent.
Deductible expenses would be anything that reduces your profit, thereby reducing how much corporation tax you need to pay. But before we go into more detail on reducing your UK corporation tax, let’s explore a few other topics. This should give you some context…
History of UK Corporation Tax Rates 🏛️
There was a budget referendum in 2021. During this, corporation tax (CT) was increased. The increase will not kick in until 2023 to 2024. But this actually marks the first wise in this rate for onshore CT since the 1970s. Indeed, CT was put into place in Britain in 1965.
Roughly 10 years ago, the onshore corporation tax for Britain was 28%. During a period of seven years, two different governments (Coalition and then Conservative) reduced the CT rate incrementally until it reached an all-time low of 19% in 2017-18.
In fact, a further reduction of 17% was announced and planned to be implemented in April 2020. But this was cancelled from a relatively recent budget, and a U-turn was made—rather than reducing the CT rate, it was increased back to 25% which will take effect in April 2023.
This increase in the headline rate brings the forecast for onshore CT between 2025 and 2026 to 3.2% of Britain’s GDP. This is the greatest rate since the peak of the Lawson boom in 1989-90, itself greatly over the 2.4% national average we’ve seen in the last 50 years. As I said, there’s actually been a steady reduction in the headline rate over time. So the recent budget represents the first increase in rates since Denis Healey bought it from 40-52% in his 1974 Budget.
Keep in mind that, in spite of the gradual reduction in the headline rate, onshore CT has actually oscillated at a relatively predictable average relative to Britain’s GDP. In the whole five-decade existence of CT receipts, it has only gone over 3% of GDP at three short periods in history—corporation tax first came into effect in 1965. From 1969 to 1970 it increased to 3.3 per cent of GDP, this is in fact the highest we’ve ever had it. In some fashion, it explains the 45% headline rate.
What to Do About It (Reducing Taxes)
After that review of British tax history, let’s have a look at some of the ways that we can reduce corporation tax. We’ve listed a few of these below:
The simplest answer is often the most obvious one. But it shouldn’t be underestimated. Strategising your expenses can be a very effective way of reducing your corporation tax receipt.
Here is the straightforward rubric you can use: you are able to make an expense claim for any expense that your business needs, something that is wholly for the business.
In effect, this means that you should track every bus fare receipt, train ticket expense, and purchase of staplers. All of these can be deducted from your final CT bill (in other words, you can deduct the price of these from your gross profits when taxed).
Suppose you purchase a mobile phone for your company, you are even able to make a claim for your phone bill, as well as the mileage in any business cars, or the cost of getting professional insurance. And if you have staff members, you can also deduct their salaries and national insurance contributions from your CT.
On that topic, don’t forget to pay yourself a salary. You are a different entity from your business. So you count as a staff member. Your salary is tax deductible. There is obviously a catch to this—anything that you count as your personal salary becomes taxable VR income tax. Whether this is the right path depends on your circumstances and sources of earnings.
You will need to sensibly know what salary to provide for yourself, as going too high could bring you into a higher income bracket. You’re also able to offer dividends to any stockholders (shareholders, at least in the early parts, would include you and additional directors).
These also are liable for taxes under dividend taxes. However, there is some tax-free allowance proportion for this. Ultimately, the most efficient way to reduce your CT bill will be to combine dividends and moderately low salaries and also use a tax expert to get some detailed instructions.
This is actually a high ROI way to reduce corporation tax.
By paying into a pension fund via your company you are not only able to set aside money for your retirement, you can also deduct this proportion from your CT. This is a highly tax-efficient way compared to withdrawing cash from your company that goes into your personal pension, as that latter method would involve you paying taxes on any money you’ve withdrawn.
Annual Investment Allowance (AIA) 📖
The AIA is there to encourage businesses to make investments on improving their business equipment. Here is how it functions: suppose a business buys new equipment for operation (this could be something like a farm tractor or as small as a new landline phone in your office), then you can deduct this from your CT profits, which would reduce how much you pay at the end of the year.
The maximum limit for office equipment deductions using the AIA is variable—relatively recently, the cap was increased to £1 million. This is a vast increase compared to 2016-18 when it was just £200k. While we won’t go into a great bit more detail on what is eligible under the scheme, the central exception for this is small vehicles. Lorries and vans are fine. But business cars can only go to positively affecting allowances, which can take off a significant per cent of the item’s value annually.
Tax reliefs 📖
Tax reliefs function in a very similar way to the AIA—this scheme this purportedly there to encourage businesses to invest in certain areas by giving tax relief provisions for them. This will be according to your industry, where a range of tax reliefs are accessible, with one of the most commonly used being for research and development (R&D).
You can read more about this in the following HMRC guide, but the main notion behind this is that tax relief should be offered for any endeavours that lead to an advancement in technology or science. And it also includes four activities that lessen confusion around certain areas in science and technology. Each of these are able to attract tax relief.
To get specific, this could include things like designing, engineering, as well as scientific research that helps to reduce technological matters, but this does not include things aimed primarily at product development without making a contribution to the central store of knowledge around science and technology.
A few other reliefs to note are:
- The Patent Box: offered for businesses who make proprietary inventions that profit.
- Creative Tax Reliefs: includes the industries of gaming, animation, film, theatre and television.
- Goodwill Relief: these are a lot more ambiguous but includes things like customers.
- Trading losses: release are provided for certain situations where traders lose money.
Early Payment 📖
The HMRC guide that we link above mentions that you will be paid an interest of 0.5% on any CT that your business pays ahead of the deadline. This is obviously to incentivise businesses to pay early. Your interest gets paid from the time you pay it up to the deadline of the CT receipt. You can pay at the earliest six months and 13 days once accounting has begun for the tax year.
How to Pay UK Corporation Tax
Simply, you need to make sure you register for CT within three months that you begin doing business. You can register for CT online, but you need to create a government Gateway user account. You can learn about this by following the official HMRC guidelines.
It’s not particularly straightforward to know when you officially begin doing business. But the HMRC has a lot of guidance on what is permissible as trading for taxes. In order to register with HMRC for CT, you will need to give them the following information:
- The 10-digit Unique Taxpayer Reference (UTR) for your business: you receive this number from the HMRC, posted to your company postbox within two weeks that you register with Companies House.
- The specific date that you started doing business. Officially, this should be the start date for the first accounting window of your business.
- The name and registration number of your company, which is something you should receive from companies house after you become incorporated.
- Your company’s business address and the type of business it does; as well as the names and home addresses for the directors of your business..
- What date your annual accounts have been made up to.
After that, HMRC will give you a deadline for your corporation tax. Keep in mind that this differs from income tax. With corporation tax, you will be given a receipt that shows you how much you hold them. Rather, you will need to submit your Company Tax Return. You expect your tax return to show the following two details:
- ✔️ The loss of profit of your corporation tax (which is not necessarily the same thing as your overall profits and losses).
- ✔️ How much CT you owe.
For any businesses that make more than £1.5 million in profit, there are different rules that are applicable.
Corporation tax payment methods
Now that you know how much CT you need to pay, need to actually go ahead and pay that money. There are different ways of doing this, according to how urgent your payment is:
If you want your payment to reach HMRC in the same day or the following day:
- ✔️ Go for the Faster Payments service (payable either over the phone or online)
- ✔️ CHAPS (Clearing House Automated Payment System)
For those who want payment within three working days:
- ✔️ BACS (Bankers’ Automated Clearing Services)
- ✔️ Direct Debit
- ✔️ Online debit or corporate card
- ✔️ Bank/building society
To pay within a working week:
- ✔️ Direct Debit should do it (but note that this takes a week itself to set up a new direct debit for the HMRC)
Keep in mind that any payments that get sent over the weekend or on a bank holiday have to reach HMRC at least one working day before the date of your deadline. It is no longer possible to pay CT via post, at the post office or by using a nonbusiness credit card.
Here are the two most important deadlines you need to know about for your corporation tax:
☑️ Any CT needs to be paid within nine months and a day of your accounting window’s end
☑️ Also, the CT tax return is due one year after your accounting period ends, unless HMRC has advised you to pay earlier
Keep in mind that the process will likely be different the first time that you use it. This is because you will need to also cover the time between when your company was actually set up from what is known as the ‘accounting reference date’ (that is, the date that Companies House has created for the close of your financial year. This is the final day of the month that your company was formed).
Because this time period will definitely be over 12 months, you may be required to fill out two tax returns and handle two separate tax deadlines. If you need to do this will be according to your circumstances; for those who started trading on the same day that the company was formed, or who only started trading after the company was formed— the result will be different.
Although at a glance, it might look as though you could pay off your CT ahead of filling in the tax return describing to HMRC how much you owe them, this doesn’t usually happen. On the contrary, you typically file both together, so we can think of this as a single deadline as opposed to two separate ones.
Always keep in mind that these deadlines represent the largest amount of time, rather than the target dates. There are firm penalties you incur if you pay late, so businesses should aim to be early— once again, HMRC even towards businesses who pay early by giving them a 0.5% interest on their payment.
Corporation Tax Penalties and More
Although there as an incentive to pay early, there is also a punishment for paying late. HMRC will find new if you do not follow their rules. These rules are unbending. They are divided into three categories:
- 📖 Fines for late returns
- 📖 Fines for inaccurate returns
- 📖 Fines for late CT payments
Penalties for Late Returns
You are charged £100 if you go over your filing date by a single day. And if you miss the deadline by up to 3 months, you receive another hundred pound fine. So far, this would be £200. But what if you go over your fine by longer? If you miss your deadline by six months, HMRC will make an estimation of your CT receipt and find new 10% more of the total amount.
But we’re not done yet… Let’s suppose you go over your deadline by a whole year. In this situation, HMRC will give you a second ten per cent increase in its estimated receipt. This means you now need to pay £200 as well as 20% extra on your total CT bill. In a situation where you pay your corporation tax late three times in a row, your £100 fines are increased to £500 each.
There are mitigating circumstances you can claim for. Let’s suppose that you have the death of a close relative. Or you end up sick with some unexpected illness. In this situation, you can make an appeal for a reasonable late payment. You need to do this in writing, sending it to the office of your business’ region. You can find this on the letters HMRC will send you or on any recent tax forms.
Penalties for Inaccuracies
HMRC finds you if it believes you have inaccurately filled out details on your corporation tax return. In the event that your tax return has inaccurate details, you may receive a fine. How much HMRC finds you will be depending on the gravity of errors made. But more specifically, if it thinks you deliberately made this error, in order to hide something from them—if you admitted the mistake before HMRC discovered it, this is different.
In the event that the HMRC believes you:
- 💵 Irresponsibly, with a lack of reasonable due diligence, filled out your tax return, it could find you anywhere up to 30% extra on your final tax bill in the circumstances that you disclose the mistake to the HMRC first. But if HMRC finds it before you, then you may pay a high heftier fine, but the maximum is still 30%.
- 💵 If you inaccurately feel that your tax return in a deliberate way, but not in a way that concealed it, then you could pay between 20 and 70% extra taxes as long as you disclose it first. Once again, the limit is the same but you may pay a heftier fine if HMRC spots before you do.
- 💵 Finally, if you inaccurately feel that your tax return in a way that was deliberate and concealed, then the HMRC can find you up to 100% extra. How much weighting the HMRC puts on this fine will purportedly be according to whether you disclose it or they spot it first.
Other ways to reduce your corporation tax finds are by being very helpful in helping HMRC to figure out the correct amount of tax that they are owed, and by giving them direct access to your financial accounts in order to calculate that number.
Fines for Paying CT Late
Let’s suppose you do not pay your CT by the deadline date. In this event, HMRC will charge you a late payments fine that is calculated as an interest of 3.25 per cent. This is accumulated as the time between the day that you should have paid and the day that you finally do. There may also be an additional fixed penalty or added charge.
But what happens if you do not pay HMRC at all? They may use one of the following routes:
- 💵 The ducting the money that you will them by dipping into your pension or earnings
- 💵 Going through debt collection agencies to get the money
- 💵 Forcibly taking your property and selling it (this is something HMRC can do if you are resident in Northern Ireland, Wales or England)
- 💵 Forcibly taking money from your building society or bank account (once again, if you live in the UK)
- 💵 Sending you to court
- 💵 Striking you as bankrupt and shutting down your business
Anyone who has issues with paying the CT return, by the deadline date, should make sure that they reach out to HMRC as soon as they can — it’s possible that they will be given more time to pay back the money owed or to do so in instalments.
FAQs: What is Corporation Tax? (UK)
What If I Need to Make Changes to My Tax Returns?
If there is something you need to update in your tax return you have already sent, then you should make sure you make these changes inside of the year of the deadline date for your tax return. Inside of this time window, you are able to make changes in the three following ways:
- ✔️ First log yourself into HMRC and update your business tax return
- ✔️ Use fully licensed business accounting software
- ✔️ The end a paper tax return (the CT600 form) or write to the CT office for your businesses (you can see this on your tax forms, on any recent letters from HMRC, or by going to the enquiries helpline for CT)
What If I Have No Corporation Tax to Pay?
For those who do not have any corporation tax to pay (for instance, if you have made a negative income), then you should still fill in a tax return and tell HMRC that you do not have any corporation tax that you are with them. This can be done in one of the following two ways. Either you do it online and just select the ‘nil to pay’ form. Secondly, you can return your CT payslip sent from HMRC and check off ‘NIL due’.
Closing Thoughts 📘
Keep in mind one principle when it comes to handling your corporation tax and working with HMRC—the more organised you are, the simpler your life will be.
Although there is a clear cut & tax rate, making sure you do not pay substantially more than you need comes down to how strategic and organised you are. You need to keep track of any tax reliefs you can take advantage of, and your expenses. There are numerous ways to go about paying, but you need to make sure you do so properly—HMRC gives strict penalties for inaccurate information or late submissions.
Finally, if there is nothing that you owe HMRC, or if you have special circumstances that make it hard to pay or difficulty understanding how to go about it, make sure you reach out to HMRC—you are better off coming to an agreement than incurring a penalty for suspected avoidance or wrong information. And if it’s really too much of a challenge, consider seeking out professional advice from a tax adviser or accountant.