Corporation tax is a tax that must be paid by all private limited companies in the UK that generate taxable profits. These profits are the income that remains after deducting allowable expenses and any tax reliefs in a specific accounting period.
Unlike individuals, companies do not receive a tax-free allowance, and all profits are taxable. The corporation tax rate increased to 25 per cent from 1 April 2023, but companies with small profits up to £50,000 still pay a rate of 19 per cent.
Corporation Tax Rates and Accounting Periods
The corporation tax accounting period of a company is usually 12 months long and matches the financial year of the company. However, in certain instances, the accounting period can be longer than 12 months, such as for newly formed companies or those making changes to their financial year end.
For companies with profits between £50,000 and £250,000, there is a tapered rate, meaning the effective corporation tax rate will be adjusted to fall between 19 per cent and 25 per cent. These limits are divided by the number of associated companies, which are companies that control each other or are under the control of the same person or persons.
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A company can reduce its tax bill by claiming research and development tax credits, patent box relief, or the Annual Investment Allowance (AIA) for investments in plant and machinery. It is also essential to claim all business expenses, as failure to do so can result in increased profits and taxes.
Payment and Returns
Following the payment, a company must submit a corporation tax return 12 months after the end of the accounting period. Large companies, with profits between £1.5 million and £20 million, pay tax in instalments.
If a company pays its tax early, HMRC pays interest from the date the company pays its corporation tax to the payment deadline, at an annual rate of 0.5 per cent. However, HMRC charges interest on overdue tax payments, with a rate of 8.25 per cent applying from May 2025.
The introduction of a small profits rate means that around 1.4 million businesses will continue to pay either no corporation tax or corporation tax at 19 per cent, even with the new 25 per cent rate. This change aims to support small businesses and entrepreneurs in the UK.
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James Richardson BA FCA, a director of Metric chartered accountants, states that understanding corporation tax rates and accounting periods is essential for businesses to effectively manage their tax obligations.
Losses incurred by a company can be offset against profits in other years. These losses can usually be carried back to the previous year or carried forward indefinitely.
A dormant company, which is a company that carries on no trade or business at any time during an accounting period, does not have to pay corporation tax.
Registering for Corporation Tax
Following incorporation, a company must inform HMRC within three months of trading that a limited company has become active. HMRC will then provide the company with a 10-digit Unique Tax Reference (UTR) which is needed to register the company for corporation tax.
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