What is corporation tax?
19% for all limited companies
Corporation tax is paid by businesses in the UK, and is calculated on their annual profits, in a similar way to income tax for individuals.
The corporation tax rate has been 19% for all limited companies since April 2016. Prior to this, the rate varied depending on the company's profits.
The recent Budget 2020 confirmed that corporation tax would remain at 19% for the 2020-21 tax year; previously, the government had planned to reduce the rate to 17%.
Unlike individuals, companies don't receive any kind of tax-free allowance, and therefore all profits are taxable. However, there are a number of expenses and deductions that can be claimed to reduce your bill.
Who pays corporation tax?
Corporation tax is payable by all UK limited companies.
The following organisations may also need to pay it, even if they're not incorporated:
- Members clubs, societies and associations
- Trade associations
- Housing associations
- Groups of individuals carrying out a business (such as co-operatives).
If you're a sole trader or partnership, you won't pay corporation tax. Instead, you'll pay income tax on your profits via a self-assessment tax return. You can find out more in our guide to income tax for the self-employed.
It is the responsibility of the company director to ensure that the corporation tax return has been submitted on time, and the tax bill has been paid - even if the company hires an accountant to prepare their calculations.
Find out more: small business tax: what you need to pay
How to register with HMRC
Once your company is incorporated, you must tell HMRC within three months of trading that a limited company has been formed.
Depending on the type of business you have, it can be tricky deciding whether your business is 'trading'. HMRC has extensive explanations of what it considers to be 'active', 'trading', 'non-trading' and 'dormant', which you can check to make sure you're compliant.
When you register with HMRC, you'll need to include details of the following:
- the date you began the business (this will be used as the start date of the company's first accounting period)
- company name and registration number (this will be provided by Companies House when you incorporate)
- the company's main address
- type of business
- the date you'll make your annual accounts up to
- name and home address of the company directors
A company must calculate its own corporation tax - unlike with individuals, where HMRC calculates you tax bill based on details provided.
You'll need to complete a company tax return each year, also known as form CT600. Your accounts need to be filed to both HMRC and Companies House, which publishes the filing history of all registered limited companies.
The form must be filed online (unless you have a 'reasonable excuse to file a paper form, or want to file the return in Welsh).
Your CT600 must contain:
- company name
- company registration number
- registered office
- tax reference number
- turnover and profit for the period being reported
- tax calculation
- details of allowances and reliefs
There are several pages, but you only need to fill out the sections that are relevant to your company.
- Find out more: How to file a company tax return
What if no tax is due?
Even if you have no corporation tax to pay, you'll still need to submit a company tax return.
When your payment is due, you'll receive payment reminders from HMRC unless you fill in the 'nil to pay' form. You can also send back the payslip on the HMRC reminder marked with the words 'NIL due'.
If your company has ceased trading, you should let HMRC know that it's 'dormant' for corporation tax purposes. If HMRC agrees, it will send you a letter confirming that you don't have to pay corporation tax or file company tax returns.
Find out more: self-assessment tax return
Corporation tax deadlines
You must submit your corporation tax return at some point between the date of your company year end and your statutory filing date. The statutory filing date is either 12 months after the year end, or three months after your receive a notice to deliver a return from HMRC - whichever is latest.
However, you may be required to pay your corporation tax bill before your return is due.
If your company has made a taxable profit of anything up to £1.5m, you'll need to pay the corporation tax within nine months and one day after the end of your accounting year.
As an example, if your accounting year ends on 31 March, your corporation tax payment will be due on 1 January the following year, while your tax return is due three months later.
For businesses with a turnover of more than £1.5m, corporation tax must be paid in instalments.
How to pay corporation tax
There are several ways to pay your corporation tax bill. Whichever method you choose, HMRC must receive the money by the deadline date to avoid a fine.
If your payment deadline falls over the weekend or on a bank holiday, your payment must reach HMRC on the last working day before.
Below are the approximate timelines for paying HMRC:
- For payments on the same day/next day: CHAPS, online or telephone banking (Faster Payments)
- Allow three working days: Bacs, direct debit (if you've already set one up), online payment by debit or corporate credit card, at your bank or building society
- Allow five working days: direct debit (if you've never set one up before).
Keep in mind that you can no longer pay with a personal credit card, so you'll need to have the funds available.
Corporation tax: late penalties
If you're late submitting your return, paying your tax bill, or you've shared inaccurate information, HMRC has the power to fine you.
The company director can be held liable, so even if an accountant filled out and submitted your return, you'll be the one to pay the penalty.
Late tax returns
HMRC has set out the following penalties for those who are late filing a company tax return:
- One day: £100 fine.
- Three months: Another £100 fine.
- Six months: HMRC will estimate your bill and add a 10% penalty onto what it thinks your unpaid tax will be.
- 12 months: another 10% is added to your estimated tax bill.
Late corporation tax payments
If you don't pay the tax on time, you'll be charged interest on the amount you owe and may also have to pay a penalty or surcharge.
HMRC has the power to carry out enforcement action to recover any money owed, which include:
- collecting owed payments through your earnings or pension
- asking debt collection agencies to collect the money
- selling things you own (in England, Wales or Northern Ireland)
- taking money from your bank or building society accounts (in England, Wales or Northern Ireland)
- taking you to court
- making you bankrupt or closing down your business.
If you can't afford to pay, HMRC suggests contacting them as soon as possible, as you may be able to set up a payment plan.
Alternatively, if you've simply missed your payment date, you should contact the Self Assessment helpline on 0300 200 3822.
If you file a company tax return and it's found to be inaccurate, HMRC may fine you.
How much you have to pay depends on whether HMRC believes the mistake was deliberate, whether you tried to hide it, and whether you voluntarily admit to it before HMRC finds out.
If HMRC decides:
- You were careless: you could be charged between 0-30% of your tax bill if you admit it, or 15-30% if HMRC spots it.
- The inaccuracy was deliberate but not concealed: you'll face a 20-70% fine if you own up, or 35-70% if HMRC uncovers it.
- The inaccuracy was deliberate and concealed: you may be charged 30-100% in fines if you disclose the error, and 50-100% if you don't.
If you want to make any changes to your company tax return, you'll usually need to do it within 12 months of the filing deadline. You can do it online, using commercial software or by sending a paper return to your company's corporation tax office.
Once you notice a mistake or inaccuracy in your accounts, you must send an amendment to Companies House on paper, clearly requesting to replace the original accounts, that the new records are now the statutory accounts and that they were prepared as at the date of the original accounts.
How to reduce your corporation tax bill
Corporation tax can mean a huge bill for some companies - so it's worth making sure you're not paying more tax than you need to.
Here are three ways you can legally reduce your corporation tax bill:
1. Claim your allowable expenses
All companies can deduct costs for expenses that have been incurred purely for use by the business. This can include things like train tickets for meetings, office equipment, petty cash for tea and biscuits, plus other things specific to your industry.
If you have employees, salaries and employer National Insurance contributions also count as a business expense, and can be deducted from the company's taxable profits.
There are no rules on exactly what can and can't be claimed. You just need to make sure the item or service was used exclusively for business purposes.
By deducting the costs of these expenses from your business profit, you reduce the amount you'll have to pay tax on and ultimately lower your tax bill.
2. Pay yourself a salary
The profits earned by the company are not yours, even if you're the only person working for it. So you may decide to pay yourself a salary.
Like with any other employee, your salary is a business expense, as are any National Insurance contributions the company makes on your behalf. So you can reduce the company's taxable profits by paying yourself.
However, you'll need to pay income tax on these earnings, as well as make employee National Insurance contributions.
Because of this, it may make sense to keep your salary under the higher-rate threshold, or even below the personal allowance limit.
In addition, many owners of limited companies choose to pay themselves in dividends, as these tend to be taxed at a lower rate than income tax. But dividends cannot be deducted as a business expense.
3. Make an early payment to HMRC
When it comes to corporation tax, fortune favours the organised. If you pay your tax bill earlier than expected, HMRC will repay you some of it as interest at a rate of 0.5%.
HMRC will usually pay interest from the date you pay your corporation tax up to the payment deadline. However, the earliest it will pay interest is from six months and 13 days after the start of your accounting period.