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. The tax rate increased to 25 per cent from 1 April 2023, but companies with small profits up to £50,000 will still pay 19 per cent.
Private companies must pay corporation tax on all earnings that remain after deducting eligible costs and reliefs, unlike personal taxpayers, who get a tax-free threshold. This covers trading income, capital gains from asset sales, and other revenue, such as rent. Inactive firms or those operating at a loss do not owe corporation tax.
Corporation Tax Rates
There’s a tapered rate for companies with profits between £50,000 and £250,000 (meaning that the effective corporation tax rate will be adjusted to fall between 19 per cent and 25 per cent).
These limits will be divided by the number of associated companies. Two companies are associated if one controls the other or both are under the control of the same person or persons. This means that companies with multiple subsidiaries or associated companies will need to consider these limits when calculating their corporation tax liability.
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If a company reports losses, it can apply them to profits in other years, either retroactively to the prior year or moving forward indefinitely, thereby lowering its tax burden.
Reducing Tax Liability
There are several ways for companies to reduce their tax liability. One way is to claim research and development (R&D) tax relief, which is available to small businesses that undertake R&D activities. This relief can provide a tax credit on qualifying expenditure incurred in a relevant accounting period.
Another way to reduce tax liability is to claim the Annual Investment Allowance (AIA), which provides 100 per cent tax relief in the year of purchase up to the AIA limit of £1 million. Companies can also claim tax relief on qualifying patents, which can reduce the tax rate to 10 per cent on profits generated from these patents.
Companies must also ensure they claim all business expenses, as failure to do so will result in increased profits and increased taxes. It’s essential to keep accurate records of all expenses, including overheads and direct costs of sale, to ensure the company can claim the correct amount of tax relief.
Following the payment of its tax liability, a company must submit a corporation tax return 12 months after the end of the accounting period. Large companies will have to pay tax in instalments, and interest will be charged on overdue tax payments.
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HMRC charges interest on overdue tax payments, and from May 2025, the interest rate applying on overdue corporation tax is 8.25 per cent. Companies that pay their tax early will receive interest from HMRC, which can help reduce their tax liability. The interest rate paid by HMRC is 0.5 per cent per annum.
Once a company begins operations, it must notify HMRC within three months, at which point it will receive a 10-digit Unique Tax Reference needed to register for corporation tax.
The corporation tax accounting period of a company is usually 12 months long and it normally matches the financial year of the company. In certain instances, the accounting period is longer than 12 months, such as for newly formed companies preparing their first accounts or for companies making changes to the financial year end.
Payment and Returns
The earliest HMRC will pay interest is six months after the start of a company accounting period.
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