Corporate Tax – Definition, What is Corporate Tax, and How Corporate Tax works?

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While starting a business, you come across the term ‘Tax’, and someone might advise you to fulfill your tax obligations in time to avoid more considerable penalties. Corporation tax is one of the important taxes businesses are liable to pay on their profits. For small business owners, understanding corporate tax can be challenging without the help of a professional.

In this article, we will learn about the definition of corporate tax and understand how it works.

What is corporation tax?

Corporation tax in the UK is a direct tax that limited companies, foreign companies with UK-based offices or branches, and some other organizations need to pay on their company’s annual profits. The current corporation tax rate in the UK is 19% on all profits except ring fence profits.

In the 2021 spring budget, the government announced corporation tax for companies with an annual profit of above £250,000 and is liable to pay the main rate of 25% and a small profits rate of 19% from 1 April 2023. Companies having annual profits not more than £50,000 will pay a small profits rate, with marginal relief available for yearly profits up to £250,000.

Register with HMRC

While starting a business in the UK, you need to register for corporation tax and do the following:

Sign in to your tax account for business.

You need to get the company’s Government Gateway user ID and password to sign in to the account.

Additionally, you need a 10-digit Unique Taxpayer Reference ( UTR) that HMRC will post to your company address.

Tell HMRC during registration.
  1. Company registration number
  2. Date when you started the business
  3. Date when you made the annual accounts
Know the corporation tax deadline

The HMRC will inform you about the tax payment deadlines.

You must file a company tax return no matter if you can pay the corporation tax or not.

Find your UTR

After enrolling for corporation tax, you can find 10-digit UTR in HMRC online services or all the letters from HMRC.

UTR is important when you contact HMRC about corporation tax and send CTR to HMRC using commercial software.

How does corporate tax work?

You won’t receive a receipt for paying corporate tax; therefore, there are certain things you can do to work out, pay, and report your corporation tax.

  • Register for corporation tax
  • Keep accounting records
  • Prepare Company Tax Return
  • Pay Corporation Tax
  • Report in CTR even when you pay no CT before the deadline.
  • File CTR before the deadline.

Find an Accountant to help you deal with corporate tax and understand your eligibility for allowances and relief that you didn’t know.

When do you pay corporation tax?

You pay corporation tax on profits your company made from:

  • Earnings generated from doing business, also known as trading profits,
  • Revenues from investment, and
  • Gains from selling assets like land, property, machinery, and shares.

When is the deadline for paying corporation tax?

The deadline for corporation tax is usually 12 months after ending your accounting period, which is your financial year. For companies with more than £1.5 million in taxable profits, you can pay corporation tax in installments.

What are the corporation tax allowances?

While calculating how much corporation tax you owe, consider various corporation tax allowances, like deducting the cost of running your business from your profits. Some allowable expenses for limited companies are accommodation, mileage, and employee training.

You can deduct certain business expenses (not all) from the profit while preparing your accounts before tax, but no personal expense. However, you cannot deduct the costs of buying business assets like equipment, machinery, and vehicles from the company’s taxable profit.

What are the corporation tax reliefs?

There are some corporation tax reliefs that you must know to reduce your corporation tax relief. These are:

  • Research & Development (R&D) relief
  • The Patent Box
  • The Annual Investment Allowance
  • Creative industry tax reliefs
  • Disincorporation Relief
  • Terminal, capital and property income losses, and trading losses
  • Marginal relief
  • Relief of goodwill and relevant assets.

Meet corporate tax accountants to know more about these corporation tax reliefs.

Conclusion

It is essential to know about corporation tax to understand you are paying the fair share of corporation tax to the government. With detailed tax planning, you can minimize the corporation tax liability of your company.

Remember to register your business for corporation tax with HMRC within three months of incorporating your company with Companies House. If your business is dormant and wants to restart its operations, inform HMRC to re-register for corporation tax.

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