If you run a business in the UK, corporation tax is something you can’t ignore. It’s a mandatory tax on company profits, and understanding how it works can help you stay compliant, avoid penalties, and manage your finances more effectively. In this guide, we’ll explain who pays corporation tax, what profits are taxed, and how to register with HMRC.
Corporation tax definition
Corporation tax is a tax on the profits of companies operating in the UK. Unlike income tax, which applies to individuals, corporation tax is specifically for businesses and some other entities, such as charities if they generate taxable income. Businesses pay corporation tax on:
Trading profits: Money earned from business activities.
Investment income: Interest, rental income, and other financial gains.
Capital gains: Profits from selling assets like property or shares.
Who pays corporation tax?
Corporation tax applies to:
Limited companies registered in the UK.
Foreign companies with a branch or office in the UK.
Unincorporated associations, such as clubs, societies, or cooperatives, if they generate taxable income.
💡 Who doesn’t pay corporation tax? Sole traders and partnerships don’t pay corporation tax - instead, they’re taxed through their personal income tax.
How much is corporation tax in the UK?
The rate of corporation tax in the UK depends on the company’s profit levels.
Corporation tax rates for 2024 (starting 1st April)
Small profits rate (19%): This applies to businesses with profits of £50,000 or less.
Main rate (25%): This applies to businesses with profits over £250,000.
Marginal relief: Companies with profits between £50,001 and £250,000 may qualify for marginal relief, which gradually increases the effective tax rate between the two thresholds.
Example of marginal relief: If a company has profits of £150,000, it will fall into the marginal relief band, and its effective tax rate will be between 19% and 25%, depending on the exact figure.
👉 Looking for more advice? We’ve written a helpful guide on how to calculate corporation tax here.
How to register with HMRC
Registering for corporation tax is a crucial step for new companies. Here’s how to do it:
Incorporate your company: When you set up a limited company, it must be registered with Companies House. Once this process is complete, HMRC will automatically be notified.
Receive your company’s Unique Taxpayer Reference (UTR): HMRC will send this to your registered business address within a few weeks of incorporation.
Register for corporation tax online: Log in to HMRC’s online services using your company’s UTR and provide details like the date you started trading and your company’s accounting period.
Set up a Government Gateway account: This will allow you to manage your tax obligations online.
💡Editor’s insight: “To incorporate a company, you typically need: a company name, a registered business address, details of the directors and shareholders, share capital information, a memorandum of association, articles of association, and proof of identity for all involved parties.”
Corporation tax deadlines explained
Corporation tax deadlines differ from other types of taxes, such as VAT or personal income tax.
Key deadlines:
Filing your corporation tax return: Companies must file a CT600 form (corporation tax return) within 12 months of the end of their accounting period.
Paying corporation tax: Corporation tax must be paid within 9 months and 1 day of the end of your accounting period. For example, if your accounting year ends on 31 December, your corporation tax payment will be due by 1 October the following year.
What happens with late payments?
Failing to pay your corporation tax on time can lead to penalties and interest charges.
Late filing penalties:
1 day late: £100 penalty.
3 months late: An additional £100 penalty.
6 months late: HMRC may estimate your tax bill and add a 10% surcharge.
Late payment interest:
HMRC charges interest on late corporation tax payments from the day after the payment deadline.
To avoid penalties, it’s crucial to keep track of your deadlines and file your tax return accurately and on time.
Is it possible to reduce your corporation tax bill?
Businesses may be able to reduce their corporation tax liability through legal means, such as claiming allowances, tax reliefs, and deductions.
Common ways to reduce corporation tax:
Claim allowable expenses: Deduct legitimate business expenses from your profits, such as office supplies, staff salaries, business travel and more.
Use capital allowances: If your business invests in equipment, machinery, or vehicles, you may be able to claim capital allowances to reduce your taxable profits.
Research and development (R&D) tax relief: Companies engaged in innovative research activities may qualify for R&D tax relief, which can significantly reduce their tax bill.
Loss relief: If your business incurs a loss, you can offset it against profits from previous or future years, reducing your tax liability.
Pension contributions: Employer contributions to staff pensions are tax-deductible and can lower your taxable profits.
FAQs
What is corporation tax in the UK?
Corporation tax is a tax on the profits of UK-based companies and some organisations. It applies to trading profits, investment income, and gains from selling assets.
Who needs to pay corporation tax?
Corporation tax is paid by limited companies, certain foreign companies operating in the UK, and some unincorporated associations that generate taxable income. Sole traders and partnerships are not subject to corporation tax.
How much corporation tax do small businesses pay?
Small businesses with profits under £50,000 pay a corporation tax rate of 19%. However, rates may vary for companies with higher profits due to marginal relief or the main rate of 25%.
What happens if I don’t pay corporation tax?
Failure to pay corporation tax on time can result in penalties, interest charges, and enforcement action from HMRC. Penalties increase the longer the payment is delayed.
How do I register for corporation tax?
You can register for corporation tax online with HMRC using your company’s Unique Taxpayer Reference (UTR). This process must be completed shortly after setting up your company.
Final thoughts
Corporation tax is a fundamental part of running a business in the UK, and understanding your obligations can help you stay compliant and avoid penalties. Whether you’re a new business owner or an established company, staying informed about corporation tax rules ensures that you can focus on growing your business with confidence.
Looking for legal advice? Get in touch today for a free quote and to see how our small business solicitors can help.
References
Corporation tax from Gov.UK
Penalties for late filing from Gov.UK
