What is corporation tax?

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Date: 1 December 2021

A visual representation of corporation tax with the word tax against a city backdrop

Although feared by many, tax is a fact of life and tax receipts help keep the country running. There are many different types of tax from income tax to VAT, but corporation tax is something many people are still confused about.

Corporation tax is paid by businesses and the amount payable is calculated based on the business' annual profits. All company profits are taxable. So, unlike personal tax, businesses do not receive a tax-free allowance.

Here are a few things you need to know about corporation tax.

Who pays Corporation Tax?

Corporation tax is paid by UK limited companies. If you own the business, you will be responsible for reporting and filing your business' corporation tax. If you don't have authorisation, follow these steps to register a business in the UK (really easy guide).

In addition to limited companies, there are some organisations that must also pay corporation tax. This includes certain societies, clubs, business groups, members clubs, and other co-operatives.

As an individual, you don't pay corporation tax. You'll be charged personal tax instead which is calculated on your profits. Self employed people file a self assessment tax return to calculate their own taxes.

How much is corporation tax?

One thing that helps simplify corporation tax is the uniformity. Every company that's liable pays corporation tax at a fixed rate of 19%.

This amount can be onerous for some small, growing companies. One way to counteract this is to increase allowable expenditure reducing taxable profits. The other benefit of this strategy is that the business gains valuable equipment while reducing tax.

How is corporation tax paid?

Before you can pay corporation tax, you need to be registered for it. You must register within three months of starting your business.

You can do this online through the government gateway. You will need the following information:

  • The 10-digit Unique Taxpayer Reference (which is sent to your company within 14 days of it being registered).
  • The business starting date.
  • Company or brand name along with the registration numbers.
  • The company address. 
  • Business type.
  • The date of annual accounts.
  • Company directors' name and address details.

After you input all the details, HMRC will notify you about the tax deadline.

About the Company Tax Return

As a company, you won't receive a notification about the tax return. You are responsible for and will need to submit the corporation tax return. But first, you will need to:

  1. Prepare your profit and loss report
  2. Calculate the corporation tax, file your corporation tax return and pay any amount owing

If your profit is above £1.5 million, you need to pay the tax electronically in instalments as a large company.

Payment methods

Depending on how urgently you need to pay (or how close the deadline is), you can pay the corporation tax in several ways.

If you want to make a next-day payment, you can use Faster Payment Service, which uses an online or calling method, or Clearing House Automated Payment System (CHAPS).

If the payment needs to be processed within three days, you can use Banker's Automated Clearing Service (BACs), Direct Debit, or pay online using the company's debit or credit card via your online banking service.

The last option is using the Direct Debit for the payment within five working days.

However you opt to pay, make sure you pay the tax on time to avoid any penalties.

Advantages of a corporate tax

You shouldn't worry about corporation tax. In reality, it could provide your business with advantages compared to individual tax. Its main benefits are the allowable deductions you can make, including medical insurance (for families), tax-deferred trusts, and losses.

The company can deduct the total loss amount as long as you can provide evidence.

Copyright 2021. Featured post made possible by Rene Mulyandari.

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