Corporation tax: how does it work?

Corporation Tax is the tax levied on the profits of limited companies in the UK, including foreign companies with UK offices. The current rate is 19% for all businesses.

Registering for Corporation Tax

HMRC requires companies to register for Corporation Tax within three months of starting to trade. You can do this by registering with Companies House. Incorporation costs £12 and takes 24 hours when done online, or can be done by post at extra cost.

Who pays Corporation Tax?

All limited companies in the UK are charged Corporation Tax at a flat rate of 19%. This rate will fall to 17% from 1 April 2020. In Northern Ireland, the rate is 12.5% and has been since 1 April 2018.

Before April 2015, Corporation Tax was tiered and marginal relief applied to businesses with profits between £30,000 and £1.5 million. This is no longer the case.

If you have not registered your business as a company with Companies House you will not be liable to pay Corporation Tax, but you will need to pay Income Tax on your profits.

If your company is not actively trading, you should notify HMRC. Companies classed as dormant do not pay Corporation Tax.

How to work out Corporation Tax

HMRC doesn’t bill for Corporation Tax – it is your responsibility to calculate and report it on time. You will need to prepare your annual accounts and file a tax return, known as a CT600, taking into account any additional income streams such as property.

Many companies appoint accountants to do this as their agent. Your company will still be responsible, but hiring an agent can provide valuable peace of mind.

If your company has not been turning a profit, you will not have to pay Corporation Tax and may be able to claim relief on future accounts. However, you will still need to declare this to HMRC. Be sure to file your company tax return on time along with a ‘nil to pay’ form. 

You may also be eligible to claim reliefs for research and development in science and technology or work in selected creative industries.

When do I pay Corporation Tax?

Your tax is due within 9 months and 1 day of the year’s end – this is usually the last day of the month your company was incorporated. You can only file 12 months at a time, so during your first year you may need to file twice to cover the full period – even if it’s only a couple of weeks over 12 months.

If you miss the deadline, you may be penalised.

If you pay your tax early, HMRC will pay you credit interest – the current rate is 0.5% and usually covers from the date you paid up until the deadline. The interest you make will need to be included in your company accounts the next year and is therefore taxable.

How do I pay Corporation Tax?

All Corporation Tax payments now have to be sent electronically, so you can no longer pay by post. It’s also no longer possible to pay at the Post Office.

If your company has taxable profits of more than £1.5 million you will need to pay Corporation Tax electronically and in instalments.

Debit or credit card

You can pay online via debit or corporate credit card, although the latter will incur a fee. You cannot pay with a personal credit card. This method takes around 3 working days, but remember to include your Corporation Tax payslip reference number to avoid delay.

Faster Payments

Using Faster Payments online, over the phone or at your bank is the quickest way to pay your tax, with funds typically clearing within hours. The limit varies from bank to bank, with some allowing Faster Payments of up to £250,000.

CHAPS

CHAPS (short for Clearing House Automated Payment System) is another speedy way to pay – usually the same or next working day. Most banks offer it, but it will cost you between £20 and £30. For funds to arrive the same day you will need to make the transfer before a certain cut-off time, typically 2pm. This method is best for very large sums that need to be paid quickly.

BACS

This payment method works similarly to Faster Payments and CHAPS but takes 3 days.

Direct debit

You can also set up a direct debit on HMRC’s website. New payments will take 5 working days to process, but direct debits that are already in place only take 3 working days.

Cash or cheque

If you prefer to pay in person, you can still pay by cash or cheque at your bank. This will usually take 3 working days to reach HMRC.