How to Calculate Corporation Tax

Corporation tax is a tax on the trading profits made by companies in the United Kingdom, taken from a business’s annual accounts.

The profit of a company is the total sales less any allowable expenses that the business has incurred. The tax rate, and thresholds are regularly reviewed along with all other tax bands and tax rates.

Corporation tax is paid by the business directly to HMRC.

For businesses operating in the UK, understanding how to calculate corporation tax is essential for maintaining compliance with tax laws, ensuring smooth financial operations and avoiding any costly penalties or fines from HMRC.

If you need any further advice or information, the team at Bright Beany Accounting are here to help.

Get on with growing your business, leave the company tax returns to us. Drop us a message today!

In the UK, corporation tax is charged on the profits of UK resident companies and any foreign companies which have a permanent UK branch or office.

The tax is charged on different types of income, including:

• Trading profits from business operations
• Investment income
• Capital gains on the sale of assets

The corporation tax rate and the rules surrounding deductions and reliefs are set by HM Revenue and Customs (HMRC), and they may change annually based on the UK government's fiscal policies.

The rate of corporation tax for UK businesses varies based on government policies.

As of April 2024, the main corporation tax rate is set at 25% for companies with profits exceeding £250,000.

However, for small companies with profits below £50,000, a small profits rate of 19% applies.

Companies with profits between £50,000 and £250,000 are subject to marginal relief , which gradually increases the tax rate from 19% to 25% as profits rise.

You can see up to date rates here.

These thresholds are adjusted if the company has associated companies (companies which are under common control) or if the accounting period is shorter than 12 months. It is important to check current rates and updates from HMRC, as they may vary over time.

Let Bright Beany Accounting handle the numbers – whilst you focus on business growth. Book a meeting today!

Working out how much corporation tax our clients owe to HMRC is calculated through preparing the company tax return (also called the CT600) – and if you use our Digital Bookkeeping Service, is a relatively straightforward process!

Calculate sales and income

First up, you need to create a profit and loss account to be able to work out how much you owe. Using accounting software such as Xero will make this much easier!

You’ll need to add up all sales income your business generates, along with any interest you’ve earned, such as on a business savings account. This includes:

• Trading profits: Income from the company’s core activities
• Investment income: Income from dividends, interest, or other investments.
• Chargeable gains: Profits made from selling assets (capital gains), such as property or shares.

Calculate overheads and expenses

Your next step is to calculate your overheads and other business expenses. These can be deducted from your trading income to work out the profit your business makes.

It is really important to claim all allowable deductions and expenses from the trading income to ensure you don’t pay more tax than you should. Allowable expenses are those that have been incurred solely for the purposes of running the business and won’t have a personal use. They could include:

• Employee wages and salaries
• Office and administrative costs
• Costs of goods and materials for resale
• Marketing and advertising expenses
• Interest on business loans
• Rent, utilities, and maintenance of business premises

Costs that you can’t include in your corporation tax return

Some expenses are non-deductible for tax purposes, such as:

• Client entertainment costs
• Fines and penalties
• Depreciation of assets (though capital allowances can be claimed instead, see below!)

When calculating your corporation tax, you will need to add back the non-deductible costs above.

You will not be able to claim tax relief or VAT on the costs associated with entertaining clients and suppliers. This includes business lunches, trips to events, and gifts.

Capital Allowances

Capital expenditure refers to money spent on qualifying fixed assets that you will keep in the business for several years. This can include computing equipment, plant equipment and furniture.

Rather than claiming depreciation (as is done in accounting), businesses can claim a capital allowance on assets like machinery, vehicles, and equipment. Different types of capital allowances include:

• Annual Investment Allowance (AIA): Allows 100% deduction for qualifying capital expenditure (up to a certain limit).
• First-year allowances: Available for certain environmentally friendly or energy-efficient equipment.
• Writing down allowance (WDA): Allows a percentage deduction of the asset’s remaining value each year.

The value of these assets will depreciate over time. So rather than being expensed in your accounts straight away, the cost of the items will be written off in the accounts over a number of years.

Losses

If a company incurs a trading loss, it can be carried forward to offset future profits, or in some cases, carried back to offset previous taxable profits, potentially resulting in a refund of corporation tax already paid.

Once you have calculated your corporation tax liability, it is essential to file your company tax return and pay the tax.

Your corporation tax return must be filed within 12 months of the end of your financial year, however corporation tax due must be paid nine months and one day after the end of your company’s accounting period.

For instance, if your accounting period ends on December 31, the corporation tax is due by October 1 of the following year.

So you’ll need to prepare it well ahead of the deadline to know how much tax you owe! At Bright Beany Accounting, we aim to get your Annual Accounts & Corporation Tax Return drafted within 2 months of your year end, so you know exactly how much you will have to pay by the deadline.

The system only allows returns to be filed for a period of 12 months – so if you set up a new limited company your first year of trading may cover 13 months, so you will end up having to file 2 returns to cover this. In this case there are two company tax returns, and you would pay corporation tax over two payments. The due date for payment is always nine months and one day after the period that the corporation tax return covers.

HMRC will charge a penalty for late filing of your return and will also charge interest on any overdue tax payments. You’ll pay a penalty of £100 if you are a day late, and then another £100 if you are 3 months late.

If your tax return is late 3 times in a row, the £100 penalties are increased to £500 each.

If your tax return is 6 months late, HMRC will write telling you how much Corporation Tax they think you must pay. This is called a ‘tax determination’. You cannot appeal against it.

You must pay the Corporation Tax due and file your tax return. HMRC will recalculate the interest and penalties you need to pay.

You should make payment of corporation tax directly from your limited company bank account to HMRC. There is very clear guidance on this from HMRC.

It is important that you use the correct payment reference when you make your payment to ensure that HMRC match payment to the correct accounting period.

Calculating UK corporation tax involves several steps, starting from determining accounting profits to making necessary adjustments for tax purposes. By understanding allowable deductions, capital allowances, and the impact of marginal relief, companies can accurately compute their tax liabilities and ensure compliance with HMRC. Moreover, businesses should stay up to date with changes in corporation tax rates and rules to take advantage of all available tax reliefs and incentives.

Accurate tax calculation is essential not only for compliance but also for effective financial planning. Many businesses, especially those with complex financial structures or international operations, may benefit

Using our Digital Bookkeeping Services means we can prepare your annual company accounts and corporation tax return in an instant at year end.

We work hard to do this as quickly as possible, to give you a clear view of your financial performance. This helps you make better financial decisions and allows you to plan for corporation tax payments.

Get in touch to see how we can help.