As a business owner and a company director paying your corporation tax bill is ultimately one of your key responsibilities. If you don’t prepare and plan for the amount of corporation tax due, it can often lead to cashflow issues and corporation tax penalties.
No one likes to pay taxes, but planning ahead and knowing how much tax you owe to HM Revenue and Customs can leave you free to focus on growing your business rather than worrying about what corporate taxes you need to pay and meeting tax deadlines.
The best way to prepare for your corporation tax bill is to understand the basics of corporation tax whilst keeping accurate accounting records so that a reliable estimate can be made.
Why preparing for your corporation tax bill is important
Make sure you plan ahead by holding a pre-year-end tax planning meeting with your accountant or getting your annual accounts finished as close to the financial year’s end as possible. This will ensure you pay the correct amount early and, wherever possible, can budget for your corporation tax by putting funds into a monthly savings account.
Corporation tax may seem daunting, especially for small business owners, and visiting your accountant can often seem less appealing than going to the dentist. But, preparing for your company corporation tax bill in advance can help ensure that you aren’t left in a position where you can not make your corporation tax payment on time, end up in financial difficulty, or are charged interest as you did not meet the corporation tax deadline, or even worse left with sleepless nights about a potential bill your company can not meet!
The best way to manage your tax affairs is by estimating how much corporation tax your company must pay throughout the accounting period.
Whilst this will only be an estimated figure of tax owed, it will give enough of a guide to have enough money set aside in your company to pay your corporation tax. We recommend putting it into a separate bank account.
When should I pay my corporation tax bill?
Limited companies must pay corporation tax within 9 months of the end of the accounting period. Getting your company accounts to your accountant as soon as you can after the end of the accounting period will give you your final bill with plenty of time to ensure that you can meet your corporation tax payments and prevent any last-minute issues.
Filing your company accounts and corporation tax return early does not mean you have to pay your corporation tax any earlier than the 9-month deadline. You just know how much corporation tax to pay well in advance of the deadline.
It is only limited companies that pay corporation tax. Self-employed businesses trading as sole traders or partnerships pay income tax and national insurance contributions through self-assessment.
How do I work out my corporation tax bill?
To work out your limited company UK corporation tax bill, you first need to calculate the company’s taxable profits. These are the company profits for the accounting period adjusted for expenses not allowable for corporation tax and any corporation tax allowances.
To do this, you should ensure that you have accurate and up-to-date financial records. This is why we love Xero and Dext, as it makes this easy for you and, when fully reconciled, can give you a snapshot throughout the accounting period of profits earned.
Once you have the taxable profits, the corporation tax rate needs to be applied to these.
From April 2023, the corporation tax rate is 25% for profits over £250,000 and 19% for companies with profits under £50,000. Profits between £50,000 and £250,000 are given what is known as ‘marginal relief’. If your company profits are within this range, your accountant should give you a corporation tax rate to help budget.
At Spotlight Accounting, we have designed a report on Xero for our clients that gives a rough estimate of the company’s profit and corporation tax payment to date.
Limited companies don’t just pay corporation tax on their trading profits; they pay corporation tax on all taxable income, including property income, chargeable gains, capital gains and investment income such as building society interest.
What can be deducted before corporation tax?
Business expenses and corporation tax reliefs can be deducted from income before paying corporation tax.
The term that HMRC use for expenses is that they need to be “wholly, exclusively and necessary for the purpose of trade”, so this includes, for example, things like rent, salaries, motor expenses, and business insurance.
Clothing is always an area that gets confusing. If you buy a plain jumper for work, this is not allowable, but if you buy a jumper with your logo on, this is allowable as it is classed as marketing.
Corporation tax reliefs can also be deducted and can include the following:
- Capital allowances for business assets purchased
- Losses brought forward from previous accounting periods
- Research and development allowances
- Losses from group companies
Unfortunately, there is no personal allowance for limited companies that pay corporation tax.
What expenses are not allowable for corporation tax?
The main expenses that are not allowable for corporation tax are:
- Capital expenses – These are expenses used to purchase assets in the business, such as buildings or machinery. While they may not be allowable as a business expense, you may get capital allowances on them.
- Depreciation of your business assets – However, you get capital allowances instead.
- Client entertainment – Taking customers to events or for food and drinks is not an allowable expense for corporation tax.
- Personal expenses – This includes personal travel expenses paid for with business money.
- Fines and penalties – HMRC see these as expenses incurred due to breaking the law, so you do not get tax relief.
However, this is not an exhaustive list, so please contact us for further advice.
What happens if my business does not make a profit?
Suppose the limited company did not make a profit. In that case, the loss can either be carried back against the company’s profits from the previous year or carried forward to be offset against future profits as long as it continues to trade.
We recommend taking advice concerning taxable losses to ensure they are utilised most tax-efficiently.
Get in touch with Spotlight Accounting for corporation tax compliance
No one wants to be worrying about paying the right amount of business tax if their company tax return is filed on time or if there is enough money in the bank to pay corporation tax.
At Spotlight Accounting, our team of tax experts help ensure that your company tax return is filed on time and with the right amount of tax paid.
We can also offer tax planning services such as a 9-month review, providing an estimated bill, and discussing potential tax-saving opportunities. We also offer a popular business tax review, where we look at your business and ensure you are extracting income in the most tax-efficient way. For more information, contact us today!
No company director or owner wakes up excited bout having to pay corporation tax. However, planning and setting aside cash each month to pay your corporation tax can make the company tax bill less of a shock.
Preparing for your corporation tax bill in advance will free up more time to discuss the future growth of your business with your accountant. It’s a win-win for everyone!
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