Corporation tax is payable by companies on the profits they make. Corporation tax is only paid by limited companies. If you’re doing business as a sole trader or a partnership, this guide doesn’t apply to you.
Corporation tax rates
Corporation tax is currently at 19%. The government has set a target for corporation tax to be reduced to 17% by the 2020/2021 tax year. Boris Johnson did state this change would be put on hold during his election campaign.
Below, find out how corporation tax has changed in the previous 3 years to date:
| 2019-2020 | 2017-2018 | 2016-2017 | 2015-2016 | ||
| Size of profits | Level of profits | % rate | % rate | % rate | % rate |
| Small | Up to £300,000 | 19 | 19 | 20 | 20 |
| Small to main | £301,000-£1,500,000 | 19 | 19 | 20 | £10,500 |
| Main | £1,500,001 and above | 19 | 19 | 20 | 21 |
| Applicable fraction | N/A | N/A | N/A | 1/400 |
There are two rates of corporation tax – “small” for companies whose profits are £300,000 or less and “main” for companies whose profits are more than £1,500,000.
Since April 2015, both the small and the main rate of corporation tax have been identical.
Corporation tax, company tax returns, and accounting periods
First of all, your accounting period for Corporation Tax is the amount of time that’s covered by your Company Tax Return.
BusinessCostSaver tip – you must file your company tax return (which shows your company’s profit and loss for corporation tax purposes) and your corporation tax bill no later than 12 months after the end of your accounting period.
Your accounting period can’t last more than 12 months.
This creates headaches for companies in their first year. If you started your business on the 11th February 2018, your first company tax return would be the 11th February 2018to the 10th February 2019. After that, you’d have a second accounting period lasting from 11th February 2018 to the 28th February 2019.
However, your first annual accounts can last more than 12 months. Using the same example, if you set up on the 11th February 2018, your first accounting period would last from 11th February 2018 to 28th February 2019.
So, in that time, you’d have one accounting period and two company tax periods. From your second year onward, the accounting period and the company tax period start and end on the same dates.
Corporation tax, company tax returns, and accounting periods – companies that have started doing business again
Every year, your company needs to report to Companies House what it’s done for the previous year. If the business is trading, you send Companies House your accounts. If the business is not trading, you declare the company as “dormant” and you send dormant accounts to Companies House every year.
Your corporation tax period starts when your company resumes trading. If your company has started up again after a period of being dormant, you can:
• keep the company’s accounting reference date the same with Companies House
• prepare account for the 12 months up to your accounting reference date
• send your accounts to Companies House and use the same accounts to complete your company tax return.
With these three options, your accounting period remains the same so it’s the simplest option for many directors restarting their business.
How do you work out what is profit for corporation tax?
Corporation tax is payable on the:
• money you make from your activities (your trading profits)
• the returns on any investments your company has
• profits it makes from selling assets it owns (HMRC’s term for this is “chargeable gains”).
What if my accounting period is shorter than 12 months?
Both the small profit and the main profit threshold last for a year.
If you decide to shorten the length of your accounting period to 9 months, then you need to reduce both the small profit and the main profit thresholds proportionately.
In the case of a 9-month accounting period, take the £300,000 threshold, divide it by 12 (giving you £25,000) and multiple it by 9. That means that, for this shorter accounting period, the small profit threshold is £225,000.
What if my company has links with other companies?
If you have a series of companies which is linked, either because…
• one company controls another company or
• two or more of your companies are controlled by the same people or companies
…then they have a shared tax threshold.
If one company is part of a group of three companies, they have a shared tax threshold. That means that, for the purposes of small profit corporation tax whose threshold is £300,000, all three companies share that £300,000 threshold.
So, for all three of the companies in the group, their actual small profit threshold is £100,000 each.
What is marginal rate relief and how do I claim it?
As we mentioned earlier, up until April 2015, the small rate and the main rate were taxed differently. If your company’s profits fell somewhere in between the small rate and the main rate (£300,001 and £1,500,000), you could apply a marginal relief to that part of your profit that was between the two rates.
How does this work? Let’s assume that your business made £750,000 profit in 2014/2015. How do you deal with the £300,000 corporation tax threshold?
First, take the £750,000 profit and apply the main tax rate of 21%. This leaves you with a figure of £157,500.
Then, take the main relief threshold of £1,500,000 and then subtract your level of profitability. You’re left with £750,000. Then multiply this figure by the fraction.
So, that’s £750,000 multiplied by one and divided by four hundred, which equals £1,875.
Subtract the £1,875 from the £157,500 to get the corporation tax payable of £155,625.