How Corporation Tax applies to limited companies

Your limited company pays Corporation Tax (CT) on any profits it makes during its financial year. CT is applied to the profits of all UK companies, regardless of size. Here we look at how companies are taxed, and the deadlines you should be aware of as a director.

The Basics

When you register a new company with Companies House, HMRC is automatically informed of the new entity’s existence.

A Corporation Tax registration form (CT41G) is sent to your company’s registered office, along with information on how to get started, together with a Unique Taxpayer Reference (UTR) for your company.

Within three months, you (or more likely, your accountant) must provide HMRC with further information about the company, such as what type of business you are running, when you started trading, and the date when your annual accounts will be up to.

What tax rates apply to your company?

These days, all companies pay the same rate of Corporation Tax – 19% of profits (2022/23 tax year).

On 1st April 2015, the main rate of Corporation Tax was finally aligned with the small profits’ rate, at 20%. It was cut by 1% from 1st April 2017 and has remained here ever since. Plans to reduce it in the future – to 17% – have been shelved.

Interestingly, although the personal tax year runs from 6th April – 5th April each year, the CT tax year runs from 1st April until 31st March each year. This so-called ‘fiscal year’ is different from your company’s accounting period, which will typically start in the month when your company was first incorporated.

For a number of reasons, your accountant may recommend changing your company’s accounting period ‘end date’ – this can easily be done by shortening the current year’s period, but the period cannot be extended.

CT tax rise from April 2023

At the March 2021 Budget, the Chancellor announced that the main rate of Corporation Tax would rise to 25% from April 2023.

The current 19% rate will still apply to profits of £50,000 and below, whilst the full rate of 25% will apply to profits of £250,000 or more.

A new system of taper relief will apply to levels of profits that lie between these two thresholds.

How to account for Corporation Tax

To calculate the profit upon which CT is applied, your accountant will add up all of your business income, bank interest, capital and other gains, and take away any legitimate expenses and reliefs.

Your company’s accounting period is likely to span two ‘fiscal years’ (see above). So, if different tax rates apply between each year, (e.g. 21% in Year 1 and 20% in Year 2) your CT liability will be apportioned using each rate, according to the number of days your accounting period spans each fiscal year.

Filing and payment deadlines

It may surprise you to learn that the Corporation Tax return (CT600) itself must be filed online within 12 months of your company’s accounting period. However, the company (if annual profits are £1.5m or less) must pay any tax it owes to HMRC within 9 months and one day following the end of its accounting period.

This is the only major tax where the payment and filing deadlines do not fall on the same day.

You can settle your tax bill via several online methods, although you can no longer do so by post.

HMRC recommends setting up a direct debit to reduce the chances of missing the deadline – which seems very sensible!

Importantly, if your company is trading but you don’t have a CT liability for the year in question, you (or more likely, your accountant) must inform HMRC that you have ‘nil to pay’.

Keeping accurate records

All companies have to keep the following information safe for a minimum of six years;

• Details of your company’s assets, liabilities, income, expenditure and any ‘stock in hand’ at the end of your company’s financial year.
• Business records, such as your bank statements, annual accounts, invoices, orders, delivery notes, and any other relevant information.

Unsurprisingly, HMRC operates a penalties regime for committing any number of CT-related offences, such as failure to late filing, and incorrect CT600 submissions. Find out more on the HMRC site.

Further Information

Try HMRC’s introduction to Corporation Tax here.

Find out your company’s tax liability by using our Limited Company Profits Calculator.