Updated on: Oct 16, 2023
This blog post covers all you need to know about corporation tax calculation for a limited company and is intended for UK based contractors and freelancers who work through their own company.
What is corporation tax?
Just quickly, here is a recap on corporation tax. Corporation tax is applied to the trading profits from the Profit and Loss statement (or Income statement) taken from the business annual accounts. The profit of a company is the total sales less any 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 the HMRC.
Handling assets are treated slightly differently which I will cover below, and not all expenses in a Profit and Loss statement are deductible for company tax (also see below).
By the way, the terms corporation tax, company tax, business income tax, and corporate income tax are often used interchangeably. They all mean the same thing.
The corporation tax calculation
Working out how much corporation tax to pay for our clients is relatively straight forward and is calculated through preparing the company tax return (often referred to as the CT600). Our online corporation tax calculator can also be extremely useful for this. Corporation tax relates to the taxable profit of your limited company and is a liability that falls on the company to pay. The other common tax our limited company contractor clients pay is tax on dividends, but this falls on the individual to pay and is not a company liability. Our dividend and salary tax calculator can help you with this.
Over the accounting period we take total sales and deduct all business expenses to arrive at the taxable profit for the business which is then used to calculate corporation tax.
There are a few common exceptions to this for our clients which affects how we calculate corporation tax.
1: The first exception is expenses that relate to Entertainment. For corporation tax purposes, Entertainment expenses are not tax deductible for your business and so any expense deduction from the Profit and Loss statement are added back in the company tax calculation. So, while entertainment may be a business expense in your business accounts it is not allowed to be used to reduce your taxable profit.
2: The second exception is bank interest. Our clients typically do not earn a great deal of bank interest income, however, those that do will pay corporation tax on the full interest income amount. This is regardless of whether the business has made a profit or not. For example, a business that has made a loss for the financial year but has also earned interest income of £100 will pay corporation tax on the £100 interest income. But, as mentioned, this rarely impacts our clients because their interest income tends to be quite small, and generally speaking if the company has a taxable profit then bank interest income will make no difference to the overall company tax calculation.
3: The third common exception to the calculation of corporation tax is the handling of assets. Depreciation is not an allowed tax deductible expense so any depreciation deductions in the Profit and Loss statement are added back into the taxable profit calculation. Instead of depreciation, capital allowances are used. For most of our clients the capital allowances regime means that the full cost of asset purchases in the first year are deducted against profit for that year. This means that while an asset made be depreciated in the company accounts over a period of three years, the full cost of the asset in terms of tax deductibility is recognised in the year of purchase. This helps our clients in terms of cash flow because the full taxable deduction for the asset purchase happens at year one.
When is corporation tax paid?
The rule here is fairly straight forward. Once you have calculated how much corporation tax to pay over the accounting period, it is payable 9 months and 1 day after the company year end. So if for example you prepare a set of annual accounts for your business for the period ending 31 December, your corporation tax must be paid by the 1st of October.
In a quirk of the corporation tax system, it is possible for a limited company in its first year of trading to be required to prepare two corporation tax returns covering a single set of annual accounts. This is because a corporation tax return can only ever be for 12 months maximum, and if the first set of trading accounts covers a period of say 14 months, then a second corporation tax return is required for the second two-month. 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.
How much corporation tax do I pay?
The current corporation tax rate is 19% of your taxable profits. For an accounting period that commences from April 2023 onwards there are two main rates of corporation tax.
1: The small business rate of 19% that applies to all taxable profits up to £50,000
2: The main company tax rate of 25% that applies to all profits over £250,000.
Where you have taxable profits that fall between these two thresholds the corporation tax rate is calculated on a straight-line basis between 19% and 25%.
For two thirds of our clients, their taxable profit does not exceed £50,000 which means they will continue to pay corporation tax at 19%. Your company tax return will automatically calculate your corporation tax liability using these thresholds, but for clarity purposes, here is a simple corporation tax calculation to help you calculate how much corporation tax you will need to pay based on your taxable profit.
Corporation tax (CT) = Taxable profit x CT (plug in the CT rate listed below that applies to you).
1: CT rate for Taxable profit below £50,000
Corporation tax (CT) = Taxable profit x 19%
2: CT rate for Taxable profit above £250,000
CT = Taxable profit x 25%
3: CT rate for Taxable profit between £50,000 and £250,000
CT = 19 + (( Taxable profit – 50,000 ) * 3 / 10000 )
After a quick Google search, you will find various other corporation tax calculator options online.
How to pay corporation tax
The payment of corporation tax should be made directly from your limited company bank account to the HMRC. There is very clear guidance on this from the HMRC.
It’s important that you use the correct payment reference when you make your payment to the HMRC to ensure they match payment to the correct accounting period. The payment reference takes the form of your business UTR (which is a 10 digit number), then “A001”, then a sequential numerical number (eg “01”) and finally the letter “A”.
Each year the sequential numeric number increments by 1. When you log in to your business tax account with the HMRC you will see the payment reference under the corporation tax section of your business tax account. When you come to close your limited company, often the accounting period is shortened, and when this occurs the HMRC will auto increment your next corporation tax reference number by two numbers, so be careful of this when preparing your final limited company accounts.
For final trading accounts, we will file the final accounts with the HMRC and then wait for the new payment reference number to be issued, (which usually takes 5 to 10 days). This way we ensure we always advise our clients of paying corporation tax using the correct payment reference number.
For further reading, take a look at our contractor calculator scenario here.