Who pays corporation tax in the UK?

Introduction to Corporation Tax

Corporation tax is a tax levied by the UK government on certain types of businesses and other entities. This tax must be paid by certain entities, both on the profits they make and the gains made from selling assets.

This tax is the fourth largest source of revenue for HM Treasury, raising £78.6bn in the 2022/23 financial year. This money is used to spend on things like public services, defence and overseas aid.

Entities Liable for Corporation Tax in the UK

The list of who pays corporation tax in the UK may be longer than you think. It’s not just limited companies by any means. The following entities are liable for the payment of corporation tax:

• Limited companies
• Foreign companies with a UK branch or office
• Members’ clubs, societies, and associations
• Co-operatives
• Housing associations
• Groups of individuals conducting a business as a partnership, where one or more partners is a company
• Unincorporated associations
• Trusts and estates with trading income

How Corporation Tax is Calculated

The way in which corporation tax in the UK is calculated changed in April 2023. Since then, the main rate of corporation tax sits at 25% of profits during the accounting period. This rate applies to all companies with profits of over £250,000 during that period.

Those who make profits of £50,000 or less during the accounting period are charged a small profits rate, which currently stands at 19%.

If your business makes profits of between £50,000 and £250,000, it is possible that you could be entitled to Marginal Relief. However, there are certain criteria that you need to meet in order to do so. Your company must be UK-resident, it must not be a close investment holding company, and profits (including distributions from unassociated, unrelated companies) must not go over the £250,000 threshold.

There are certain allowances and reliefs that you may be able to claim to bring your corporation tax payments down. These could include:

• Capital allowances, for the purchase of business assets
• Trading losses
• CITR relief for creative industries
• The Patent Box, if you patent inventions
• Property income, terminal and capital losses
• Relief on goodwill and relevant assets
• Disincorporation Relief

Filing Corporation Tax Returns

In order to file a corporation tax return, you must ensure that your company is registered for corporation tax. This can be done by signing into your business tax account and following the guidelines there.

Many businesses choose to file their corporation tax return online, via their HMRC account. This can either be done by the director(s) of the company, or through an accountant. The deadline for filing your return is normally 12 months after the last day of the accounting period that the return in question covers.

The deadline for payment is different, and is normally nine months and one day after the end of the accounting period. Some companies may be liable for payment in instalments, rather than a single lump sum.

Payment can be made in various ways. It can be paid online. It can be paid at your local bank branch or Post Office. Payments can also be made over the phone. Bear in mind that some payment types – like BACS, credit/debit card payments and direct debits – can take 3-5 working days to clear: important to note if you are paying on the day that the payment is due.

Deadlines and Penalties for Corporation Tax

Every company liable for corporation tax in the UK should be aware of the deadlines for filing and payment, and the potential penalties that could be imposed if these deadlines are not met.

The deadline for filing a company tax return is 12 months after the end of the accounting period that it covers.

For companies with profits of up to £1.5 million, corporation tax payment is due 9 months and 1 day after the end of the accounting period.

For those with profits of over £1.5 million, corporation tax payments are due in instalments.

HMRC will also penalise those who file or pay late, as follows:

• Filing your company tax return up to three months late will result in a £100 penalty.
• For tax returns filed over three months late, an additional £100 penalty will be charged.
• HMRC will add further penalties if they believe you have purposefully underestimated your corporation tax bill. These penalties can sum to up to 100% of the unpaid tax.
• HMRC will also charge interest on late payments and penalties, with this beginning from the day after the tax payment was due.

Tips for Managing Corporation Tax Liabilities

You’ve had corporation tax explained, but are there any strategies you can put in place to make your tax planning more efficient, and legally reduce your liabilities?

The answer? Yes. While all of the below won’t apply to every single business, it is important to be aware of the following – both for now, and in case your business changes in the future. 

• Make use of Capital Allowances. You may be able to claim capital allowances on business assets including vehicles, machinery and equipment, reducing your taxable profits.

• Claim Research and Development (R&D) Tax Credits. If innovation is a core function of your business, claiming R&D tax credits can help reduce your corporation tax bill.

• Maximise Pension Contributions. Any employer pensions contributions that you make will be tax-deductible, reducing your corporation tax liability.

• Carry Forward Losses. Has your business made losses? If so, these losses can be carried forward to offset against future profits, reducing your tax liabilities in the future.

• Dividend Planning. By carefully considering both the timing and the amount of dividends, you can optimise tax efficiency – both for your company and for its shareholders.

• Transfer Pricing. To avoid any adjustments by HMRC, ensure that any company transactions with connected parties are conducted at arm’s length.

• Patent Box Regime. If your company earns income from patented inventions, use of the Patent Box Regime can ensure that those profits are charged corporation tax at a lower rate.

• Creative Industry Reliefs. If your company operates in the creative sector, you may be able to benefit from various tax reliefs that are designed to encourage cultural production.

• Group Relief. If your company operates as part of a group, consider using group relief to share group losses and reduce your overall tax liability.

• Seek Professional Advice. Every business needs to be fully up to speed on its corporation tax requirements, and professional tax advice is vital. Regular consultations with an accountant can help you to navigate the complexities of corporation tax legislation, as well as helping you to identify areas where you could reduce your tax burden.

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