How is Corporation Tax Calculated?

Limited companies in the UK must pay Corporation Tax on profits they make by doing business.

The problem is that you’ll never get a bill for Corporation Tax. Instead, you’ll have to work out, pay, and report your tax yourself.

What is Corporation Tax?

Corporation Tax is a tax that all limited companies must pay, no matter how small they are. You pay this tax on your profits. That is, any money your business makes after you’ve deducted your overheads and expenses.

The Corporation Tax rate for 2020/21 is 19%

You don’t get a bill for Corporation Tax. Instead you have to work it out for yourself.

How to Register for Corporation Tax

Once you’ve registered your company and started trading, you’ll have to register for Corporation Tax. For this, you’ll need a Government Gateway account and a 10-digit Unique Taxpayer Reference (UTR) for your company. You’ll receive this within 14 days of registering with Companies House.

You’ll have to tell HMRC the date you started doing business. Your business’s first accounting period will then start from this date. HMRC will then let you know your deadline for paying your Corporation Tax.

Head here to register for Corporation Tax.

Corporation Tax Deadline

The deadline for paying your Corporate Tax is nine months and one day after your company’s accounting period. You’ll also have to file your Company Tax Return within 12 months of the end of each financial year.

You must keep detailed accounting records to ensure you pay the correct amount of Corporation Tax. You may have to pay a penalty if you’re late in paying your Corporation Tax, or submitting your Corporation Tax return

What to Include in Your Corporation Tax Records

  • Profits and Loss – All sales income your business generates, including any interest from your business bank account, as well as any profits from investments or selling assets.
  • Allowable Expenses – You can deduct certain allowable expenses from your Corporation Tax bill. This usually extends to expenses that are “wholly and exclusively” for business use, including marketing, insurance, supplies, and travel. Learn more about allowable expenses.
  • Capital Allowances – These are assets that you acquire for business use, such as equipment, machinery, and vehicles. These are treated differently from allowable expenses, as you keep them for longer yet their value usually depreciates over time. Depreciation is not an allowable expense. Instead, you need to add depreciation into your tax calculation. So if you bought a car worth 20,000 in one year, but it’s only worth 15,000 the following year, you’d have to add 5,000 as a deduction to your tax calculation. Capital allowances are a means for businesses to manage these depreciation charges. Learn more about capital allowances.
  • Entertaining Costs – Unfortunately, any costs associated with entertaining clients and suppliers are not tax deductible. Instead, you must add your client entertaining costs to your total profit, and your corporate tax bill will be calculated based on the total amount.

So How is Corporation Tax Calculated?

First, you need to calculate your total profits. Then you’ve have to take away your overheads, any depreciation of your assets or additional costs before using the relevant corporation tax rate to calculate your corporation tax liability.

Let’s say you made 100,000 in sales, and 300 from interest. However, your overheads – that is, your allowable expenses – amount to 25,000.

This would give you a total profit figure of 75,300.

To this figure you need to add any depreciation of your assets (let’s say 300) and any amount you’ve spent on entertaining clients (let’s say 2,000). However, you can subtract any capital allowances from the total figure (let’s say 5,000).

So to get your total figure for profits chargeable for corporation tax, you’d add 2,300 to 75,300, then subtract 5,000 from the total. This gives you a final figure of 72,600.

Corporation Tax is currently charged at 19%. So in this case, the amount of Corporation Tax you’d have to pay would be £13,794.

Bespoke Insurance Cover for Small Businesses

If you keep detailed accounts, then neither you nor HMRC should be in any doubt over any aspect of your Corporation Tax return.

But if HMRC does have any doubts, it may trigger an investigation into your finances. That’s why no small business should be without some form of insurance cover. Insurance can cover your legal expenses in the event of tax investigations.

At Tapoly, we specialise in providing comprehensive and affordable insurance for small businesses. Our flexible tailored cover starts at just £5 a month, and you can get a free quote in minutes. Head here to learn more.

If you have any questions or would like to discuss your options please contact our Tapoly team at info@tapoly.com, call our help line on +44(0)207 846 0108 or try our chat on our website. 

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