A Bionic guide to corporation tax for small business

Taxes are an inevitable part of all our lives, but it’s only when running your own business do you realise just how complicated things can get – income tax, VAT, business rates, and national insurance all need to be accounted for.  

And, all being well, corporation tax is another one you’ll need to factor in. Our corporate tax guide explains everything you need to know, including why you should actually be glad you’re paying it (well, sort of glad you’re paying it). 

What is corporation tax? 

Corporation tax is a tax paid by UK businesses on any profits they make. Calculated and paid annually based on your corporation tax accounting period' - usually the same as your company's financial year - the UK’s corporate tax rate is currently 19%. 

Although no-one enjoys paying taxes, if you’re paying corporation tax then you’re in a relatively good place as your business is turning a profit.  

There’s no tax-free corporation tax allowance, which means all profits are taxable. But if your business isn’t making a profit, you don’t pay corporation tax. It’s that simple. 

What is the UK’s corporation tax rate? 

The UK’s current corporation tax rate is 19%. This will rise to 25% in 2023, but only for business with profits of more than £50,000.  

Any business that makes profits of £50,000 or less will still pay the 19% rate. A tapered Small Profits Rate will be in place for businesses with profits of more than £50,000, which means that only businesses with profits of over £250,000 will be taxed at the 25% rate.   

Who pays corporation tax? 

Corporation tax in the UK is charged on profits made by business that are registered as a limited company. If you’re a sole trader or partnership, you won’t pay corporation tax but will income tax on your profits as part of your self-assessment tax return. 

There are some exceptions though, and the following types of businesses often need to pay corporation tax, even if they’re not a limited company: 

  • Co-operatives to groups of individuals carrying out a business 
  • Members clubs, societies and associations 
  • Housing associations  
  • Trade associations  

When you register your business as a limited company with Companies House, you will be registered for corporation tax at the same time. For more information, go to the Register your company page on the government website. 

You’ll need to notify HMRC within three months and register to pay corporation tax. You’ll also need to register your company as 'active', 'trading', 'non-trading' or 'dormant' for corporation tax purposes. For more information, check out the government guide to trading and non-trading for corporation tax

When does corporation tax need to be paid? 

Corporation tax is calculated annually based on your business's corporation tax accounting period, which is usually the same as its financial year.  

If you have taxable profits of up to £1.5 million -a position most SMEs will be in - you need to pay your corporate tax bill nine months and one day after the end of your accounting period. This means that if your company’s accounting year ends on March 31, you’ll have to pay your corporation tax bill by January 1. 

If you have taxable profits of more than £1.5 million, then you need to pay your corporation tax in instalments.  

You can find out more about the rules and deadlines at the government website. If you’re a large business, check out the deadlines for taxable profits of between £1.5 million and £20 million. If you're a very large business, here’s more information on paying tax on profits of more than £20 million

How to pay corporation tax 

You can pay corporation tax online or over the phone, in one of the three following ways: 

  1. Direct Debit – Use this to make a single, one-off payment. You are covered by the Direct Debit guarantee 
  2. Bank transfer - Get HMRC’s bank details to make your payment using your bank’s website, app or at a branch 
  3. Debit card or corporate credit card - There is no fee for paying with a personal debit card, but corporate credit and debit cards are charged a fee 

The way you pay you corporation tax bill will have an effect on the time it takes for your payment to process.  

  • Payments are take on the same day or the next day when using online banking, telephone banking or CHAPS (Clearing House Automated Payment System) 
  • Payments can take up to three working days when paying in branch at your bank or building society, and when paying online by debit or corporate credit card. You should also allow for three days’ clearance when paying by BACS (Bankers' Automated Clearing System) or using a Direct Debit that you’ve used before. 
  • Payments can take up to five working days to clear when you pay by a newly created Direct Debit. 

If your payment date falls on a weekend or a bank holiday, you need to make sure you pay in enough time for your payment to have cleared by the last working day before your deadline. 

You can't pay your corporation tax bill by post or at the Post Office.  

For more information, go to https://www.gov.uk/pay-corporation-tax  

What if my business has made no profit in the last year? 

If your business hasn’t made any profits during the last accounting period, you need to let HMRC know that you have nothing to pay. 

You can do this by filling in the ‘nil to pay’ form, or by marking the pay slip on any HMRC reminders as ‘NIL due’, before sending it back. 

If you don’t let HMRC know, you’ll keep getting reminders sent to you. 

And you still need to file your company’s tax returns as normal, even if you’ve no corporation tax to pay. 

What happens if your corporation tax payment is late? 

HMRC does not take tardiness well and will hit you with a fine if  you post your tax return late or you're late paying your tax bill.  You'll also be fined for giving them inaccurate information, even if it's by mistake.

Even if you're accountant is to blame for a late or inaccurate return, it's the company director who'll be held responsible and have to foot the bill.

What if my tax return is late?

HMRC has a sliding scale for late tax returns:  

  • One day late = £100 fine.  
  • Three months late = Additional £100 fine.  
  • Six months late = HMRC will estimate your bill and add a 10% penalty onto what it thinks your unpaid tax will be.  
  • 12 months late - Another 10% is added to your estimated tax bill.  

What if my corporation tax payments are late?

 If you don't pay your corporation tax bill on time, you'll be charged interest on the amount you owe and might be hit with a further penalty.  HMRC can collect payments in the following ways:

  • Directly from your earnings or pension  
  • Via debt collection agencies
  • Through the sale of your assets (except in Scotland)  
  • Applying to the courts to taking money from your bank or building society accounts (except in Scotland)
  • Making you bankrupt or closing down your business

If you've missed a payment, get in touch with the HMRC corporation tax helpline on 0300 200 3410. Line are open from 8am to 6pm, Monday to Friday.

If you can't afford to pay your corporate tax bill, you need to contact HMRC and set up a Time to Pay arrangement as soon as possible. If you're in this situation, call the HMRC Payment Support Service on 0300 200 3835. Line are open from 8am to 6pm, Monday to Friday.

What if I give inaccurate information?

If your tax returns are inaccurate, you'll be fined by HMRC. But the level of the fine will depend upon whether the taxman believes the mistake was deliberate and whether you tried to hide it. If you have made a mistake on your tax return, you need to let hMRC know as soon as possible, preferably before they get in touch with you.  

  • If the mistake was careless but not deliberate you could be charged between 0-30% of your tax bill if you highlight it, or 15-30% if HMRC spots it first.  
  • If the mistake was deemed to be deliberate but not hidden, you'll be hit with a 20-70% fine if you disclose the mistake, or 35-70% if HMRC finds it.  
  • If the inaccuracy was deliberate and you tried to hide it you may be charged 30-100% in fines if you admit it, and 50-100% if you don't.  

In short, be honest and don't make any mistakes, but if you do make a mistake don't try to hide it.

If you want to make any changes to your company tax return, you'll usually need to do it within 12 months of the filing deadline. You can do it online, using commercial software or by sending a paper return to your company's corporation tax office.  

Once you notice a mistake or inaccuracy in your accounts, you must send an amendment to Companies House on paper, clearly requesting to replace the original accounts, that the new records are now the statutory accounts and that they were prepared as at the date of the original accounts.