Corporation Tax – what it is, and how to account for it

As a limited company owner, your company is liable to pay Corporation Tax on its profits. All UK companies are liable to pay tax on their profits, regardless of where in the world these profits were accumulated.

How are company profits taxed?

Over the past decade, the rates of Corporation Tax have fluctuated, and the current rate payable by the vast majority of contractors – the ‘small profits rate’ – is 20% (2012/13 tax year). This rate applies to companies that make profits of £300,000 or less per year.

Above this point, between £300,000 and £1.5m, companies can reclaim ‘marginal relief’, and beyond that, the main rate of Corporation Tax applies, which is currently 24% following George Osborne’s decision to slash the rate by 2% during Budget 2012.

Registering for Corporation Tax

When you set up a new limited company, you are legally obliged to tell HMRC that you are liable to pay tax, and file a tax return each year, regardless of whether or not the company is expected to make any profits or not.

After setting up a company via Companies House, you will automatically be sent Form CT41G, which collects your new company details, which should be returned to the local Corporation Tax office right away.

You will appoint your accountant to deal with your tax affairs on your behalf, using Form 64-8 (or via the online authorisation service), however as company director, you are ultimately responsible to ensure your tax returns are completely accurately and on time, and that you settle your Corporation Tax liabilities by the annual deadline.

Accounting for Corporation Tax

At the end of each Company financial year, your accountant will work out how much Corporation Tax you owe, and this amount must be set aside until payment is due. Many contractors set up a separate business bank account to store future tax liabilities (also including VAT).

Unlike other taxes, the deadline for paying your tax liability falls before the date by which you must file your tax return.

Payment is due 9 months and 1 day after your company’s financial year end.

Your tax return must be submitted within 12 months of the year end date.

Since April 2011, your Corporation Tax Return (CT600) must be submitted to HMRC online, and your tax payment must be made electronically. You can elect to pay via direct debit (the best option), Billpay, or bank transfer.

Further Information

You can visit HMRC’s Corporation Tax pages here. including information on how to pay your Corporation Tax bill.