*Updated for 2021/22 tax year.

If you have a small limited company, perhaps working alone or with a small number of employees, preparing a Corporation Tax Return each year can feel like a stressful task.

In this simple guide, we’ll take you through everything you need to know about the process, so you can get it done right and get back to running your business.

What do you pay Corporation Tax on?

Whenever your limited company starts trading, you will have to start paying Corporation Tax. It can be tricky to understand exactly what ‘trading’ covers, and HM Revenue and Customs (HMRC) have a guide to this here.

Corporation Tax is calculated on a company’s annual profits, in a similar way to income tax for individuals. However, companies don’t get a personal allowance in the way individuals do, so tax must be paid on all profits gained.

In fact, you have to pay tax on all of your taxable profits. That includes income earned from investments and property too.

You must calculate your own Corporation Tax bill − unlike with individuals, where HMRC calculates your tax bill based on details provided.

It’s location dependent

If your business is based in the UK, you’ll have to pay tax on any profits made in the UK or abroad. If your business is based in another country but has a branch in the UK, you will only have to pay profits on the UK-based activities.

Rate

The Corporation Tax rate has been 19% for all limited companies since April 2016. This is due to increase to 25% from April 2023.

Step by Step

Make sure you are registered

The first thing you need to do is make sure that you are registered to pay Corporation Tax. You need to do this within three months of when you started to trade, and many people do it at the same time as they register their business online with Companies House.

If you haven’t already done so, you can register via the HMRC website.

If you don’t have a user ID, you can create one when you log in.

You’ll need your company’s Government Gateway user ID and password to log in. This is different from your personal Unique Taxpayer Reference (UTR) number and will have been posted to your company address by HMRC within 14 days of the company being registered.

Be aware of the deadlines

There are two key dates that you need to be aware of:

• Your Corporation Tax accounting period, and
• Your Company Tax Return deadline.

You need to prepare your Company Tax Return in order to work out how much Corporation Tax you have to pay. The deadline for this is 12 months after the accounting period it covers.

You need to pay your Corporation Tax before you file your Company Tax Return, and the date you pay it is dependent on your company’s Corporation Tax accounting period. For most companies, this will be 31^st March.

The deadline to pay your Corporation Tax bill will be nine months and one day after the end of your accounting period for your previous financial year.

If your profits are over £1.5 million, you must pay Corporation Tax in instalments. There are different deadlines and rules for:

• if your taxable profits are between £1.5 million and £20 million, and
• if your taxable profits are more than £20 million.

Your accounting period

You can find out your accounting period by logging onto HMRC’s online service.

When you registered your company, you will have told HMRC the date you started to do business. Your first accounting period will start on that date, but you can always change it.

In your first accounting period you will get a letter from HMRC giving you the dates, after you register for Corporation Tax.

When to submit your Corporation Tax Return

You need to submit your Corporation Tax Return at some stage between the date of your company year end and your statutory filing date – this is either 12 months after your accounting year end or three months after you receive a notice to deliver a return from HMRC.

However, many people prepare and file their tax return well in advance of the deadline, to allow time to calculate how much they have to pay.

This is because the deadline to pay Corporation Tax is usually before the deadline for filing a Company Tax Return.

There are some circumstances where it might be different, for example your first year of trading. In that situation, you might need to send two tax returns to cover your first year.

The company director is responsible for ensuring that the tax is paid on time and that the bill is paid in full. Even if you hire an accountant, this is still the case.

Tell HMRC if you have nothing to pay

All limited companies must prepare a Corporation Tax Return, even if they didn’t trade or didn’t make a profit. If you don’t do this, HMRC will send you payment reminders.

You can tell HMRC by either:

• filling in the ‘nil to pay’ form here, or
• sending back the payslip on the reminder that HMRC sends you, marked ‘NIL due’.

Prepare a Corporation Tax Return

Every company is responsible for preparing their own Corporation Tax and working out how much needs to be paid.

As part of the process of preparing your Company Tax Return, you will need to calculate your profit and loss for Corporation Tax. Your company’s accounting profit will be different to its taxable profit, as some items of expenditure will be allowable for tax and others won’t. We’ll look at this in more detail in the next section.

Expenses and allowances

Unlike individuals, companies don't receive any kind of tax-free allowance, and therefore all profits are taxable. However, there are a number of expenses and deductions that can be claimed to reduce your bill.

Most expenses you spend on your business are allowable, for example:

• Wages and salaries
• Rent and rates
• Some personal expenses
• Equipment
• Insurance
• Travel

You can check the full list on the government’s website here.

Business entertaining is not an allowable cost for Corporation Tax and must be added back into your profit and loss calculation.

Capital allowances and depreciation

The main adjustment you will need to make to your calculation is capital allowances. This relates to money spent on fixed assets, such as computers or cars, that your business will keep for several years. The value of these assets will depreciate over time.

The money spent on these types of items will be written off over a number of years. For example, a laptop costing £600 won’t be added to your profit and loss calculation. If you believe it will last 3 years, then you will add it to your calculation sheet as a ‘fixed asset’ costing £200 for the next 3 years.

At the end of the three years, the laptop will appear on your balance sheet with a cost of £600 and accumulated depreciation of £600 − so a net value of £0.

However, depreciation is not an allowable expense. This means that you will have to add it back in when calculating your taxable profit.

For most small businesses, most capital asset purchases will qualify for Annual Investment Allowance (AIA) tax relief. This means that up to £1 million of capital costs each year can be effectively written off and can be used to reduce the amount of profit liable for Corporation Tax.

These include things like laptops and desktop computers, but not things like:

• Leased items
• Buildings, gates and doors
• Entertainment items.

You can’t use AIA for company cars; these get a separate tax relief known as ‘writing down allowances’, which you can read more about on the HMRC website here.

For more details on the criteria for claiming AIA, see HMRC guidelines.

How to run the calculation

Your calculation can be done in a few straightforward steps:

1. Calculate all your profit and loss details. Combine all your sales and income, including any interest gathered. Remember, it’s not just your trading profits that are taxed, but any investments and sales or equity, too.
2. Work out all the overheads and expenses that your business has incurred. Deducting these is the key to not paying more tax than is necessary, but make sure that you only deduct allowable expenses. Don’t forget that your salary counts as expenses.
3. Capital allowances and depreciation. See the table below for calculating your capital allowances.
4. Add any business entertainment expenses back in. Again, this will be clear in the table below.
5. Final calculation. Corporation Tax is 19%, so divide the liable profit by 100, then multiply the result by 19 to get the amount due.

Example Tax Calculation

How to pay

To pay your bill, you must complete a Company Tax Return (form CT600) to HMRC each year.

If your payment deadline falls over the weekend or on a bank holiday, your payment must reach HMRC on the last working day before.

Below are the approximate timelines for paying HMRC:

Note: You can no longer pay with credit card.

Make sure you check your online account within a few days to make sure that your payment has been received.

You must tell HMRC if you discover any errors after this, even though it is too late to amend your Company Tax Return.

Conclusion

As a small limited company, the most complicated part of calculating your own Corporation Tax is making sure that you’ve allowed for the correct capital investments. Once you have this bit figured out, the next thing you need to do is make sure that you file your Company Tax Return and pay your tax bill by the correct deadline.

It can seem like a daunting task, but with this guide it should be a bit more straightforward, and it will get easier each time you do it.

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