How to Calculate and Pay Corporation Tax
A small business guide to working out what corporation tax you owe, offsetting profits with losses and minimising costs…
All companies must pay corporation tax on whatever profits they make – even unincorporated organisations such as clubs and societies pay corporation tax on any profits they make.
The responsibility for calculating the amount of tax you owe is largely your own – do not wait until the end of the tax year to think about it, since your activities during the year will go a long way towards affecting the final figure.
Here we look at how to calculate the tax you owe; offset your profits with losses, and minimise your tax bill.
How are taxable profits calculated?
Corporations can make profits on several different aspects of their business and all forms of profit made during an accounting period are taxed – they must be totted up separately and then added together to reach a complete figure.
Profits which are taxed include capital gains, which is profit made by selling off particular assets (for example, if you sell a piece of machinery, any profit made will be taxable unless the money is reinvested); however, profit made when selling shares in a trading subsidiary may be exempt from taxation.
The other main revenues you will be taxed on are profits made from trading activities; leasing buildings or land; interest on money held on deposit (companies usually receive interest without the tax having been deducted, unlike individuals) and finally other forms of capital gain/income – such as profit made on the movement of currency, or on shared partnership income.
How much tax do businesses pay?
The Corporation Tax rate for company profits from 1 April 2015 is 20%
In regards to profits prior to April 2015, your level of profit will determine the rate at which tax will be paid. For corporation tax, in the year 2013/14 there were three main bands:
- 20% for £0-3000,000 worth of profit
- 75% for £300,000-1,5000,000 worth of profit
- 23% for £1,500,000 and above.
Note that marginal relief – designed to ease the transition from one band to another – is available for companies who move into the £300,000-1,500,000 band. This is to prevent companies segmenting themselves to reduce tax charges, the above limits are split between several companies operating under common control.
What period do businesses need to account for?
The accounting period is usually the same as the business’ financial year. The tax rates are set for the tax year (April 1 to March 31); if this does not coincide with the end of the accounting period, profits must be time-apportioned to establish the rate that companies should apply.
And if an enterprise goes into liquidation or ceases trading, the end of the accounting period is brought forward to coincide with this.
The tax charge also depends on where the company is resident. UK based companies pay corporation tax on worldwide profits but non-UK based companies pay corporation tax on profits made at a UK branch/agency (profit made outside the UK are usually taxed elsewhere and often at much higher rated).