How corporation tax is calculated

All limited companies pay corporation tax on their profits. Your profit is any money your business has left after you have paid for your overheads and expenses. It also includes any money your business makes from investments or selling capital assets for more than they cost. 

 

Your corporation tax is paid annually to HMRC within nine months and one day of the end of your company’s financial year. It’s self-assessed so your company is responsible for calculating how much is due. This means you must work out how much tax is due and pay it before filing your company tax return (CT600) with HMRC. This must be submitted within 12 months of the end of your company’s financial year. 

 

An example – if your financial year runs from 1 January to 31 December, you must calculate your corporation tax and pay what’s due by the following 1 October while your company tax return must be submitted to HMRC by the following 31 December. 

 

To work out how much you must pay you’ll need accurate bookkeeping records and knowledge of your allowable expenses and any tax relief available for your business. 

 

Income – the first step is to work out how much income you have received so you can create a profit and loss statement. You should include all your sales income and any interest earned from a corporate savings account for example. 

 

Overheads – your overheads and other business expenses can be deducted from your income before you work out your corporation tax. To be sure you’re paying the correct amount you should check that you are claiming all your allowable expenses. 

 

In HMRC’s words, allowable expenses must be ‘wholly and exclusively’ for business use. In general, that means you can claim for things you have bought specifically for your business that you don’t use personally. This can include accounting fees, cost of sales such as materials or postage and packaging, salaries, insurance, travel and office costs. 

 

Capital allowances and depreciation – if you buy assets for your business that will have value for several years such as IT equipment, plant or furniture their value will fall over time. This is called depreciation. For example, if you buy a new computer for £1,800 depreciation could be £600 a year over three years and then the asset will be valued as zero. However, this isn’t an allowable expense, so it must be included in your tax calculation. 

 

Most capital asset purchases for small business will qualify for Annual Investment Allowance tax relief. This means up to £200,000 of capital costs each year are written off and can be used to reduce your profits and the amount of corporation tax you will pay. 

 

Corporation tax due – if, for example, your total income during your company’s financial year was £120,000 and your overheads and expenses were £40,000 then your profit before accounts will be £80,000. If your accounts show depreciation and entertainment costs worth £2,000, these must be added because they aren’t deductible, making your profit £82,000. However, if you have bought assets during the year worth £5,000 you can subtract this so that your profit that will be subject to corporation tax is £77,000. The corporation tax you pay at 19% of this figure will be £14,630.