What is Corporation Tax? – Guide in Paying and Reducing Corporate Tax
As a business owner, there are many small business taxes that you need to be familiar with. HMRC won’t accept tax ignorance as an excuse to not pay what you owe. It is your responsibility to understand what your tax liabilities are otherwise you could face major consequences if you fail to pay your business taxes. If you are a limited company, one of the most common taxes that need you to pay is Corporation Tax.
To learn more about Corporation Tax, we’ve answered the most frequently asked questions, here:
- What is corporation Tax?
- How much is corporation tax?
- How to reduce corporation tax?
- How to pay corporation tax bill?
What is Corporation Tax?
Corporation Tax is also called corporate tax or company tax. This tax is applied to the company’s profits after all the expenses have been paid but before dividends are withdrawn. The rate of Corporation Tax you pay will depend on the current tax year rate. However, the amount you pay will depend on how much profit your company makes.
You must pay Corporation Tax on profits from doing business as a limited company. Sole traders don’t have to pay company tax as they are not considered to be a legal corporation.
How much is Corporation Tax?
The Corporation Tax rate for company profits is 19% for the 2019/20 tax year.
Corporation Tax rate
How to reduce Corporation Tax?
There are many ways you can reduce your corporation tax through allowance and rates. Here are some of the ways you can do it:
Prepare your company accounts
You can deduct the costs of running your business from your profits before tax when you prepare your company’s accounts.
Claim all your expenses
You can reduce your Corporation Tax by claiming all your business expenses. However, remember that anything you or your employees get personal use from must be treated as a benefit in kind. For a full list of expenses, download our A-Z Guide of Business Costs & Expenses.
You should also be aware of capital allowances. This is a tax relief that allows you to claim if you buy assets that you keep to use in your business such as equipment, machinery, and business vehicles.
Always remember that your limited company is a separate legal entity from you. Even if you are running the business alone the money generated is the business’s money, not yours. So, don’t forget to pay yourself a salary.
Salaries are considered a business expense (unlike dividends) thus it will reduce your profit and therefore decrease your Corporation Tax amount due.
However, make sure before you issue yourself a salary that you understand how much to pay yourself to minimise tax. Many business owners pay themselves a mixture of salary and dividends to be as tax efficient as possible.
How to pay your Corporation Tax bill?
The Corporation Tax deadline is 9 months and 1 day after the end of your accounting period, so you must pay it before then. You must pay HMRC before this deadline or you may incur a penalty charge and additional interest.
There are many payment methods available: online or telephone banking, CHAPS, Bacs, Direct Debit, online by debit or corporate credit card or at your bank or building society. You cannot pay for Corporation Tax by post.
Corporation Tax is one of the important business tax responsibilities of an entrepreneur. Make sure you have better visibility of your company finances to avoid fines and late fees. If you want better financial clarity, book a free tax review today.
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