As a business owner, it’s important to understand how corporation tax is calculated. This tax is levied on the profits of limited companies, and the amount due is based on a company’s taxable income. 

In this post, we’ll explain the basics of corporation tax calculation and provide a step-by-step guide to help you determine your company’s tax liability.

What is corporation tax?

Corporation tax is a tax on the profits of limited companies. The tax rate varies by country and is typically a percentage of a company’s taxable income. In the United Kingdom, the current rate is 19%. As of April 2023, there are two applicable tax rates for corporation tax. These are namely, 19% for profits up to £50,000 and 25% for profits over £250,000. For companies with profits between these two amounts, the tax rate will be somewhere between 19% and 25%, the exact rate of which can be calculated using a tax calculator. 

A professional tax advisor will also be able to advise more accurately on the correct tax rate your business should be paying. 

The Basics of Corporation Tax Calculation

Calculating corporation tax involves determining a company’s taxable profits and applying the appropriate tax rate. Adjustments and reliefs may also be applied to arrive at the final taxable amount. Essentially, it all depends on the amount of money your company is bringing in, but also on the nature of your company’s business. Corporation tax may change depending on the products and services your business provides and whether or not they operate locally or globally. 

Step-by-Step Guide to Calculating Corporation Tax

When figuring out how much corporation tax you earn, you need to follow certain steps to arrive at the correct conclusion. It may be the case that you don’t need to pay corporation tax at all, however if you do need to, accurate calculation is essential to ensure you remain compliant and legally in check with your local authorities. The below will give you all the steps you need to follow on how to work out corporation tax. 

Determining Taxable Profits

The first step in calculating corporation tax is to determine your business’s taxable profits. This is done by subtracting allowable expenses and deductions from your gross profits. Allowable expenses include operating costs such as rent, salaries, and materials. Deductions may include capital allowances for investments in equipment or machinery.

Applying the Current Corporation Tax Rate

Once you have determined your taxable profits, you can apply the current corporation tax rate to arrive at the tax liability. However, to accurately establish the rate of tax your business is liable for, you need to take marginal relief into account. Typically speaking, companies can reduce the amount of tax they pay from 25% should they fall into that tax bracket. You can calculate marginal relief using the following formula: (3/200) x (upper limit – total taxable profits). 

Your tax rate may also vary depending on the nature of your business and the amount of profit you generate. There are also some business structures that do not need to pay corporation tax. As a general rule, all companies registered as corporations need to pay corporation tax. 

Adjustments and Reliefs

There are several adjustments and reliefs that can affect the calculation of corporation tax. For example, capital allowances can be used to reduce taxable profits by deducting the cost of investments in equipment or machinery. Loss relief can also be applied to offset losses against profits in previous or future years. 

If your company is not yet turning a profit or is registered in a capacity that does not require corporation tax to be paid, you may be exempt. If you’re unsure about whether or not you are eligible for corporation tax relief, consider finding professional help. 

Calculating and Paying Taxable Amount

In the UK, the current corporation tax rate is 25% for companies with profits over £250,000, while companies with profits below £50,000 pay a small profit rate of 19%. For companies with profits between £50,000 and £250,000, the main rate applies, but this is reduced by a marginal relief providing a gradual increase up to the 25% rate.

To calculate your company’s taxable profits, you need to subtract allowable expenses and deductions from your gross profits. Allowable expenses include operating costs such as rent, salaries, and materials, while deductions may include capital allowances for investments in equipment or machinery. Once you have determined your taxable profits, you can apply the current corporation tax rate to arrive at the tax liability. 

When is corporation tax paid?

Corporation tax is typically paid annually, and the deadline for payment depends on the company’s corporation tax accounting period. In the United Kingdom, for many companies, this period is 31 March, although it may vary. 

Generally, corporation tax is due nine months and one day following the end of the company’s accounting period. For example, if a company’s accounting period ends on 31 March, the corporation tax would be due on 1 January the following year. However, it is important for each company to be aware of its specific corporation tax deadline, which can be confirmed with an accountant if needed. 

For small businesses in the UK, corporation tax is payable annually as a one-off payment for companies with profits below £1.5 million. Companies with profits exceeding £1.5 million typically pay their corporation tax in four instalments throughout the year.

It’s important to be aware of these deadlines and payment methods to ensure compliance with tax regulations. If a company is unable to pay its corporation tax on time, it’s vital to seek expert help and advice as a matter of urgency to avoid potential consequences. 

We Specialise in Helping Companies with Corporation Tax

At Reed & Co Accountants, we understand that calculating and paying corporation tax can be a complex and time-consuming process that may take away precious business time. That’s why we offer a range of services to help businesses manage their tax obligations. 

Our team of tax experts can provide advice on tax planning, compliance, and reporting, ensuring that your business stays on top of its tax obligations. If you need assistance with your corporation tax or need assistance in calculating the right amount to pay, contact us today to learn more about how we can help your business.