What is Corporation Tax? Guide for small companies

All limited companies in the UK – big and small – pay tax on their annual profits. This is corporation tax.

Dealing with your corporation tax is one of your accountant’s key duties. However, it is ultimately the directors of a limited company who are responsible for ensuring that a company’s tax affairs are in order.

As a limited company director, you must make sure that your company’s corporation tax calculation is accurate, the company tax return is filed with HMRC on time, and any corporation tax is paid to HMRC when it falls due.

If you are setting up a limited company for the first time, here is an overview of how corporation tax works, including details on the 2023 tax hike.

This guide has been updated for the 2024-25 tax year

Which businesses pay Corporation Tax?

All UK limited companies pay Corporation Tax. The tax is charged as a percentage of the annual profits made by a company.

Corporation Tax is not paid by businesses operating as sole traders or partnerships. If you are self-employed, you pay tax on your business profits via the annual self assessment system.

For more details on the self-employment route, read our guides on how to set up as a sole trader and tax for the self-employed

Corporation Tax does apply to the following organisations, even if they are not incorporated:

• Members’ clubs, societies and associations
• Trade associations
• Housing associations
• Groups of individuals carrying on a business but not as a partnership, (for example, co-operatives.)

Registering a new company

You are legally obliged to tell HMRC that your new limited company has been formed as soon as you have completed the incorporation process.

Once you appoint an accountant, you authorise them to deal with your tax affairs on behalf of your new company.

You can do this with HMRC online, or with the relevant paper forms which you can download from this page of the HMRC website.

Corporation Tax rates from April 2024

Corporation Tax rates increased in April 2023. They remain the same for the 2024/5 tax year.

• If your company has profits of £50,000 or less, it will still pay the old rate of 19%.
• Profits between £50,000 and £250,000 are taxed at an effective 26.5% rate.
• Profits above £250,000 are taxed at 25%.

Try our Corporation Tax Calculator to see how much more tax your business will pay.

What were the Corporation Tax rates historically?

Historically, there were two different rates of UK Corporation Tax; the ‘small profits rate’ and the ‘main rate’.

Companies making profits of up to £300,000, were charged at the ‘small profits rate’ which was typically a few percentage points lower than the ‘main rate’ of corporation tax.

Companies with profits of £1.5 million and above paid the main rate of corporation tax, with ‘marginal relief’ being applied to profits between these two figures.

However, this was simplified in April 2015, when the ‘small profits rate’ and ‘main rate’ of Corporation Tax were aligned, giving the UK a single rate of Corporation Tax.

The rate of CT was 19% for the 2022/23 tax year.

Corporation tax self assessment – CT600

Each year, your company must complete a corporation tax return (Form CT600). All corporation tax returns must now be filed with HMRC online.

Although your accountant will prepare and submit the CT600 and supporting documents, ensuring the information is correct is one of the responsibilities and duties of a limited company director.

Each CT600 return must contain your;

• Company name
• Company registration number
• Your registered office and
• Tax reference number (you’ll find this on the notice to deliver a company tax return)
• Turnover and profit for the period
• The tax calculation
• Details of any allowances e.g. capital allowances, and reliefs claimed

In total, the CT600 form runs to 11 pages and asks for hundreds of pieces of financial information, but your accountant only completes the sections that are relevant to your company.

Accounting periods

Most businesses have a 12 month accounting period, although it is possible to set a shorter period.

Your accountant can also apply to change your year end date so that it ties in with other statutory deadlines.

Corporation Tax deadlines and penalties

Your accountant can submit your CT600 return any time between the date of your company year end and your statutory filing date.

This is typically the latest of 12 months after the end of your year end, or 3 months after you get a notice to deliver a return.

If you submit your corporation tax return late, or the contents are inaccurate, you – and not your accountant – will be charged a penalty.

If your company has made a taxable profit of up to £1.5 million, the corporation tax must be paid by 9 months and 1 day after the end of your accounting year.

For example, if your accounting year end is 31st December, then your corporation tax payment will be due by 1st October of the following year.

You must pay your company’s corporation tax liability to HMRC electronically. If you are late paying, you will be charged interest.

Keeping tax records

By law, you must keep all company records for at least 6 years, and it is probably sensible to maintain your records for longer if you can afford the space! Records include all receipts, workings, invoices and tax-related paperwork.

HMRC says it is acceptable to keep records in a legible alternative such as an optical imaging system, where documents are scanned into a computer. These days, online accounting makes storing tax records a doddle.

Try our Corporation Tax calculator to work out your tax liability for 2024/5.