Corporation tax is a key financial obligation for UK businesses… But how is corporation tax calculated?
Understanding how it works can help companies stay compliant and manage their tax responsibilities effectively.
Total receipts from all corporate taxes for 2023 to 2024 were £93.3 billion, up from £84.5 billion in the previous year according to the government statistics commentary.
Tax is all part of running a business in the UK and that means that it is especially important to ensure that the right tax is paid on time.
This guide explains how corporation tax is calculated, what factors influence the amount payable, and what businesses need to know to ensure accurate calculations.
What is corporation tax exactly?
It’s a tax on the profits made by companies and other incorporated entities. In the UK, all limited companies are required to pay this tax on their taxable profits, which include trading profits, investment income, and chargeable gains.
This tax applies to both UK-based businesses and overseas companies with a branch or office in the UK. Unlike income tax, there are no personal allowances, meaning that all profits are subject to tax.
Understanding how corporation tax is calculated is useful to businesses planning their finances, avoiding penalties and taking advantage of reliefs
It also helps with HMRC rules and removes disputes or audit risks, to help you work out what to invest, where to spend money and how to grow.
How is corporation tax calculated (UK)?
The corporation tax rate is applied to a company’s taxable profits for an accounting period.
The steps involved are:
1. Calculate taxable profits
The accounting profit is adjusted to take into account allowable expenses, discountable expenses, any other allowance before taxable profits are determined.
- Start with accounting profits: Start from your net profit on your profit and loss statement.
- Add back disallowable expenses: There are certain business expenses that are not tax deductible like client entertainment, or fines. You will need to add these on to your profit.
- Deduct allowable expenses: Any allowable expense should be deducted including staff salaries, rent, and office supplies.
- Include chargeable gains: However, for example, if the company has sold an asset (e.g. property or shares) then any gain might be taxable.
Recently we covered annual accounts preparation in detail.
2. Apply the corporation tax rate
The tax rate you pay depends on the size of your business and your profits.
The main rate of corporation tax, at the time of writing, is 25%. But small companies with profits of less than £50,000 are charged a rate of 19%.
Marginal relief cuts the effective tax rate for companies with profits between £50,000 and £250,000.
3. Factor in tax reliefs and credits
Businesses can reduce their corporation tax liability by claiming reliefs and credits, such as:
- Annual investment allowance (AIA): For purchases of equipment under a plan
- Patent box relief: For profits arising from patentable inventions
- Research and development (R&D) relief: This will help companies innovating
And more. Find out more about research and development tax credits.
What are allowable and disallowable expenses?
Understanding the difference between allowable and disallowable expenses is crucial for accurate calculations.
Allowable expenses
They are business related costs to which all and only are wholly and exclusively attributable. Common examples include:
- Staff wages and salaries
- Office rent and utilities
- Advertising and marketing
- Travel-related to business expenditure expenses
For more details, read our guide on travel and subsistence expenses.
Disallowable expenses
These are expenses you cannot deduct on your taxes. Examples include:
- Entertainment costs
- Fines and penalties
- Donations to non-registered charities
Expense categorisation put together well, helps you report the correct amount and prevent tax underpayment and over payment.
How to simplify corporation tax calculations
Managing corporation tax can be daunting, but these strategies can help:
Seek professional advice: As with any business, it’s important to have an accountant or tax advisor helping out with calculating taxable profits, claim reliefs and meeting deadlines. They can also help businesses optimise their tax position.
Maintain accurate records: To get your corporation tax calculation right, you need good record keeping. This involves the keeping of receipts, invoices while equally, keeping track of the income and expenses involved.
Find out here – how long should I keep accounting records?
Errors in calculating corporation tax can lead to serious consequences, including:
- Penalties for underpayment
- Interest on overdue amounts
- HMRC investigations or audits
Businesses should ensure accuracy by keeping detailed financial records and using accounting software or professional services.
What are the corporation tax deadlines?
UK businesses must adhere to specific deadlines to avoid penalties:
- Payment deadline: Within nine months and one day after the end of the accounting period corporation tax must be paid. Suppose the financial year ends on 31 March then the payment is due before 1 January the following year.
- Filing deadline: The corporation tax return must be filed within 12 months of the end of an accounting period.
Late payment or filing can result in penalties and interest charges.
Final thoughts: How is corporation tax calculated?
Corporation tax is a vital part of running a business in the UK and you must ensure you are calculating it correctly.
Understanding how taxable profits are worked out, how the correct tax rate should be applied and what reliefs are available can make the process easier and more streamlined.
With professional advice and trusted tools, the process becomes even simpler, helps businesses stay committed and focused on growth.
Businesses come to Accountants East London for our great fixed prices and reputation – then they stay, because we care.
With over 30 years’ experience,whatever your accountancy needs, we can help – contact us for more information.
