Tax is a charge paid to the government by individuals, consumers and businesses. A direct tax is paid directly by a person or business to the government from wages or profits. These are known as income tax and corporation tax. An indirect tax is applied to goods or services at the point of sale, known as value added tax (VAT). These are the government’s main sources of revenue.
Corporation Tax Versus Income Tax
Income tax is liable on earnings such as wages and salaries. This applies to the earnings of employees and self-employed, whether that is a sole trader or a partnership. Corporation tax is liable on the profits of a limited company, either private or public.
Corporation tax applies to:
- Corporations originated in the UK (small, medium, and large)
- Corporations running a business within the UK
- Foreign enterprises with a permanent UK establishment
- Corporations that are UK resident for tax purposes
If you are self employed you will pay tax on all your earnings over the personal allowance. The personal allowance is currently frozen as opposed to rising in line with inflation. The chancellor announced that the personal allowance will be frozen at £12,570 for the tax years 2022-23 until 2025-26. The personal allowance threshold is currently £12,570.
Personal income tax applies to:
- Self-employed individuals
- Full-time employees
|Tax band||Taxable income||Tax rate|
|Personal allowance||Up to £12,570||0%|
|Basic rate||£12,571 to £50,270||20%|
|Higher rate||£50,271 to £150,000||40%|
|Additional rate||over £150,000||45%|
Allowable expenses are the essential costs of running your business that are tax deductible, for both li items companies and self employed. Any outgoings that are allowable expenses can be deducted from your taxable income, allowing you to save money and reduce your tax bill. Only certain costs can be claimed as allowable expenses. This includes anything that your business could not trade without. This may include stationary, phone bills or other items that you use for less than two years. Costs of business premises such as utility bills and rent. Travel costs incurred by your business activity such as fuel, parking or train tickets, however this does not include travelling to and from your regular work premises. Staff costs such as wages, salaries, bonuses and pensions. Clothing costs such as uniforms or protective clothing. Legal and financial costs such as credit card charges, overdraft fees, insurance policies or hiring the services of accountants, bookkeepers, solicitors or surveyors. Advertising and marketing costs such as printed adverts and the cost of building a website. Items that you only buy to sell on such as raw materials or merchandise.
Self Employed Versus Limited Company
While your profit stays under £50,000 we suggest you stay self-employed. To calculate your profit you simply deduct your expenses from your income. Everything left over, is your total profit, which you declare to HMRC in your self assessment tax return. If your profit is below £50,000 then you won’t save anything by registering as a limited company. It is cheaper and simpler to be self-employed up until your profit reaches £50,000. Over and above this threshold, it will be more tax efficient to run your venture through a limited company. Once you get close to £50,000 in profit, we would open a limited company for you, so it’s ready to simply switch over to, when you need it. The other main difference is that you have no real legal protection as an individual when trading under self-employment. Therefore if someone takes legal action against you, they are taking it out on you personally and all your personal assets are at risk. There is no limited liability like you would experience if you ran a limited company. We recommend reading our Guide to Self Employment Versus Limited Company here.
Corporation Tax Rates
Corporation tax is charged at a flat rate of 19% which will remain until 1st April 2023. After this the corporation tax rate will increase to 25% for companies with profits over £250,000. The 19% rate will become a small profits rate payable by companies with profits of £50,000 or less. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate. Corporation tax had been due to fall to 17%, but the chancellor changed this decision in 2020.
What Is a Tax Return?
Your tax return is the document you need to file with HMRC, so that they can calculate the tax you owe. Your tax return reports your income, expenses, and other financial information in three sections – income, deductions and tax credits. Usually tax returns are filed annually by both corporations and individuals.
Corporation Tax Explained
Corporation tax is based on the annual profits of a business. All profits are tax liable. However some expenses can be deducted and there are tax allowances you can use to help reduce the amount of tax you owe. Corporation tax applies to trading profits, investments and selling assets. Qualifying assets could be land, property, shares or equipment. This is known as capital gains tax. Capital gains tax is the tax charged on the increase in value of an asset that you sell, which you have held for more than one year. The amount of tax due, is calculated on the amount of gain made. This is the increase in value of the sale price, compared to the purchase price. Corporation tax applies to all limited companies registered in the UK. The main difference between a limited company and a sole trader or partnership, is that a limited company is a legal entity in its own right. This separates the business’s finances from your personal finances. This is one of the reasons why these business models are taxed differently. A sole trader is a business owned and run by one self-employed individual and there is no legal distinction between the owner and the business entity. All UK limited companies are required to pay corporation tax. Sole traders and partnerships do not pay corporation tax, instead they are required to fill in a self assessment tax return and pay income tax. Some other organisations need to pay corporation tax, despite not being incorporated as limited companies. Always seek professional accounting advice if you are unsure.
These exceptions are:
- Housing associations
- Membership organisations
- Clubs and societies
How to Register for Corporation Tax
You will need to register for corporation tax when you register a new limited company. You can register here. You need to have registered for corporation tax within 3 months of commencing trade. The company director is responsible for completing the company tax return, filing it, and paying the bill. You need to complete a company tax return known as a CT600 every year. You are also required to file your annual company accounts with HMRC and Companies House. Your accountant can conduct this for you. It’s important to choose an accountant with experience and whom you trust, because legal responsibility still lies with the company director. Ask prestige business management about what we can offer you. Your company tax return needs to be filed within twelve months after the accounting period that it relates to. You need to complete this tax return even if your business has made a loss during this tax period. If your business makes profits of more than £1.5 million, you will need to pay your tax bill in instalments. The payment schedule for this depends on the size of your business. Usually payments are due quarterly with 2 of these instalments due before the end of the accounting period. These instalments will be an estimate of the corporation tax liability due for that period. An adjustment will be made once the final liability has been calculated after the end of the tax period.
When is Corporation Tax Paid?
The filing deadline for corporation tax filing is different from other taxes. Corporation tax is due to be paid before you file your company tax return. This means the due date depends on your accounting period. Your corporation tax bill needs to be paid within nine months and one day after the end of your accounting period from the previous financial year. For example if your accounting period ends on 31st December, your bill will be due by 1st October the following year. Depending on how you intend to pay, make sure you have your method of payment set up in good time, as some methods take a few working days to register and late payment can result in fines and penalties. Prestige Business Management can keep informed with all the upcoming accounting dates.
Tax Relief and You
It’s important to understand how tax reliefs apply to your business to make sure you are using these to achieve tax efficiency without triggering a tax enquiry. There are also various rules to help you navigate your tax bill. Talk to Prestige Business Management for comprehensive guidance and tax planning. These are some areas in which tax relief applies:
As outlined above allowable expenses apply to both limited companies and self employed. So these are tax deductible in the tax returns for both corporation tax and self assessment.
Up until 31st March 2023 companies that invest in qualifying new plant and machinery, benefit from first-year capital allowances. This was announced in the March 2021 budget. Companies can claim a super deduction providing allowances of 130% on most new plant and machinery investments. This relief is not available for unincorporated businesses. You may want to consider with your tax advisor – what your likely profitability will be in the next few years. Also how the super deduction may affect how much of your profits are subject to corporation tax and it may be worthwhile bringing forward your investment plans to benefit from this tax relief.
R&D Tax Relief
Research and Development (R&D) tax relief is in place to support businesses who produce innovative research in science and technology. You can even claim R&D tax relief on unsuccessful projects under certain criteria. This is because it is recognised that uncertainty in new areas of scientific or technological development could hold back critical development in innovative fields. The amount of R&D tax relief available to qualifying businesses depends on the size and scale of your operations. For example an SME employing fewer than 500 staff may deduct an extra 130% of their qualifying costs from their annual profit, as well as the normal 100% deduction, to make a total 230% deduction. Large companies can claim a Research and Development Expenditure Credit (RDEC) for working on R&D projects. This can also be claimed by SMEs and large companies who have been subcontracted to do R&D work by a large company. The RDEC is a tax credit of 13% of your qualifying R&D expenditure.
Businesses that register patents on their inventions can use the patent box regime to reduce corporation tax on profits. This allows businesses to lower their corporation tax liability to 10% for profits from patented products or intellectual property that generate income in the UK. The patent box regime is designed to encourage businesses to keep and commercialise intellectual property within the UK. It allows companies to apply a lower rate of corporation tax to profits earned from its patented inventions.
Annual Investment Allowance
Annual Investment Allowance (AIA) is a tax allowance for capital expenditure. This applies to the purchase of equipment in the form of tools and machinery. This expenditure can be deducted from your taxable profits on your company tax return, subject to a cap.
Employee Share Schemes
It’s possible to apply for a deduction in corporation tax if you use a qualifying employee share scheme. Make sure you understand which schemes are eligible and seek financial advice about which one is the best for your situation.
Training and related subscriptions that are relevant to your business can be paid for by the company. This ensures your employees don’t then incur an income tax charge on this cost. For the company these costs are tax deductible.
Did you know that you can claim a tax deduction on your annual staff party? For example an annual Christmas staff party or a summer party would be eligible at a cost of under £150 per person. Even if your team is based in multiple locations, an annual event that’s open to all of your staff based at one location is tax free for your staff and tax deductible. Alternatively you can host separate parties for your departments, this still counts provided all of your employees can attend one at least of them. This exemption can also apply to multiple events, as long as they are annual and the combined cost comes in under £150 per person.
If your business has made a loss you can make use of loss relief where relevant. In most cases these can be carried back to a previous year, which will generate a tax refund. Or alternatively a loss can be carried forward and used against future profits. Make sure to get good tax planning advice to make sure you are using this tax relief effectively.
Penalties apply if you file your tax return late, for both corporation and income tax. If you are unable to pay your income tax bill by the deadline, contact HMRC as early as possible to discuss paying in instalments, known as a Time to Pay arrangement. If you cannot pay your corporation tax bill on time, there are a few options, but you still risk legal action. Take financial planning advice to avoid this situation.
Prestige Business Management Works for You
We can help you manage your assets and file your tax return in the most efficient ways possible. We’ll keep you up to date with filing deadlines and forthcoming changes to legislation at all times. Plus we can help you plan your cash flow and investment strategy. We do this for enterprises of every scale. Find out what we can do for you. Call us today on 0203 773 2927.