Owning your own business can offer unique advantages and freedoms but also a greater degree of responsibility. One of the main responsibilities that business owners face is taxation. Paying the correct taxes, in full and on time is necessary in order to comply with the law. However, the tax system can be complicated, particularly for those who are just starting out. There are different taxes to consider, guidelines to follow and deadlines to meet.
With this in mind, we are going to focus on the tax that affects the majority of business owners- corporation tax.
What is Corporation Tax?
As the name suggests, corporation tax is paid by businesses- differing to income tax, which is paid by individuals. Corporation tax is calculated using annual profit and has been set at 19% since 2016. Recently, the government planned to increase the percentage of profit that would be taxed but this was eventually scrapped. However, with such a dramatic period in recent politics, it’s recommended that business owners keep on top of any changes in the law.
Another major difference between income tax and corporation tax is that of a personal allowance. Whereas individuals are entitled to a tax-free allowance, this doesn’t apply to businesses paying corporation tax. However, there are specific deductions which can be made.
Who Pays Corporation Tax?
Those who own a limited company, will have to pay corporation tax. This means that anyone who is self-employed or in a partnership, does not have to pay corporation tax but will have to complete self-assessment.
Other than limited companies, there are other circumstances in which corporation tax would be applicable. These include trade associations, members clubs, housing associations and cooperatives.
As this is a UK based tax, UK based businesses will be taxed on profits made both here and abroad. However, businesses based outside of the UK will be taxed on the profits they have made in the UK.
If you’re confused as to whether your organisation is eligible for corporation tax, you can contact HMRC for clarification.
The Process
As with all taxation, there are specific guidelines that must be followed when paying corporation tax.
- Business owners must register for corporation tax upon the start of trading or when a dormant business is restarted.
- Business owners must keep company tax records.
- Corporation tax is calculated by the business owner and this information is used in the completion of the tax return (CT600).
- The tax return must be filed by the relevant deadline (normally 12 months after the accounting period).
- A tax return must be completed, even if no tax is due.
- Business owners must pay the tax that is due by the deadline (normally 9 months and 1 day post the accounting period).
Deductions
Of course, every reputable business owner wants to pay their fair share in corporation tax. However, there are deductions which can be made, ensuring you’re not paying more than you owe. This is particularly important with corporation tax, which doesn’t benefit from a non-taxable allowance. Fortunately, there are some useful tips available, ensuring you don’t accidentally pay more than your fair share.
- Limited companies are their own separate entities and therefore business owners should remember to pay themselves a salary.
- When making purchases for the business, always try to use the business account, rather than your own personal finances.
- Keep track of all of your expenses throughout the working year, no matter how small or insignificant- they all add up.
- You can reduce your tax burden by using company profits to pay into your employee’s pension schemes.
- Look out for specialist tax relief schemes, aimed at specific industries. These include creative industries tax relief and R & D tax credits.
- Ensure that you don’t miss any deadlines.
Keeping on top of taxes can be stressful and complicated. This can be made infinitely more difficult when HMRC decides to investigate your company. Fortunately, Taxation Investigation is on hand to help. If you’re looking for expert advice from an experienced third-party, look no further.
