What is corporation tax?
Essentially, corporation tax is to companies what income tax is to individuals; it applies to the taxable profits of limited companies and a range of non-profit-making organisations, including clubs, societies and associations.
The rate of corporation tax depends on the amount of profit you make. If your profits amount to less than £300,000, you’re treated as a small company, and obliged to pay at the small companies rate. If your profits exceed £1.5m, you have to pay corporation tax at the main rate.
If your profits fall between £300,000 and £1.5m, you have to pay the main rate, but you can apply for marginal relief – this means you get a discount, the size of which depends on the amount of profit you make. If your company is making profits of £305,000, you’ll get a much bigger discount than a company making £1.495m.
Chancellor George Osborne used the 2011 Budget to start a high-profile campaign of corporation tax reduction; his Finance Act reduced the main rate of corporation tax to 26%, and the small companies rate to 20%.
Osborne has pledged to further reduce the rate of corporation tax during this parliament, so small firms could find their bill significantly reduced by 2015.
Deadlines and conditions
The deadline for payment of corporation tax is different from that of other major taxes, such as income tax or VAT, and it falls before the deadline for filing of company tax returns.
Although there are some exceptions, companies have to pay their corporation tax within nine months of their company’s tax accounting period ending. So, if your accounting period ends on March 31, you must pay your corporation tax by January 1 the following year.
How to pay
Under further changes announced by the chancellor in his 2011 Budget, all corporation tax payments now have to be made online – postal payments won’t be accepted anymore.
Thankfully, there are still various ways you can make the payment. These are as follows:
Direct Debit. It’s easy to set up a direct debit payment for your corporation tax. First, you register with HMRC Online Services, then the website will give you step-by-step instructions to make the payment. Allow five working days for the payment to be processed.
Debit or credit cards. HMRC accepts payment by debit or credit card via BillPay, which is provided by Santander Corporate Banking. To make a payment through BillPay you’ll need your credit/debit card number, as well as your corporation tax reference number (displayed on the bottom left-hand side of your payslip). Allow three bank working days for processing.
For more information on signing up to Billpay, and paying your tax through this channel, click here.
Internet, telephone banking or Bacs. Again, paying this way is relatively straightforward - all you’ll need are HMRC’s bank details, and your corporation tax reference number. The process normally takes three bank working days.
Cheque. If you wish to pay this way, you have to deposit the cheque at your local bank or building society; HMRC classifies this as online payment.
CHAPS. This method ensures same-day payment from your bank, which can be vital if you’re running late and need to get your corporation tax paid asap. But do note this is expensive, and most banks will only allow you to pay by CHAPS within a certain daily time window – so you’ll need to check when you can make the payment before you begin doing it.
For more details on paying by chaps, click on this page.
Get professional advice
Corporation tax may seem relatively simple, but in reality it can be a minefield if you don’t know all the ins and outs. Entrepreneurs underestimate it at their peril!
Before you make your payment, we strongly advise you to seek out professional advice for a detailed rundown of what you need to do.