If you are entering into business as a public or private company, you may be asking: what is corporate tax? You pay this tax on the annual profits you make from doing business as a company. This can include profits made from trading, investments, or selling assets at more than their purchase price. All businesses in the UK must pay this tax on their profits, including foreign companies doing business in the UK. Having defined what is corporate tax, we can now ask who pays corporate tax, how to calculate corporate tax and how to reduce corporate tax for your business.
Who Pays Corporate Tax?
All companies registered in the UK pay this tax. This includes clubs, societies, trade associations, housing associations, and any group carrying out a business function. If your company is a UK business it pays tax on all profits made domestically and abroad. On the other hand, foreign companies with UK branches only pay tax for activities done in the UK. Sole traders and partnerships do not need to pay this tax. It is up to the director or head of the company to ensure they pay all tax on time.
How To Calculate Corporate Tax
All tax is calculated based on your company’s annual net profits before taxation. For the 2019/20 financial year the tax rate was 19%. So, for a company with taxable profits of £40000 the tax would be £7600. The profit itself is often calculated against any business costs or losses incurred. In addition, there may be other adjustments that need to be factored into the net profit. This could be claims for entertaining clients and business contacts, or the expense and depreciation of capital assets. As such, calculating what is corporate tax is not always a straightforward process.
How To Reduce Corporate Tax
Unlike personal tax you cannot claim any tax-free allowance on profits. However, there are some ways to reduce your tax:
- Claim any relevant expenses such as business-related travel, capital asset expenditures, and so on. There are many things you can claim for deductions as long as they were done strictly for business purposes.
- Profits earned by the company belong to the company itself, not you. Therefore, paying yourself a salary or in dividends can count as a business expense you can claim. Keep in mind that you will still need to pay income tax on your earnings. Therefore, try and keep any salary paid under the threshold.
- If you pay your tax early then HMRC will repay you some of it at a rate of 0.5% interest. You can do this six months and 13 days from the beginning of your accounting period.
SRG For Tax Assistance
With the knowledge of what is corporate tax in mind, you may be wondering what the best strategy is for paying it. At SRG we have over a century of experience in all matters of finance, accountancy and taxation and will be able to give you the advice you need to reduce the amount you need to pay. For more details on how we can help speak with our expert team at our London and Glasgow offices or send us a message online. For expert help in tax matters contact SRG today.