Corporation tax on small business explained
“I’ve just received a letter from HMRC about corporation tax and I have no idea what I’m supposed to do.”
This is something we hear from company owners often. Corporation tax on small business is one of those topics that causes unnecessary stress, mainly because no one ever sat you down and explained it properly.
If you run a limited company, understanding corporation tax on small business is essential and not just to stay on the right side of HMRC, but to make sure you’re not paying more than you need to.
What is corporation tax?
Corporation tax is a tax on the taxable profits of limited companies. Unlike income tax, which applies to individuals, corporation tax is levied on your company’s profits after allowable expenses have been deducted. It applies to trading profits, investment income, and any chargeable gains on assets you’ve sold.
Every limited company registered in the UK must pay corporation tax, regardless of size. Corporation tax on small business is one compliance obligation you cannot ignore.
What are the current rates of corporation tax on small business?
The current corporation tax rates are:
- Small profits rate: 19% on profits up to £50,000
- Main rate: 25% on profits over £250,000
- Marginal relief applies to companies with profits between £50,001 and £250,000, meaning you pay an effective rate somewhere between the two
For most small businesses in Kent with modest profits, the 19% small profits rate will apply. However, if your company is associated with other companies – for example, if you own multiple businesses – the thresholds are divided between them, which can push you into a higher band sooner than you’d expect. This is worth discussing with your accountant.
When and how do you pay corporation tax?
Your corporation tax payment is due nine months and one day after the end of your accounting period. So, if your company year-end is 31 March, your payment is due by 1 January the following year. You then have a further three months to file your company tax return (known as a CT600) with HMRC.
One thing that catches many small business owners off guard: you must pay before you file. HMRC expects the money before you’ve even submitted the paperwork. Getting your accounts prepared promptly after your year-end is the best way to know exactly what you owe in good time.
How to reduce your corporation tax bill legally
There are several legitimate ways to reduce the amount of corporation tax on your small business:
- Claim all allowable expenses – every business cost that is ‘wholly and exclusively’ for trading purposes reduces your taxable profits
- Make the most of capital allowances – investing in equipment, machinery, or vehicles can qualify for significant tax relief through the Annual Investment Allowance
- Company pension contributions – employer contributions to a pension scheme are a tax-deductible expense, reducing taxable profits whilst building your retirement savings
- R&D tax relief – if your company carries out qualifying research and development, you may be able to claim enhanced deductions
- Director’s salary and dividends – structuring how you extract profits from the company can significantly influence your overall tax position
A client of ours who runs a small IT consultancy in Canterbury had been missing out on capital allowances for three years before coming to us. Once we identified everything she was entitled to claim, she saved over £3,500 in corporation tax in her first year working with us. Small changes really do add up.
Common corporation tax mistakes small businesses make
In our experience, small business owners tend to make the same handful of mistakes:
- Not setting money aside throughout the year, leading to a shock when the bill arrives
- Missing the payment deadline and incurring interest charges
- Failing to claim all allowable expenses and reliefs
- Assuming things are too complicated to question, when a quick chat with your accountant could save hundreds or even thousands of pounds
Our advice is to treat your corporation tax liability like any other business cost: plan for it, set money aside monthly, and get professional help to make sure you’re claiming everything you should be.
Get help with corporation tax for your small business
We’re here to help you and it doesn’t matter if you’re approaching your first year-end as a limited company or you’ve been running your business for years.
Contact Adams Accountancy for a free, no-obligation chat about your company tax. No question is too silly, we promise.
Frequently asked questions about corporation tax on small businesses
Does a small, limited company always have to pay corporation tax?
Yes, if your company makes a profit, corporation tax applies. If you make a loss, you won’t owe any tax for that period, but you must still file a CT600 with HMRC. Losses can often be carried forward to offset against future profits. See HMRC’s corporation tax guidance for more detail.
What counts as a taxable profit for corporation tax purposes?
Your taxable profits are your company’s income minus allowable business expenses. Not all costs are deductible – client entertaining, for example, is generally not allowable. Capital expenditure on assets like equipment and vehicles is handled separately through capital allowances rather than being deducted directly. Your accountant will calculate this correctly when preparing your CT600.
Can I pay myself a salary to reduce my company’s corporation tax bill?
Yes. A salary paid to a director is an allowable business expense, reducing your company’s taxable profits and therefore its corporation tax liability. The optimal salary level depends on your personal circumstances and the current National Insurance thresholds. Read our blog on dividend tax planning for company directors for more on this.
What happens if I miss the corporation tax deadline?
If you pay late, HMRC will charge interest from the day after the due date. If you also file your CT600 late, there are additional penalties – starting at £100 for a return up to three months late, and rising significantly beyond that. Getting your accounts prepared promptly after your year-end is the best way to avoid this. HMRC’s guidance on paying corporation tax has more detail.
About the author
Michelle Adams is a qualified accountant and director of Adams Accountancy, a friendly, all-female accountancy practice based in Dartford, Kent. With over 15 years’ experience supporting limited companies, sole traders, and landlords across Kent, Michelle and her team specialise in making corporation tax and small business accounting straightforward and stress-free. Call us on 01322 250001 or visit adams-accountancy.co.uk for a free, no-obligation chat.