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What Is Corporation Tax?

Updated: May 5, 2023

How do you handle corporation tax? Do you pay it on revenue or profits? or do you try to write off every expense that you can? Do you even know what corporation tax is, or how it works?

Whether you’re looking to start your own business or if you want to understand how to pay less tax in general, this article has everything you need to know about what corporation tax really means and how to deal with it.

What Is Corporation Tax

What Corporation Tax Means For My Business

In general, corporations pay taxes on their net income. This means after accounting for business expenses and other taxable income such as capital gains or dividend payments.

The tax rate is what's known as a marginal tax rate, which means that if you earn a certain amount of profit, then you will pay corporation taxes.

The corporate tax rate has been falling over time from a high of 50% during World War II to around 19% now, although due to rise for some firms in the near future.

uk corporation tax rate 2022

As is common with many forms of taxation, there are various deductions and loopholes that enable some businesses to keep their effective rates even lower than 19%.

Essentially though, all companies are taxed at 19% for now with big increases on the way for larger firms.

What Types of Businesses Need to Pay Corporation Tax?

First, let’s be clear about what corporation tax means. It is a business tax levied on companies based on their earnings and profits. But before you can understand your corporation tax responsibilities, you need to know if your company is considered a corporation under U.K. law.

To do that, you must determine whether your business is limited by shares or not limited by shares. (sole trader)

Businesses without share capital are called corporations sole; those with share capital are called limited companies.

After figuring out which type of company you have, it becomes easier to see what types of businesses have to pay corporation tax in England and Wales (in Scotland and Northern Ireland, there is another type of business tax).

What are the UK Rates of Corporation Tax?

In both Northern Ireland and Great Britain, corporation tax is paid in a tiered system, meaning that different rates are applied to different levels of taxable income.

As a general rule, taxable profits over £300,000 will be taxed at 19% percent; profits between £100,000 and £300,000 will be taxed at 19% percent; while all profits below £100,000 are taxed at 19 percent.

In addition to paying corporation tax on your business’s total profit levels, you may also be liable for additional taxes on dividends or corporate capital gains.

What Are my Main Deductions and Allowances When Calculating My Corporation Tax Liability?

You can claim various deductions when calculating your corporation tax liability, but there are three main ones to keep in mind: expenses, capital allowances and non-cash items.

The first two are relatively self-explanatory; expenses are costs you incur during your business operations (e.g., travel expenses), while capital allowances allow you to write off certain assets against your corporation tax bill (e.g., buildings or machinery).

Non-cash items cover non-monetary transactions (e.g., a customer paying for their purchase with gifts instead of cash) and can be both complicated and easy to overlook when it comes time to pay corporate taxes.

If you have more than one business, for example, only one of them is liable for those particular taxes on that transaction.

What Records Should I Keep to Prepare My Corporation Tax Returns?

If you are a small business owner, you have to keep records for corporation tax. But what does that mean and what kind of records do you need to keep?

This depends on your business size, accounting method and other factors. We outline all of these requirements below along with some record keeping tips from our experts.

The best way to get organized is by keeping all your receipts and setting up an accounting system that meets your needs. If your finances are so complicated that it seems hard to know where to start, we suggest talking with a professional accountant who can help set up a bookkeeping system specific for your situation.

How Can I Reduce My Corporation Tax Liability?

The corporate tax rate in 2022 is 19 percent. That said, there are a lot of ways you can lower your corporation tax liability if your business is incorporated or registered as an LTD.

For example, you can shield some of your income from taxes by setting it aside in a retirement account like a SIPP or regulated pension scheme.

That will lower your taxable income and reduce what you have to pay in taxes—the more you put away for staffs retirement, the bigger your tax deduction.

You may also be able to deduct money you pay toward health insurance premiums (if those premiums are high because of pre-existing conditions), travel expenses and home office expenses that help get business done.

What Is Corporation Tax - The Bottom Line

While it may not be sexy, tax is important. Indeed, it's probably a bigger expense for your company than wages. Understanding your company's tax liability and keeping in check is critical to overall financial health of your business.

If you're looking to get started with company taxes but aren't quite sure where to begin, we hope this blog on what is corporation tax has helped.

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