Heard of Corporation Tax but not sure what it is? This guide explores what Corporation Tax is, how it works and what it means for your company.

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Corporation Tax is a business-related tax that only applies to limited companies. The main rate of corporation tax is 25%, however for profits below the lower limit (£50,000), it is charged at 19%, and between the lower and upper limit (£250,000), is effectively tapered with the use of marginal relief.

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Marginal Relief

With the removal of the fixed rate of Corporation Tax, HMRC introduced marginal relief for smaller companies. Marginal relief is a complicated calculation, but HMRC have provided a handy calculator to allow you to see the effective rate of Corporation Tax applied to your profits chargeable for Corporation Tax, as well as the Corporation Tax chargeable, based on that profit.

 

Calculating Corporation Tax

Corporation Tax is charged based on profits chargeable to Corporation Tax, and this won’t necessarily be the same as the profit per the accounts as there are some things that can change the chargeable profits: allowable business expenses that aren’t allowable for tax purposes, the application of capital allowances on assets in the year, and any losses brought forward.

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There are several things that are disallowable for Corporation Tax purposes, but the most common items that are added back for the calculation are: depreciation, entertainment, tax investigation insurance and incorporation charges.

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Capital allowances are applied to purchases of assets (typically something that will have a useful life over 3+ years and having significant value, usually over £150), where the full cost of the item is offset against your Corporation Tax in the year of purchase. This is claimed under the Annual Investment Allowance (AIA) but does not apply to all assets; for example: business cars, items you owned for another reason before you started using them in your business and items given to you or your business.

 

Associated Companies

Your Corporation Tax effective rate is also impacted if you have any associated companies. Per HMRC, an associated company is defined as, “A company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons”, and you can read the definition of “control” here.

 

As the purpose of a Director is to run the limited company on behalf of its shareholders, this means that if you are the director of more than one limited company, this will very likely impact the marginal relief available and the total Corporation Tax charge.

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It is also worth keeping in mind that if you are looking at changing your directorships in aide of this company, HMRC’s guidance states, “An associated company is counted even if it is an associated company for only part of an accounting period”.