How much tax does a limited company pay 2022/23?
The distinction between small businesses and limited companies is an incredibly important one, especially when it comes to finances. Many businesses either immediately start up as limited companies or become one when finances demand it. But how much tax does a limited company pay in the UK?
As the #1 finance partner for Startups, we’ll compile all of the information as if from scratch. In this limited company guide, you’ll learn exactly what a limited company is, how much is corporation tax for a limited company and the most effective methods of lowering corporation tax via allowances and tax reliefs.
But for now, the very basics.
What is a limited company?
A limited company is so named because it limits the amount of liability undertaken by its shareholders. Due to its legal structure, the liability of shareholders is only limited to their stake in the company.
Essentially, this means that if the worst comes to the worst, shareholders and owners are protected from losing more than their original investments within the company. As, in a legal sense, a Limited Company is its own individual, you are not responsible for the debts of that company. Even the original owner of the business cannot take the profits of the business - you set yourself a standard pay.
With this separation of assets and debts, this means that limited companies have the advantage of:
A firewall between the company’s finances and those of its owners
Being able to own assets and retain any post-tax profits
The ability to enter contracts on its own
Limited companies are recognisable by abbreviations such as Ltd, PLC, LLC, AG etc. As for how this legal structure is created, limited companies are either limited by shares, or limited by guarantee.
These are an extraordinarily popular version of a limited company for shareholders who want a high return. These companies have one or more shareholders and are run by a director. Frequently these companies will take the post tax profits and redistribute them in dividends for shareholders.
These companies operate with one or more guarantors with a director. The post tax profits of the company are then re invested into growth for the company’s future. For obvious reasons, these types of companies are used for non profit limited companies, or for companies that need to grow quickly and not satisfy shareholders in the short term.
Corporation tax for limited companies
These can include housing associations and membership organisations as well as clubs or societies which have memberships from several people
Corporation tax is a levy on the profits of UK incorporated companies. So, if you run your own business and have received some money for it in return (whether as revenue or profit), then this also involves paying corporation tax! It might seem like sole traders and partnerships would be exempt since they are not taxed at all when earning income; however, there are other organisations that could incur such an expense despite being non incorporated entities. These can include housing associations and membership organisations as well as clubs or societies which have memberships from several people.
How much is corporation tax in the UK?
While Limited Companies still must pay VAT, Capital Gains and National Insurance taxes, corporation tax is perhaps the most specific and vital for these companies.
What is corporation tax
Corporation tax is standard practice for Limited Companies and other organisations and businesses all over the UK. It is a purely profit-based tax based on your company tax return every year.
The important thing for startups to know about corporation tax is that even if your startup came about through funding and grants, corporation tax is based on the profits. Regardless of where they came from, the calculations you perform will be based solely on that positive cash flow.
Business, investments, sale of assets - everything that helped make you a profit will count.
Which entities pay corporation tax?
While sole traders are obviously exempt from being a corporation tax, it’s a good question. The UK Government states that 3 types of entities must pay corporation tax.
Foreign companies with a UK branch or office
Any club, co-operative or other unincorporated association
So while you work out how much is corporation tax for limited companies, your local Freemasons could be doing the same as well!
How much is the corporation tax rate for the UK?
Since 2020, the corporation tax rate in the UK has stood at 19%. However, limited companies both new and old must be aware of one important detail.
As of 1st April 2023, the UK corporation tax rate will change!
But what does the change in corporation tax mean? Well according to the latest government announcements, limited companies with annual profits over £250,000 will be subject to corporation tax of between 19-25%. The “small profits” rate of 19% will continue for companies with profits of up to £50,000 with marginal relief available up to £250,000.
When does corporation tax need to be paid?
The deadlines for corporation tax are incredibly specific and vital for limited companies.
Corporation tax is paid nine months after the accounting period for companies with profits up to £1.5 million.
For companies with over £1.5 million in profits, corporation tax is paid in 4 instalments, due on the seventh and tenth month of the current accounting period, and the first and fourth month after the accounting period.
For limited companies with over £20 million in taxable profits, corporation tax instalments are due on the third, sixth, ninth and twelfth months of their accounting periods.
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How to register for corporation tax
When it comes to corporation tax, you don’t automatically receive a bill, you must register for corporation tax, perform the necessary number crunching and pay that bill within 9 months of the end of your accounting period.
You must register for corporation tax within 3 months of starting to do business. This includes renting property, employing people, buying, selling or advertising. You can check what counts as starting a business.
You will need:
Government gateway user ID (GGID) and password of your limited company
10 digit unique taxpayer reference number (UTR)
Company registration number
The date you started doing business (this will begin your accounting period)
The date your annual accounts are made up to
The rest of your company’s information is taken from when you registered with UK Companies House.
Filing a company tax return
The company tax return form is a CT600 form.
If you fill in this form yourself you will need a range of information, beyond those needed for just registering for corporation tax in the UK. You’ll need your company type, registered office address, estimations and many more.
If you don’t fill it out to the letter then it could result in fines worth thousands of pounds. It’s for that reason why many UK limited companies choose to turn to dedicated tax professionals when it comes to these valuable calculations.
Penalties for late or incorrect company tax returns
The penalties for late company tax returns aren’t nearly as pricey as the penalties for incorrect tax returns.
If your company tax return is up to 1 month late, you will be charged an extra £100, and up to 3 months will be another £100. After 6 months with no company tax return, HMRC will estimate your corporation tax based on previous years and add a 10% charge based on those calculations. If your company tax return is 12 months late, you will receive another 10% charge of any unpaid taxes.
However, if you file incorrect company tax returns, the fines are far steeper.
If your corporation tax submission is incorrect through lack of care or mistakes. HMRC will calculate the extra tax that you must pay and add on up to 30% of that as a penalty.
If your error on your corporation tax submission is deliberate, the penalty will be between 30%-70% of the extra tax due.
Finally, if the error on your corporation tax is both incorrect and deliberately concealed, the penalty is between 30%-100% of the extra tax due.
Corporation tax relief and allowances
Now, there are ways in which you can get a lower corporation tax rate and others with which you can reduce your overall corporation tax. It sounds great doesn’t it? An easy way to save money for your next year of business.
However, as previously stated, penalties for incorrect corporation tax can be hefty, which is why calculating your corporation tax relief and allowances should always be undertaken by a professional accounting service.
As with any business, you have a number of vital purchases, subscriptions or payments, without which your company could not function. Now, some of these are eligible as expenses, and others can be classed as partly expenses. This means that you have to work out what classes as an acceptable expense, and how much of it can be claimed!
For example, a staff uniform is an allowable expense, but a suit for a meeting - absolutely not! It’s up to a professional tax expert to help show you where to draw the line.
Until the 31st March 2023, limited companies have the ability to gain a super deduction on their corporation tax thanks to new allowances launched in an effort to help companies recover from Covid.
The super deduction applies to Plant and Machinery that would normally lie in the 18% pool for Allowance for Investment. This super deduction gives 130% relief on applicable machinery.
The SR allowance was introduced alongside the Super Deduction as a similar tax relief program for companies investing in plant and machinery.
This allowance allows for 50% corporation tax relief off plant and machinery that would normally qualify for the 6% tax relief pool.
R&D tax relief
R&D tax relief rewards innovation and creation, even if you don’t know it yet. As an incentive for pushing boundaries and creating new solutions to problems, R&D tax credits allow you to either lower your corporation tax rate or receive a cash incentive for your efforts. You can recoup up to 33.35% of your R&D costs!
In fact, it’s so effective that our R&D tax credit experts have saved over £30 million for businesses.
But don’t take our word for it. Just ask our partners.
The Patent Box scheme has the potential to massively decrease your corporation tax. This scheme offers you the chance to lower your corporation tax to 10% for any profits made from patents that you own. This is essential, especially with the new corporation tax rate set to increase to 25% in April 2023.
So, do you qualify for the Patent Box Scheme?
Ideally this will never happen to your business, but it is possible to gain loss relief on corporation tax. This allows you to offset your losses against other income like investments or past profits, or be carried forward to set against future profits.
Group relief allows companies in a group to offset the losses of one business against the profits of the others.
Annual Investment Allowance
The Annual Investment Allowance (AIA) is a form of tax relief for UK companies designed to promote investment in plant and machinery. This fast tax relief allows you to lower corporation tax immediately in the year that it is spent rather than spread over multiple years.
The current AIA stands at £1 million over a single year, however from 1st April 2023, that amount will be lowered to £200,000. Although the UK Government has repeatedly expressed that it will be lowered, and continued to extend the £1 million AIA, so we will have to wait to be sure.
Capital allowance claims
Purchase of assets is not counted under business expenses. Instead, you claim capital allowances. For capital allowance claims over the AIA, they are classed as writing-down allowances.
From 1 April 2021 - 31st March 2023, Capital Allowance claims are boosted. Normally the claims are:
18% capital allowance on plant and machinery each year
A special rate of 6% per year on long-term assets, integral building features and low-emission cars
However, with the capital allowance claim boost, business can now:
Claim 130% capital allowance in their first year instead of the standard 18%
Special rate purchases currently enjoy a 50% capital allowance claim boost
There are a number of different types of equity compensation available for businesses. These are a range of different stock and share options, all with differing tax repercussions.
When used correctly, you can lever an employee share scheme to help reduce your corporation tax!
Staff training not only allows you to elevate the skill of your staff and upgrade your workforce as a whole, but it can also help lower corporation tax. It is a tax-deductible expense for the company, so when it comes to your limited company, it’s a win-win situation!
Staff parties are a great way to blow off steam and to reward your hard working employees. That’s why the UK Government offers up to £150 tax-free and deductible per person for any staff party that you throw in the holidays.
Just make sure that you follow the HMRC guidelines first!
Ready to pay corporation tax on your limited company?
You may be prepared to do it, but have you worked out how much is your company’s corporation tax? Could you calculate the lowest rate possible for your limited company? Remember how much HMRC can fine companies if they calculate corporation tax incorrectly?
We don’t blame you if you can't. It takes years of training and practice to recognise what can be written on your capital allowance and what can’t. You wouldn’t get an amateur to run your company, so why would you get an amateur to handle your taxes?
Our team has over a decade and a half of experience behind them. Armed with AI-assisted bookkeeping software and minds as sharp as razors, our team of accounting specialists handle all of your accountancy needs. Our R&D Tax Specialists have saved businesses over £30 million and counting, and our CFOs provide strategic in-depth business planning and financial models.
We organise your finances for your company’s future. Get in touch with a finance specialist today and make sure to not miss out on our School of Startups. It contains free online guides and advice for Startups. Made for professionals, by professionals, CEOs and entrepreneurs!