How corporation tax is calculated, the allowances and reliefs you may be missing, and simple ways to plan ahead and reduce what you owe.
If you run a limited company, corporation tax is one of the most important figures in your financial year, and one of the most misunderstood. It is charged on your company's profits, but exactly how much you pay depends on more than just your sales. Understanding how the bill is built is the first step to managing it well.
How corporation tax is calculated
Corporation tax is charged on your company's taxable profit, which is your income less your allowable business costs. Crucially, it is profit that is taxed, not turnover, so genuine business expenses reduce the amount you owe. The rate you pay depends on the level of your profits, with a lower rate for smaller profits and a higher rate once profits pass a certain threshold.
Reliefs and allowances you may be missing
- Capital allowances on equipment, machinery, and certain vehicles, which let you offset the cost against your profits.
- Allowable expenses such as staff costs, premises, software, professional fees, and travel that is genuinely for business.
- Pension contributions made by the company, which can be an efficient way to extract value while reducing taxable profit.
- Research and development relief, if your company invests in developing new products, processes, or services.
Simple ways to plan ahead
The worst time to think about corporation tax is after the year has ended, when most opportunities have passed. Reviewing your position before year end gives you room to act, whether that means timing a planned purchase, making a pension contribution, or making sure every legitimate expense has been captured.
- Set money aside for your bill as profits come in, so the payment never comes as a shock.
- Keep accurate records throughout the year so no allowable cost is overlooked.
- Review your profit position before year end, while there is still time to plan.
- Note your payment deadline, which falls nine months and one day after your accounting period ends.
Good planning can make a real difference to what you owe, entirely within the rules. If you would like a clear explanation of your corporation tax position and the reliefs available to you, our team is here to help. Get in touch and we will make sure you are not paying a penny more than you need to.
