Owning and running a limited company in the UK has its perks, including distinct legal status and limited liability protection for its members. However, once a limited company has gained a financial stronghold, such as increasing its profit-generating capacity, it comes on HMRC’s radar.
So, this blog will discuss what is corporation tax and how corporation tax works for a limited company.
Now, if you run a limited company, you are liable to pay corporation tax on all the taxable profits your company produces.
Moreover, to ensure compliance with HMRC regulations, you must register with HMRC to pay this tax within three months of your limited company starting to do business.
Also, while you learn about corporation tax, you must know the most tax-efficient ways to keep your corporation tax bill in check. Therefore, read our comprehensive guide: How to reduce the corporation tax bill for a limited company?
What is corporation tax?
According to UK government laws, corporation tax is a mandatory business tax a limited company pays to HMRC on its taxable profits within an accounting period. Every UK-based business structure that is running as a limited company is subject to corporation tax payment with HMRC.
Now, the amount of tax you will pay exclusively depends on how much profit your limited company generates. Similarly, you may be entitled to claim allowances and reliefs based on your profits.
Moving further, if a limited company is considered UK resident or UK-based for tax purposes, it must pay corporation tax on all its profits produced in the UK and overseas.
On the contrary, when a limited company is based abroad but has an operational office or branch in the UK, it will only be liable to pay corporation tax on profits generated from its UK-driven business activities.
Likewise, co-operative or other unincorporated association, such as a community group or sports club also pay corporation tax on their profits.
More importantly, registering your limited company for corporation tax is crucial to ensure compliance with HMRC’s legal obligations. By contrast, if you fail to register or miss the filing deadlines, it will lead to fines deducted from your hard-earned profits.
Get in touch with our young, clever, and tech-driven professionals if you want to choose the solution to tax burden or accounting problems in the UK for your income. We will ensure to offer the best services.
When do limited companies need to pay corporation tax?
When a limited company conducts any sort of business activity or receives any form of income, it is mandatory for it to pay tax on all its taxable profits. For greater clarity, the following are the business activities that are subject to pay this tax:
- When a limited company buys and sells goods or services;
- If it leases or buys property;
- Sells assets;
- Manages investments and receives dividend payments;
- Earns interest;
- When it pays its employees, including the directors;
- If it pays bank charges or fees;
- Receives income from any other source;
- If it incurs fees for legal or accountancy services.
What is the corporation tax on a dormant company?
It is worth highlighting that if a limited company does not carry out any of the above-cited activities, it will be considered a dormant or inactive company. In such scenarios, the director must inform HMRC about the company’s dormant status.
Accordingly, dormant limited companies are inactive for corporation tax. For instance, they have no tax obligation, given they have been inactive since their incorporation (registration) date or for the whole duration of their most recent accounting period.
Speaking of incorporation, it is significant to know how to create a limited company and its benefits before it must pay corporation tax. Thus, to gain in-depth clarity about the limited company, read our respective guides,
How to set up a limited company?
Limited company advantages and disadvantages.
Please bear in mind as soon as a dormant company starts conducting any sort of business activity or begins receiving or spending any money, its dormant status ceases. Consequently, it will now be classed as an active trading company.
What are the corporation tax rates for a limited company?
The following are the corporation tax rates for profits yielded by a limited company for the 2024/25 tax financial year:
Small profits rate:
The corporation tax rate is 19% for limited companies with annual profits under or less than £50,000.
Main rate:
For a limited company with annual profits above £250,000. It is 19% for companies with a profit of less than £50,000, corporation tax rate is 25%
Marginal relief rate:
When a limited company’s annual profit vacillates between £50,000 and £250,000, it pays a corporation tax at the rate of 25%. Fortunately, this rate is reduced by the marginal relief rate.
What is in corporation tax marginal relief?
If your limited company has produced an annual profit between £50,000 and £250,000, you can become entitled to claim marginal relief. This marginal relief is a sliding or decreasing rate of tax.
Moreover, marginal relief gradually increases this tax rate between the small profits and main rates. Subsequently, it smoothens the transition from the small profits rate to the main rate.
Luckily, you can viably determine the marginal relief rate by using the marginal relief tax calculator on the Government website.
More importantly, you cannot claim marginal relief if:
- Your limited company is a non-UK resident.
- You are running close investment holding companies.
Beyond that, if a company’s profits exceed the £250,000 figure, you won’t be able to claim marginal relief on the portion of profits between the small profits rate and the main rate. As a result, you must pay 25% corporation tax on all profits in this case.
Conclusion:
To recap, corporation tax is obligatory on every limited company running in the UK or overseas (with its office or branch in the UK) based on the generated profit. Since evading this tax has legal repercussions from HMRC, it is wise to consult a professional and skilled accountant who will guide you through all the processes regarding a limited company.
Accountingfirms might be your best option for knowing the ins and outs of a limited company. Our price comparison list is highly user-friendly, where you can orientate your requirements and find the most affordable accountant based on your specific location. Hence, with Accountingfirms, you can get an instant quote in just a few quick steps.
Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.