Corporation Tax Explained: Rates, Reliefs, and Recent Changes for UK SMEs

Corporation Tax is a significant consideration for any limited companies, including clubs and societies the UK. Understanding how Corporation Tax works, the rates that apply, and the reliefs available can help you manage your company’s tax liabilities more effectively. With recent changes introduced by the government, it’s more important than ever for business owners to stay informed.

In this article, we’ll explain the essentials of Corporation Tax, explore the reliefs you can claim, and outline the recent changes that could affect your business.

1. What is Corporation Tax?

Corporation Tax is a tax on the profits made by UK-based companies and organisations, including limited companies, clubs, and societies. Profits subject to Corporation Tax include income from trading, investments, and selling assets for more than they cost (capital gains).

Unlike personal taxes, there is no tax-free allowance for Corporation Tax; every penny of profit is taxed.

2. Current Corporation Tax Rates

As of the 2024/25 tax year, the UK operates a tiered system for Corporation Tax:

• Main Rate: The main Corporation Tax rate is 25% for companies with profits over £250,000.
• Small Profits Rate: A reduced rate of 19% applies to companies with profits up to £50,000.
• Marginal Relief: Companies with profits between £50,001 and £250,000 can benefit from Marginal Relief, which gradually increases the effective rate of tax as profits rise.

This tiered system means that businesses with higher profits pay more in Corporation Tax, while smaller businesses benefit from a lower rate.

3. What Profits are Taxable?

Corporation Tax is levied on various types of profits, including:

• Trading Profits: The profits made from your day-to-day business activities.
• Investment Income: Income from investments such as shares or rental properties.
• Chargeable Gains: Profits from selling assets, such as property or shares, for more than their original cost.

It’s essential to keep accurate records and account for all sources of income to ensure you pay the correct amount of Corporation Tax.

4. Corporation Tax Reliefs and Deductions

To help reduce your Corporation Tax bill, there are several reliefs and deductions available:

• Annual Investment Allowance (AIA): This allows businesses to deduct the full value of qualifying capital expenditure on plant and machinery from their profits, up to a specified limit (currently £1 million).
• Research and Development (R&D) Relief: SMEs can claim enhanced deductions for qualifying R&D expenditure, which can significantly reduce their tax bill or even result in a cash credit.
• Patent Box Relief: Companies that profit from patented inventions can benefit from a lower Corporation Tax rate of 10% on those profits.
• Loss Relief: If your company makes a trading loss, you may be able to offset this against profits from previous years or carry it forward to reduce future profits.

Taking full advantage of these reliefs requires careful planning and accurate record-keeping.

5. Recent Changes to Corporation Tax

The Corporation Tax landscape has seen several changes in recent years, with more on the horizon. Key recent changes include:

• Increase in Main Rate: The main Corporation Tax rate increased from 19% to 25% in April 2023 for companies with profits over £250,000. This change has a significant impact on larger SMEs.
• Extension of Full Expensing: The government has extended the full expensing scheme, allowing businesses to immediately deduct the cost of qualifying capital expenditure from their profits.
• New Investment Zones: The creation of new Investment Zones offers tax incentives, including lower Corporation Tax rates, for businesses operating in designated areas.

It’s important for SMEs to stay informed about these changes and consider their implications for tax planning.

6. Filing and Paying Corporation Tax

Corporation Tax returns must be filed online with HMRC within 12 months of the end of your company’s accounting period. However, the tax itself is due 9 months and 1 day after the end of your accounting period.

For example, if your company’s accounting period ends on 31 March 2024, the Corporation Tax payment is due by 1 January 2025, and the return must be filed by 31 March 2025.

Late payments or filing can result in penalties and interest, so it’s crucial to stay on top of your deadlines.

Conclusion

Corporation Tax is a major expense for any business, but with the right knowledge and planning, you can minimise your liabilities and keep more of your profits. Understanding the rates, reliefs, and recent changes will help you make informed decisions and optimise your tax position.

For SMEs, staying on top of Corporation Tax obligations and making the most of available reliefs can be challenging. Consulting with a knowledgeable accountant can help you navigate these complexities, ensuring that your business remains compliant and financially efficient.

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