Do Small Businesses Pay Corporation Tax?

Corporation Tax for Small Businesses: What You Need to Know

The short answer is: it depends on your business structure. Here's everything UK small business owners need to know about corporation tax obligations.

Who Pays Corporation Tax?

• Limited Companies: Yes, always liable for corporation tax
• Sole Traders: No, pay income tax instead
• Partnerships: No, partners pay income tax on their share
• LLPs: No, members pay income tax on their share

Corporation Tax Rates for Small Businesses (2024/25):

• Small Profits Rate: 19% on profits up to £50,000
• Main Rate: 25% on earnings over £250,000
• Marginal Rate: Tapered rate between £50,000 and £250,000

When Do You Start Paying Corporation Tax?

From Day One of Trading:

• Corporation tax applies from your first day of business
• Even if you make a loss, you must file returns
• Losses can be carried forward to offset future profits

Registration Requirements:

• Register for corporation tax within 3 months of starting a business
• File CT600 return within 12 months of the accounting period end
• Pay tax 9 months and 1 day after the accounting period end

Small Company Exemptions and Reliefs

Marginal Relief

Reduces the effective tax rate between £50,000-£250,000 profits:

• £75,000 profit = 21.5% effective rate
• £100,000 profit = 23.75% effective rate
• £150,000 profit = 24.17% effective rate

Small Companies Rate

• Applies automatically if profits are under £50,000
• No application required
• Significant savings compared to the main rate

What Counts as Taxable Profit?

Included:

• Trading profits
• Investment income
• Capital gains (after annual exemption)
• Rental income from property

Excluded:

• Dividends from UK companies
• Profits already taxed elsewhere (with relief)

Common Small Business Deductions

Allowable Expenses:

• Staff costs and salaries
• Office rent and utilities
• Professional fees
• Marketing and advertising
• Equipment and software
• Travel and subsistence

Capital Allowances:

• Annual Investment Allowance: Up to £1 million
• Plant and machinery allowances
• Structures and buildings allowance

Corporation Tax vs Income Tax

Sole Trader (£40,000 profit):

• Income tax: £5,486
• National Insurance: £3,089
• Total: £8,575 (21.4%)

Limited Company (£40,000 profit):

• Corporation tax: £7,600 (19%)
• Effective rate: 19%

When Corporation Tax Makes Sense

Benefits of Limited Company Structure:

• Lower tax rates on retained profits
• Flexibility in dividend timing
• Credibility with customers and suppliers
• Limited personal liability

Drawbacks:

• Additional compliance requirements
• Filing and administrative costs
• IR35 considerations for contractors

Payment and Filing Deadlines

• Corporation Tax Payment: 9 months and 1 day after the accounting period end
• CT600 Return Filing: 12 months after accounting period end
• Late Payment Interest: Charged from the due date
• Late Filing Penalties: £100-£500+, depending on delay

How Nunns Accounting Helps

We ensure small businesses:

• Understand their corporation tax obligations
• Maximise available reliefs and allowances
• Meet all filing and payment deadlines
• Structure their affairs tax-efficiently