Essential knowledge for new businesses – corporation tax

Companies pay corporation tax on their profits and they now all pay at 20%, but it is due to fall in the future.

That’s quite a low rate and it applies to any level of profit, so if you’re making £1,000 or £100m you pay 20%. Compare that to employed or self-employed income where you pay up to 45%.

In order to plan a companies cash-flow its important to know when the tax is due. The payment is normally due in a single payment 9 months and 1 days after the company’s year end. So if your year end is December 2015 the payment needs to be paid by 1 October 2016.

A company’s year end is initially set at the end of the month one year after the company incorporated. So if you incorporated on 15 January 2016 then your first year end would be 31 January 2017.

For companies with larger profits, and by that we mean over £1.5m in a year, there are special rules to pay by installments. Unless your profits are over £10m then you don’t go into the installment rules until your second year of profits over £1.5m.

Under the installment rules the Company has to estimate its tax liability and make the appropriate quarterly payments and once the actual amounts are known interest is payable on any shortfall. The first payment is due 6 months and 14 days into the Company’s accounting period, with the remaining installments payable at quarterly intervals.

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