Businesses must pay corporate tax in the UK, but understanding the country’s business tax code requires time and effort. Get started with our easy primer.
If you’re a self-employed business owner in the UK, you may have to pay corporate tax in the UK. However, what you are taxed on depends on whether you are classified as a resident or non-resident taxpayer in the country.
This guide covers its business aspects, including the different kinds of taxes for different businesses, how to go about paying them, as well as payment deadlines and tax credits.
Sections to this guide include:
- The UK corporate tax system
- Who pays corporate tax in the UK
- Corporate tax rates in the UK
- Corporate tax credits and exemptions in the UK
- VAT in the UK
- UK corporate tax year
- How to file your corporate tax return in the UK
- Other UK business taxes
- Business tax advice in the UK
- Corporate tax fines
- Useful resources
The corporate tax system in the UK
The UK’s corporate tax code has seen extensive and far-reaching reforms in recent years. This is part of the UK government’s attempts to create a tax system that is “easy to understand, simple to engage with, and hard to evade, [and] successfully supports investment in business, as well as those who work hard and save,” while also maintaining the UK’s competitive position.
HM Revenue and Customs (HMRC) administers and collects corporate tax in the UK. Corporations account for approximately 9% of the total receipts collected by HMRC. These receipts have increased by more than 60% over the past decade – from £38.9 billion in 2013-14 to £63.2 billion in 2019-20.
Who pays corporate tax in the UK?
Any incorporated business (i.e., a company registered with the Companies House) is legally obliged to pay corporation tax on its taxable profits in the UK. Such taxable profits include money that a company makes from doing business (known as trading profits), rental income from property, investment gains, as well as other chargeable gains.
Corporate tax in the UK applies to limited companies; foreign companies with a UK branch or office; clubs, co-operatives, or other unincorporated associations; and also self-employed persons set up as a limited liability company.
However, unregistered companies are not liable to pay UK corporate tax. Instead, they must pay income tax on their business profits.
The type of business structure you select determines your corporate tax rates and reporting obligations. In addition, your business structure will determine how you personally take profits and any personal responsibilities you have if your business makes a loss.
Corporate tax rates in the UK
All companies except those in ring-fenced sectors pay UK corporation tax at 19%. They may be eligible for a lower rate of 10% if they can attribute profits to the exploitation of patents. Specific corporation taxes apply in four cases: for oil and gas regimes, UK life insurance companies, the banking sector in the UK, and companies that operate qualifying ships (in which case tonnage tax applies).
Tax-adjusted trading profits
Corporation tax in the UK is calculated as a percentage of your taxable profits. In general, the trading profits that you publish in your accounts (revenue minus expenditure) are not your taxable profits. Instead, you must calculate your tax-adjusted trading profits before you can pay corporate tax in the UK.
It is usual to hire a tax consultant to determine what taxes you need to pay. The Low Incomes Tax Reform Group also offers a great explanation of tax-adjusted trading profits.
UK corporate tax for sole traders
The simplest business form is the sole trader. Sole traders are in business for themselves and assume responsibility for business results, operations, setting prices, and scheduling. A critical distinction between sole traders and employees is that the sole trader works for several clients at the same time, thereby avoiding issues of economic dependence characteristics of being an employee.
On the other hand, sole traders in the UK are distinguished from limited business structures in that the sole trader business is an extension of the business owner, even if the business has other employees. In contrast to limited companies, the sole trader business is not a legal entity separate from the owner.
As a sole trader, all business profits belong to you personally. This means that tax on profits as a sole trader will be added to your other personal income and assessed at your personal tax rate. This rate ranges from 0% to 45% in England, Wales, and Northern Ireland, while the top rate is 46% in Scotland.
As a sole trader in the UK, you’ll need to:
- Keep records of your business’s sales and expenses
- send a Self Assessment tax return every year
- pay income tax on your profits and Class 2 and Class 4 National Insurance
- Register for VAT if your turnover is over £85,000
Corporate tax in the UK for partnerships
The UK offers several types of partnerships to meet your business structuring needs. Regardless of the type of partnership, all partners share the business’s taxable profits, and each partner pays tax on their share. Each partner will need to file a personal self-assessment form and pay both income tax and National Insurance on their portion of the partnership profits.
Partnerships that expect to achieve more than £85,000 in sales must also register for VAT.
Corporate tax in the UK for limited companies
Whereas sole trading and partnership businesses are an extension of the individual, limited companies are legal entities in their own right. Thus, the limited company must have separate bank accounts and records, and any profits earned belong to the company, not the individual. There are two types of limited companies in the UK: limited by shares and limited by guarantee.
All limited companies must pay corporation tax on their profits – 19% on net earnings in most cases. The company must complete its company corporation tax return (CT600) annually. After paying the corporate income tax, the remaining profits may then be distributed among the members or shareholders. Recipients must claim their distributions on a self-assessment form. Large companies face some additional compliance and reporting requirements.
If you are the director of a limited company, you accept legal responsibilities for the performance, taxes, and reporting of the company. This also means you can be held personally responsible if the company does not comply with the relevant laws and regulations. In addition, as a director of the company, you must file a personal self-assessment return with the HMRC.
From 6 April 2021, the UK government made major changes to off-payroll working rules (IR35) that impact limited company directors. In short, the new rules mean that freelance and self-employed workers who provide services through their own limited company (sometimes known as a personal service company) or another intermediary will no longer assess their own tax status. Instead the responsibility shifts to the private-sector businesses that hire them. This is already the case for all businesses and workers in the public sector. HMRC has compiled a number of resources to help companies come into compliance with the new regulations.
Special corporation tax regimes
Businesses operating in four specific sectors in the UK can avail of special corporation tax regimes, as explained by PWC:
- Oil and gas company regime: Companies that make profits from oil extraction or oil rights in the UK or the UK continental shelf are known as ring-fence companies. Companies with profits under £300,000 pay 19% in corporation tax while those above this limit pay 30%. A supplementary tax charge of 10% applies to adjusted ring-fence profits in addition to normal corporation tax.
- Life insurance company regime: Life insurance businesses are also taxed under a special regime, which effectively includes different corporation tax rates as well as special rules for quantifying profits.
- Tonnage Tax regime: Companies that are liable for corporation tax and operate qualifying ships that are strategically and commercially managed in the United Kingdom can choose to apply Tonnage Tax in the place of corporation tax.
- Banking sector: A supplementary tax is applicable to companies in the banking sector at 8% on profits in excess of £25 million. Also, loss utilization is restricted; carried forward trading losses can be set against only 25% of profits in a period.
Besides the four sectors listed above, there are no special UK corporate tax rates for particular types or sizes of business activity. By and large, all companies in every sector are subject to the same corporation tax rates and rules. However, as PWC notes, certain treatments and reliefs do vary according to size, including transfer pricing, research and development credits, and some targeted anti-avoidance rules.
Online tax calculators
A number of online corporate tax calculators are available, such as this one from ContractorUK.
Corporate tax reliefs and exemptions in the UK
Companies operating in the UK may apply deductions or claim credits on their taxes. HMRC offers specific reliefs on the following:
- Research and development
- Creative industries
- Goodwill and other assets, such as customer relationships and unregistered trademarks
- Marginal reliefs
- Terminal, capital, as well as property income losses
- Trading losses
Companies can pay lower corporate taxes in the UK by deducting donations to charities or community amateur sports clubs from total business profits. Compensatory fines and damages including payments to employees for wrongful dismissal are also tax-deductible, but punitive penalties are not.
For more information specific to your business, seek professional advice.
VAT in the UK
Companies operating in the UK will also need to charge and pay VAT at 20%. Domestic fuel and power and certain other reduced-rate supplies are subject to VAT at 5%. Under certain conditions, some small traders may adopt a special flat-rate scheme, which computes VAT at a sector-specific rate. Items such as children’s clothes, books and newspapers, and goods exported to non-EU countries are charged at 0% VAT.
Companies with a taxable turnover of over £85,000 must register for VAT. There are two tests to determine when you need to start paying VAT:
- Firstly, when your 12-month running total of sales revenue crosses reaches the VAT registration threshold. This is the total amount for a month and the preceding 11 months. It applies to any consecutive 12-month period. Here, you have until the end of the following month to register. For example, if your VAT taxable turnover exceeds £85,000 for the 12 months to 30 June 2021, you need to register for VAT by 31 July 2021.
- Secondly, you need to register immediately for VAT at the start of any 30-day period if you believe your taxable turnover for that period alone will cross the VAT threshold.
The UK’s VAT regime
Most businesses can register online. When you do so, you create a VAT online account (also called a government gateway account), which you require in order to submit your VAT returns. You then need to provide details such as turnover, business activity, and bank details when registering for VAT in the UK. You will receive a VAT registration certificate within 30 working days, though it can take longer.
Now that the UK has exited the European Union, the government can change its VAT rates. However, authorities have indicated that the UK is unlikely to diverge too far from current rates in the near future.
VAT returns must be filed every month or every three months, depending on the size of the company. All businesses must file VAT returns online and make electronic payments. However, smaller enterprises can apply for annual returns. The deadline for VAT returns is usually 30 days after the end of the period.
Due to the COVID-19 pandemic, the UK enabled businesses to defer VAT payments between 20 March and 30 June 2020. Those payments should be submitted to HMRC before 31 March 2021 unless the business makes another arrangement with the tax authorities.
The corporate tax year in the UK
The UK’s corporate tax year runs from 1 April to 31 March the following year. The financial year is commonly referred to as the start of the year. For example, the tax year 1 April 2021 to 31 March 2022 may also be referred to as FY2021.
The deadline to settle a company’s corporation tax liability for the accounting period is nine months and one day after the end of the period for companies with taxable profits below £1.5 million. Your accounting period is usually your financial year, but you may have two accounting periods in the year you set up your company.
For large companies with taxable profits of more than £1.5 million, corporation tax is due in four quarterly installments. These are payable online. Companies with an annual taxable profit of more than £20 million follow a different payment schedule.
How to file your corporate tax return in the UK
File your corporate tax returns online.
You do not send a corporate tax return if you’re self-employed as a sole trader or in a partnership. However, you must send a self-assessment return. If you have a limited company, you may be asked to file your accounts with Companies House at the same time as your tax return. The deadline for corporate tax returns is 12 months after the end of the accounting period it covers. You must usually make any changes or amendments within 12 months of the filing deadline.
Other types of business taxes in the UK
A number of other business taxes are payable in the UK. While many of these taxes are sector-specific, others apply to specific types of industry. A broad overview is below.
Employers’ national insurance contributions (NICs)
Employers are obliged to pay NICs based on a percentage of each employee’s earnings. The 2021–2022 rate is 13.8% on all earnings above £169 per week. Businesses are exempt from the first £3,000 per year (maximum) of this liability. There are no other payroll taxes, but employers remain responsible for deducting employees’ income tax liability at source, through the pay-as-you-earn (PAYE) system.
Diverted Profits Tax
In certain circumstances, companies operating within the UK may be liable to pay diverted profits tax. In most cases, it is levied at 25% on diverted profits and applies in the following cases, according to PWC:
- Where groups create a tax benefit by using transactions or entities that lack economic substance, and/or
- Where foreign companies have structured their UK activities to avoid a UK permanent establishment
Capital Gains Tax
Self-employed and partnership businesses operating in the UK may have to pay capital gains tax on any profits from the sale of all or part of a business asset. Such assets include the following:
- Land and buildings
- Fixtures and fittings
- Plant and machinery
- Registered trademarks
- Your business’s reputation
Limited companies pay corporation tax on profits from selling their assets instead.
In the UK, businesses must pay stamp duty at 0.5% on instruments affecting sales of shares. Agreements to sell shares usually attract stamp duty reserve tax (SDRT) at 0.5%, although stamp duty is not usually charged on an issue of shares. Stamp taxes also apply to acquisitions of non-residential or mixed land and buildings. There are specific land and buildings taxes in Scotland and Wales.
Companies renting business premises are also liable to pay local municipal taxes.
Other business taxes
The UK has several other business taxes. These include the following:
- Annual tax on enveloped dwellings (on the acquisition and holding of residential properties over £500,000)
- Apprenticeship levy
- Offshore receipts in respect of intangible property tax
- Pension protection fund levy
- Soft drinks industry levy
- Bank levy
- Insurance premium tax
- Environmental taxes, including landfill tax, climate change levy, aggregates levy, and plastics tax
- Carbon reduction commitment
Taxes for non-resident companies
From April 2020, non-resident companies which carry on a UK property business will be liable to pay the 19% UK corporation tax (previously they paid the 20% income tax rate) on income received from UK property. These businesses are also liable for UK corporation tax in respect of debits or credits that arise from loan relationships or derivative contracts that the company is a party to for the purpose of that business.
Corporate tax fines in the UK
If you don’t file your corporate tax returns by the deadline (12 months after the end of the accounting period it covers) the HMRC charges late filing penalties according to the schedule below:
|Time after your deadline||Penalty|
|3 months||Another £100|
|6 months||HMRC estimates your bill and adds a penalty of 10% to the unpaid tax|
|12 months||Another 10% of any unpaid tax|
If your tax return is late three times in a row, the £100 penalties increase to £500 each. Furthermore, if you pay your corporation tax late, don’t pay enough, or don’t pay at all, HMRC will charge you late payment interest. The rate from 7 April 2020 is 2.60%.
Corporate tax advice in the UK
With such a wide variety of taxes on businesses operating in the UK, it is advisable to consult a chartered accountant to advise on corporate taxation, social security charges, tax law, and any available refunds, for example.
You can find an accountant through the Institute of Chartered Accountants in England and Wales or via the Institute of Financial Accountants, which lets you search for professionals via location.
Below is a list of corporation tax resources useful to expats: