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 live in the United Kingdom as a self-employed worker or business owner, 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, 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
- 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. Corporation tax accounted for £135 billion in 2018/19, official data shows. The number of companies with a tax liability in the accounting period 2017/18 was up 4% to 1.5 million. In total, 93% of profitable companies were liable to pay tax in 2017/18, the HMRC says.
Who pays corporate tax in the UK?
Any business that is incorporated, i.e. registered as a company with 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 and 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 self-employed persons who have set themselves up as a limited liability company.
However, unregistered companies are not liable to pay UK corporate tax. Instead, they must pay income tax on the profits for their business.
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%.
A lower rate of 10% is applied when the profits can be attributed to the exploitation of patents. Specific corporation taxes apply in four cases: for oil and gas regimes, life insurance companies, the banking sector, and companies that operate qualifying ships (in which case tonnage tax applies).
A reduction in corporation tax rates to 17% was announced for 1 April 2020. However, in the 2019 general election, Prime Minister Boris Johnson pledged to keep the rate unchanged. Consult the HMRC website for more information.
Tax-adjusted trading profits
Corporation tax in the UK is calculated as a percentage of your taxable profits. Typically, 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 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 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.
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. After paying the corporate income tax – 19% on net earnings in most cases – the remaining profits may then be distributed among the members or shareholders. Recipients must claim their distributions on a self-assessment form.
There are several types of limited companies in the UK. In each type (limited by shares, limited by guarantee or public limited), the members’ personal liability for the company’s obligations are limited to their unpaid share value or agreed-upon guarantee levels.
If you are the director of a limited company, you accept legal responsibilities for the performance, taxes, and reporting of the company – and may 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 will need to file a personal self-assessment return with the HMRC.
Large companies face some additional compliance and reporting requirements. Some elements of HMRC’s organizational structure and approach to avoidance and compliance are arranged by size of business (e.g. Large Business Strategy).
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 (R&D) 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 and 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 2020, you need to register for VAT by 31 July 2020.
- 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.
Most businesses can register online. When you do so, you will create a VAT online account (also called a ‘Government Gateway account’), which you require in order to submit your VAT returns. You will 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.
Until December 2020, the UK’s VAT regime accords with overall EU rules. After the Brexit transition period ends, the UK will likely have the freedom to change its VAT rates, but the government has thus far indicated that it is unlikely to diverge too far from current rates.
VAT returns must be filed every month or every three months, depending on the size of the company. All businesses are required to 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.
Corporate tax year in the UK
The UK’s corporate tax year runs over from 1 April to 31 March. The financial year is commonly referred to by the start of the year. For example, the tax year 1 April 2019 – 31 March 2020 may also be referred to as FY2020.
The deadline to settle a company’s corporation tax liability for the accounting period is 9 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 2 accounting periods in the year you set up your company.
For large companies with taxable profits of more than £1.5 million, corporation tax falls due in four quarterly installments. These are payable online.
How to file your corporate tax return in the UK
Corporate tax returns are filed online.
You do not send a corporate tax return if you’re self-employed as a sole trader or in a partnership – but 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. If you miss the deadline, you’ll have to pay a late filing penalty that ranges from £100 to 20% of the unpaid tax. If your tax return is late 3 times in a row, the £100 penalties are increased to £500 each.
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. For the year ending 5 April 2020, the rate is 13.8% on all earnings above £166 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
- land and buildings;
- fixtures and fittings;
- plant and machinery, e.g. a digger;
- 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:
- 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
Non-resident companies are subject to UK corporation tax only on profits accrued from and connected to trade through a permanent establishment, or in developing UK land. Any other UK-source income received by a non-resident company is subject to UK income tax at the basic rate, currently 20%, without any allowances (subject to relief from any applicable double tax treaties.
With effect from April 2020 however, non-resident companies will be liable to UK corporation tax (rather than income tax) on income received from UK property.
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: