In this article, you will learn how corporation tax works, how to calculate it and how to reduce it. You will find out how corporation tax loss can benefit your business.
I also provide a free corporation tax calculator for 2023. You can estimate your company taxes depending on the number of companies you own.
Corporation tax is easy to grasp. Understand it well enough, and you can help your business grow faster.
- Corporation tax will be 25% in 2023
- Small businesses will pay corporation tax between 19-25%
- The more small companies you own, the lower the benefits
- You can reduce your corporation tax by taking action
Let’s dive in and first look at how corporation tax works.
How Corporation Tax is Calculated
Corporation tax is the tax businesses pay on their annual profits.
The corporation tax is calculated using the following formula:
Corporation tax = Profits * Corporation tax rate (%)
For example, if your profits are £50,000, at a tax rate of 19%, your corporation tax would be:
Corporation tax = £50,000 * 19/100 = £9,500
Your Corporation tax return covers your company year (known as the company’s accounting period), not a calendar year or April tax year.
For example, your company’s accounting year might be January to January, which is different from your personal tax year, which is always April 6th to April 5th.
What are Profits in the corporation tax calculation?
A business makes money by selling goods or services or by making investments.
The profits you pay corporation tax are after deducting expenses, bills and other outgoings.
Let’s see an example.
The Greatest Biscuits Ltd might sell £300,000 worth of biscuits a year.
But it also has costs.
It might spend money on rent, bills, paying employees and buying the ingredients. Let’s say these expenses amount to £250,000 in total.
Therefore, if we deduct the expenses from the gross profits, our Biscuit company ends up with £50,000 in taxable profits.
Then corporation tax applies on the taxable profits, hence the 19% on £50,000 = £9,500 corporation tax.
Often a business will decide to spend more money to grow instead of handing it over to HMRC. For example, it might open another biscuit branch, hire more people etc.
This would save corporation tax and effectively trade more money now for higher profits in the future.
Note that corporation tax is only on profits! So if your business makes no money, there is no tax to pay.
What will the corporation tax be in 2023?
The corporation tax will be 25% from April 2023. It is currently 19%.
But there is some good news for small businesses.
If your business makes less than £50,000 in profits in a year, it will pay 19% corporation tax.
This lower tax rate is known as the Small Profits Rate.
Up to £250,000 yearly profits, businesses will pay a tax rate somewhere between 19 to 25%.
If your business makes less than £250,000 in taxable profits, here is a quick way to calculate your corporation tax from April 2023:
|Corporation tax rate
|Less than £50,000
|Between £50,000 – 250,000
|More than £250,000
To put it differently, the Small Profits Rate provides a maximum £3,000 corporation tax discount for small businesses each year.
19% instead of 25% on the first £50,000.
There are exceptions to these rates if you own more than one company. The limits are split between the associated companies you own.
Also, investment companies must pay 25% corporation tax and are not eligible for the Small Profits Rate.
Investment companies, however, typically defer taxes for much later in life if they don’t have to sell their investments early.
So yes, although the corporation tax rise is a headwind, it does not hurt investment companies to the same extent as trading companies.
Property buy-to-let companies can still benefit from the small profits rate. So property buy-to-let limited companies can still pay 19% corporation tax up to £50,000 in profits.
Not bad, dear landlords… Goes to show why so many BTL owners have used a limited company to invest in property.
Corporation Tax Calculator 2023
Here is a corporation tax calculator for 2023, which also takes into account the number of companies you own. Also known as Associated companies.
Simply enter your company profits, and it will calculate your corporation tax and your effective tax rate for each of your companies.
Use File -> Make a Copy to edit your own numbers. Check out the different tabs if you own more than one company.
These calculations are for trading companies. As I mentioned above, investment companies have to pay a flat 25% corporation tax and cannot benefit from the Small Profits Rate.
If you own one trading and one investment company, the spreadsheet will still work for your trading company taxes.
See the end of the article, which explains these special cases in more detail.
Corporation Tax Calculation Example 2023
Here is an example of how to calculate the corporation tax in 2023.
The Greatest Biscuits Ltd makes £100,000 of taxable profits.
Our biscuit business with £100,000 taxable profits would have to pay the following corporation tax:
19% * £50,000 + 26.5% * £50,000 = £22,750
So the total corporation tax is 22.75% for a business of 100,000.
Not as low as 19% but not as bad as 25%.
How can I pay less corporation tax?
You can pay less corporation tax by doing the following:
- Make pension contributions
- Increase your salary/employees’ salary
- Claim all business expenses
- Claim R&D relief
- Expand your business (buy equipment, hire more people etc.)
- Time your costs with profits
- Claim work from home allowances
- Carry loss forward to future years
Let’s visit some of them in more detail.
Salaries, pensions and business expenses
Expenses can dramatically reduce the corporation tax you pay.
You can deduct salaries and pensions from your profits as long as the compensation is for work you did for the business.
Here are some business expenses that can reduce your corporation tax:
- Accountancy fees, legal and solicitor fees
- Utility bills
- Office Supplies
- Office rent
- Materials to make your product
- Computer software, subscriptions
- Travel costs, car miles, bicycle miles
Many people operate one-man-band companies, such as IT contractors, doctors, plumbers etc.
You could add spouses to the company who can take on business tasks and get paid a salary. Even simple tasks such as admin can qualify for salary/pension.
Bigger businesses buy equipment, invest in another product line, hire people, or outsource tasks.
All these payments can grow future profits while lowering your corporation tax.
R&D relief on corporation tax for limited companies
Your company can get even greater tax relief if you’re doing research.
You can deduct an extra 130% of qualifying costs from the yearly profit, on top of the standard 100% deduction, to make a total 230% deduction!
Here’s what Gov UK say on the subject:
Research and Development (R&D) reliefs support companies that work on innovative projects in science and technology. It can be claimed by a range of companies that seek to research or develop an advance in their field. You can even claim it on unsuccessful projects.
You can claim relief on salaries, software, materials and utilities. Ask your accountant if your project qualifies as research and development.
The tax treatment is attractive!
Corporation tax loss: The best thing that happened to limited companies
If you made a loss in the current year, you could carry it forward in future years. This is known as “tax loss carry forward”.
Carrying loss forward is excellent because it allows company owners to incur costs now without losing the ability to deduct them from future profits.
As a result, if you make profits in the future, they will only be subject to corporation tax once your tax loss is covered.
In a way, HMRC encourages risk-taking. Because, let’s face it, running a business comes with risks.
Reducing future taxes is beneficial to investment companies too.
You control where you place your investments but not how your assets will perform.
If your property loan defaults, you can offset it against investment profits and pay no corporation tax up to the loan amount.
Focus on growing your top line
Thanks to the Company Investing Course, I had the chance to interact with hundreds of business owners. Some turn over more than £1m a year in their businesses.
They all shared a common thought:
Michael, stop thinking about how to save tax but focus on how to grow your top line. This is what makes the difference in the long term.
They are right! Spending too much on taxes is time NOT spent growing your revenues and building products. Running a tight ship can only get you so far.
Remember to make money too!
How is corporation tax calculated if you own two or more companies?
The corporation tax is slightly different if you own more than one company.
The more companies you own, the less favourable the small profits rate becomes.
This is known as the Associated company rule (see below).
You can just use the corporation tax calculator spreadsheet to estimate your corporation tax for two companies. But if you are curious about how the sausage is made, read below.
Corporation tax on two companies under common ownership
If you own two companies, your ‘small profits rate’ will be capped at a lower level.
Remember how you paid only 19% instead of 25% on the first £50,000 profits? If you own two companies, your 19% corporation tax will apply to each company’s first £25,000 profits, not £50,000.
This is to avoid gaming the system.
Because, in theory, you could spin up new companies and split profits between them to stay below the £50,000 level across all of them. But HMRC introduced the Associated Company rule to prevent corporation tax manipulation.
This table shows how corporation tax works on TWO companies under common ownership:
|Profits (two companies)
|Corporation tax rate
|Less than £25,000
|Between £25,000 – 125,000
|More than £125,000
Corporation tax on investment companies
Investment companies must pay the full 25% corporation tax on taxable profits.
The Small Profits Rate applies to trading companies only.
For example, if you operate a company that invests in ETFs, your corporation tax rate is 25% in 2023, regardless of how much you made.
As a result, mixing your trading business with investing is not a great idea. Now, even more so, because you risk applying the 25% corporation tax to your entire trading company’s profits.
Note that Property Buy-to-let companies can still benefit from low corporation tax. Those landlords still have it good!
Here are some frequently asked questions on corporation tax.
No, dividends do not reduce your company’s corporation tax. Dividends are paid from net profits.
Make sure you have enough profits before you distribute dividends.
No, dividends are not an expense. They are paid from net profits and do not reduce your corporation tax.
Corporation tax is applied to net profits. Qualifying expenses can reduce your corporation tax. These expenses can be salaries, bills, the cost of goods, and more.
Yes, holding companies count as Associated companies and cannot benefit from the Small Profits Rate of corporation tax. An exception holds if the holding company does not carry a trade or a business and has no other assets than the subsidiaries. See here for the exact holding company criteria.
I hope you enjoyed this corporation tax guide for 2023.
Feel free to use the bonus corporation tax calculator to estimate your 2023 company taxes. Remember, tax is only on profits.
Remember to make money too! Thank you for reading.