Knowledge Base - Limited Company UK Corporation Tax

What is corporation tax?

Corporation tax is the tax due on "taxable profits" (Sales less expenses & claims). Expenses include Directors Salary.

How much is corporation tax ?

Corp Tax is 20% of the taxable profits. (It recently altered from 19%)

When is it paid?

It is due 9 months after the end of the tax year.

How much do I pay, where to and how?

All of this detail is supplied in an e-mail you receive after I have prepared your Statutory Accounts for Companies House along with the Corp Tax Calculations. If you are querying the year past, please first check for this e-mail. The amount of tax due and the date it is due will be contained within the PDF file dealing with your corp tax calcs. If after checking you cannot find this mail, please feel free to request a copy of that mail sent to you.

I'm worried about my future corporation tax bill - help!

To guess the tax bill, simply deduct what you guess to be the expenses from the income. Multiply this by 20% and you will have a guessed tax bill. Make sure that this sum has been put away in enough time to pay the tax bill. Of course, any tax bill you guess is subject to how correctly you have guessed what can be claimed as expenses and what the income is. There is little further help that can be provided on this as accuracy is subject to the validity of your guesses. The only truly accurate way to project your tax is from your final accounts and these are only available in final format when you send them to me.

How do my wages relate to my tax bill?

The first £5225 (Annual Tax Free Amount) is treated as salary. This is how Payroll Services prepare your payroll. This is the sum that should be entered for each Director (unless they have another income) within your book-keeping software. The remainder should be recorded as Dividend.

The company's profits are obviously reduced by the £5225 and this in turn lowers the Corp tax bill with no personal tax bill existing. The company will then pay tax on the remainder ("taxable profits"). Dividends are paid out of this "taxable profit" so dividends do not lower the Corp Tax Bill. The saving occurs for you as dividends do not attract National Insurance. This saving can be many thousands fo pounds even for average earnign one man Ltd Companies. In summary, the Company has paid the tax bill on the Dividends, not you.

But I take a wage!

Lets say every week you pull out £250 and in your mind they are "wages". This amounts to £13,000 a year. The way to treat this is either:

•  Each week enter £100.48 as wages (That's the £5225 divided by 52 weeks) and the remaining £149.52 as dividend. But that's the painful way, instead

•  Count up the monies you have drawn within the year (£13K in this example), enter £5225 to wages and £7775 as dividend. That's 2 entries once a year, a lot easier to do!

It's important to remember that the £250 a week you draw is simply a "drawing" or "advance" but not a wage or dividend. Once we categorise this £250 it becomes what it becomes, a wage or dividend.