UK Corporation Tax

If you run a UK Limited Company you’re required to pay Corporation Tax on all company profits. The amount of Corporation Tax paid depends upon the level of profit made by the company in the financial year. For the majority of freelance computer contractors the rate of corporation tax used is 20%, the small companies’ rate.

Note: The chancellor announced in the budget that the small companies’ corporation tax rate will increase to 21% in 2009/2010

Corporation Tax Rates 2008/2009:

Corporation Tax Rate	Profit Level on which rate is charged	2008/2009 rates
Small Companies Rate	£0 - £300,000	20%
Main Rate	£1.5 million +	30%

Note: For companies with profits between £300,001 and £1.5 million, marginal relief helps to ease the transition from the small companies’ rate to the main corporation tax rate.

Marginal Relief is 1/40ths of the difference between £1.5 million and taxable profits above £300k. If taxable profits are £500,000 the rate of tax is 30%, therefore £150,000 is payable. However, this amount is reduced by marginal relief. To do this the difference must be found between the upper band (£1.5m) and taxable profits (£500k), so £1m. Multiply this amount by 1/40ths and you get £25,000. This marginal relief value (£25k) is deducted from tax payable (£150k) to make the actual tax payable £125,000. Marginal relief therefore smoothes the transition to the higher rate band

Corporation Tax and Company Profits

Only contract income generated from contracts outside IR35 can be considered profit on which corporation tax is payable. If the contracts you have been working on are considered Inside IR35 you will have to deduct employed levels of tax and class 1 National Insurance using the PAYE scheme.

It is recommended that you use an umbrella company solution such as Expat Advantage or Payroll Umbrella if you continually undertake contracts inside IR35 as this will save you time and money. Contractors outside IR35 traditionally take low salaries (of around £12,000), business expenses and dividends (which unlike salary do not attract large amounts of class 1 national insurance deductions). Before a dividend can be paid, a corporation tax provision (normally of 20% of net company profits) must be made. For freelance contractors running limited companies it is normal to either take a dividend on a monthly or quarterly basis. Although dividend payments may happen at any time Corporation Tax does not have to be paid to the HM Revenue and Customs until 9 months after the end of the companies’ financial year.

What do I need to do if my company is liable to pay Corporation Tax?

If your company is liable to pay Corporation Tax you must:

1. Register for Corporation Tax with the HMRC
2. Keep detailed records of all company income and expenditure. When recording income you should make a note of which contracts were inside IR35 and which were outside IR35 and the expenses relating to them. This information will be used when calculating your end of year liability
3. File a self assessment company tax return with the HM Revenue and Customs within 9 months of the end of your financial year
4. Pay the HMRC all Corporation Tax relating to the period

When should Corporation Tax be paid to the HM Revenue and Customs?

You must file a Corporation Tax Return (Form CT600) with the HMRC by your company’s ‘statutory filing date’ (day on which a company tax return must be received by the HMRC) and make all Corporation tax payments by the ‘normal due date’ (date on which you must pay Corporation Tax to the HMRC). These dates are within 9 months of the end of your company’s financial year. If you miss the filing date or fail to make payment to the HMRC in time you will face a fine.

To find out more about going into business with your own Limited Company call Commonwealth Contractors now on 0800 294 4388 or submit your details and we will get right back to you.

Related Contractor Ltd Companies Pages:

• Contractor Limited Companies
• • Contractor Limited Companies
  • IR35 Assessment Tool
• Managed Service Companies
• • Managed Service Companies
  • MSC Involvement
• UK Dividends
• • Freelance Contractors and UK Dividends
  • Calculating and Paying Dividends
  • Dividend Tax
• Income Tax and National Insurance
• • Setting a Salary
  • Registering for PAYE
  • Income Tax and National Insurance
  • PAYE Payments and Returns
  • PAYE Investigation
• Business Expenses
• • Claiming Business Expenses
  • Contractor Expenses
  • Home Based Rules and Business Expenses
  • IR35 and 5% Expense Rule
  • Site Based Rules and Business Expenses
• VAT Guide
• • VAT Guide for Contractors
  • The VAT Flat Rate Scheme
• Timesheets, Invoices and Payments
• • Contractor Timesheets
  • Limited Company Invoices
  • Client and Agency Payments
• Section 660 and Income Shifting
• • Section 660a and Income Shifting
  • Section 660a Background
• Dealing with Contracts Inside and Outside IR35
• Directors Duties and Responsibilities
• Opening a Limited Company Bank Account
• Loans and Mortgages
• Contractor Limited Companies and UK Immigration