Corporation Tax Isn’t Just an Annual Bill
Many business owners view corporation tax as a once-a-year bill that lands on their desk when their accountant prepares the company’s accounts. However, this approach can lead to financial surprises and cash flow struggles.
The reality is that corporation tax is a recurring tax—it increases as your profits grow, meaning it’s something you need to plan for throughout the year, not just at the end of it. Ideally, you should be reviewing the company’s corporation tax liability each month.
Corporation tax is charged on your company’s taxable profits, and it doesn’t stay static. If your business is doing well and your profits are increasing, your corporation tax bill will rise too. Unlike fixed costs such as rent or insurance, it’s a variable expense that grows in line with your financial success.
Many company owners make the mistake of only thinking about corporation tax at year-end, but by then, it’s too late to do much about it. That’s why proactive tax planning is essential.
How Corporation Tax Works
- Tax is based on profit – The more your business earns, the more tax you’ll pay. The main rate of corporation tax is currently 25% for companies with profits over £250,000, while those with profits under £50,000 pay 19%. If your profits fall between these figures, a marginal relief calculation applies.
- Tax is due 9 months after year-end – Your corporation tax bill is payable nine months and one day after your company’s financial year-end. But if your profits exceed £1.5 million, you may need to pay in quarterly instalments.
- Profitability changes your tax bill – If your business was making £50,000 in profit last year and pays tax at 19%, but this year profits rise to £100,000, your tax bill could more than double.
Why You Need to Plan for Corporation Tax
1. Avoid Cash Flow Problems
If you wait until your tax return is filed to think about corporation tax, you may find yourself struggling to set aside the money in time. By treating it as a recurring cost, you can build it into your cash flow planning.
2. Make the Most of Tax Reliefs
With proactive planning, you can take advantage of tax reliefs and allowances that reduce your liability. For example:
- Pension contributions – These are tax-deductible and a great way to extract profit efficiently.
- Capital allowances – If you invest in equipment, you may be able to claim tax relief.
- R&D tax credits – If you’re investing in innovation, you could be eligible for tax savings.
3. Set Aside Money Regularly
A good habit is to put aside a percentage of your profits into a separate tax reserve account. Some business owners save 19-25% of their monthly profits to ensure they have enough when the bill is due.
4. Know When to Take Dividends
If you take dividends, remember they’re paid after corporation tax. If your tax bill is higher than expected, it could affect how much you can withdraw from the company. Regularly reviewing your figures with an accountant can help you manage this.
Final Thoughts
Corporation tax isn’t just a once-a-year headache – it’s an ongoing financial commitment that grows with your business. Planning ahead, setting aside funds regularly, and making the most of tax reliefs can help you stay in control.
If you’d like advice on tax-efficient profit extraction, cash flow planning, or reducing your corporation tax liability, get in touch.
Call us on 01386 366741 or visit accountancyoffice.co.uk to book your free consultation.