How is Corporation Tax calculated?

All companies are required to pay Corporation Tax on their profits. These profits may be trading profits, investment profits and chargeable gains on investments such as residential and commercial property. Adjustments are then made to the profits shown in the company accounts to arrive at the Profits Chargeable to Corporation Tax (PCTCT).

In this article, we will share how this is calculated, how you can potentially reduce your Corporation Tax bill and how Gerald Edelman can support you.

How does a company calculate the profits that are liable to Corporation Tax?

To calculate the PCTCT, you must take the accounting profit found in the Profit & Loss accounts and add to this profit the following non-deductible items in the accounts:

• Client entertainment.
• Depreciation of assets.
• Fines and Penalties.
• Legal costs relating to investments like property or shares.

Further deductions include Capital Allowances (a deduction that replaces depreciation and relates to the purchase of plant and machinery and fixtures and fittings) and losses brought forward from previous years.

The rate of Corporation Tax

The current rates of Corporation Tax are:

• Main Rate 25%
• Small Companies Rate (SCR) 19%

The main rate of Corporation Tax is for profits exceeding £250,000 per annum – the upper profits limit.

The SCR is for companies whose profits fall below £50,000 per annum – the lower profits limit.

Companies whose profits fall between the lower and upper-profit limits will pay Corporation Tax at the main rate (25%) and then marginal relief is deducted.

Marginal relief is calculated using a specific formula, which is adjusted depending on the company’s total income and the number of associated companies.

The lower and upper profits limits are reduced proportionately where the accounting period is less than 12 months and where a company has one or more associated companies. 

Companies with the following profit levels pay the below amounts of Corporation Tax.

How can you reduce your Corporation Tax bill?

There are several ways to reduce your Corporation Tax bill. These include:

• Ensure that all expenditure of the company is recorded and anything wholly exclusively for the purpose of the company’s business.
• Ensure that plant and equipment is purchased at the earliest possible time and full capital allowances are claimed.  
• Use Corporate Tax reliefs as appropriate to reduce your company’s liability to tax – We recommend speaking to a corporate tax adviser to see what reliefs you could be entitle to.

How can Gerald Edelman help?

At Gerald Edelman, we have a team of expert advisers with a wealth of experience in compliance and advisory work for corporation tax. We can assist with UK taxation of businesses from small single-director companies to large multinational groups.

For further information and advice, speak to a member of our team today.