How to calculate small business corporation tax

Corporation Tax is a tax that all limited companies must pay on their profits – any money your business makes after overheads and expenses have been deducted.

Understanding how to calculate it for small businesses is essential to ensuring you meet Corporation Tax requirements.

What is small business Corporation Tax?

All limited companies are liable for Corporation Tax – no matter how small.

The tax is paid annually to HMRC and must be paid within nine months of the end of your financial year.

This is a self-assessed tax levied on company profits as well as any money your business makes from investments or selling capital assets for more than they cost.

This means it’s your company’s responsibility to calculate how much is owed and pay it to HMRC in advance of filing your company tax return (CT600), which must be filed with HMRC within 12 months of the end of the accounting period.

For example, if your financial year ran from the 1st of January to 31st of December, you would need to calculate and pay any tax due within nine months and one day of the financial year end.

In this case, you’d need to pay any tax due by the 1st of October.

You would also need to file your company tax return by the 31st of December.

You can find the current Corporation Tax rates on the HMRC website.

How to calculate Corporation Tax for small businesses

Working out your tax requires some skills in accounting, along with accurate bookkeeping.

You’ll also need to understand what tax reliefs your business can benefit from, which helps reduce the amount your business pays.

It’s best to seek professional advice from a business accountant to help prepare your company tax return.

Step 1 – calculate sales and income

You’ll need to create a profit and loss account in order to calculate what you owe.

This should total all sales income your business generates, as well as any interest earned such as in a corporate savings account.

Let’s assume a small consulting business generates sales of £120,000 and interest of £100 on money stored in a business bank account.

This would give total income of £80,100.

• Sales = £300,000)
• Interest income = £100
• Total income = £300,100

Step 2 – calculate overheads

Overheads and other business expenses can be deducted from your trading income to arrive at the profit your business makes.

To ensure you pay no more than necessary, remember to claim all allowable deductions and expenses from the trading income.

However, you can only deduct allowable expenses – which the law says is an expense that is “wholly and exclusively” for business use.

It’s likely you can claim for anything you have bought specifically for your business that you don’t get any personal use from.

Expenses usually include accounting fees, cost of sales such as materials or postage and packaging, salaries, insurance, travel and office costs. For example:

• Directors salary = £25,000
• Professional fees = £2,500
• Marketing = £1,000
• Insurance = £300
• Entertaining = £1,000
• Bank charges = £350
• Software = £2,300
• Travel = £6,000
• Office supplies = £325
• Subscriptions = £90
• Depreciation = £600
• Total overheads = £39,465

Step 3 – capital allowances and depreciation

Capital allowances are expenses that your business incurs buying fixed assets that will be part of your business for several years, such as computing equipment, plant equipment and furniture.

Over time the value of the asset will depreciate.

For example, your business may determine that a computer initially worth £1,800 will depreciate by £600 a year over three years.

At the end of the three years the asset has a value of zero.

But instead of allowing depreciation as an expense, most capital asset purchases will qualify, so need to be added back into the tax calculation.

For most small business tax calculations, most capital asset purchases will qualify for Investment Allowance tax relief.

This means that up to £1,000,000 of capital costs each year are effectively written off and can be used to reduce the amount of profit liable for Corporation Tax.

Step 4 – entertaining costs

Costs associated with entertaining clients and suppliers – such as business lunches, trips to sporting events, gifts and free samples – are not tax deductible; you can’t claim either tax relief or VAT on the costs of entertaining.

Step 5 – calculating Corporation Tax

In our example, let’s assume that £1,800 was spent on capital equipment in the year, which will depreciate at £600 a year over three years, and £1,000 on entertaining clients.

To calculate, you would add back any depreciation and client entertaining costs to the profit before accounts total, then subtract any capital allowances to arrive at the profit value that is liable tax.

Total income = £300,100

Overheads = £39,465

Profit before accounts = £260,635

Add back:

Depreciation = £600

Entertaining = £1,000

Deduct:

Capital allowances = £1,800
 

Profit liable to Corporation Tax = £260,435
Tax due @ 25% = £65,108.75
 

Tax would be due at a rate of 25% on profits, so simply divide the liable profit by 100 then multiply the resulting sum by 25 to arrive at the amount due.

It's important to remember that the rate of Corporation Tax you will be liable for will change depending on the amount of profit your business makes.

From 1 April 2023 the Corporation Tax rate are:

19% for taxable profits below £50,000 (small profit rate)
25% for taxable profits above £250,000 (main rate)

For those businesses with profits between £50,000 and £250,000, Marginal Relief provides a gradual increase in Corporation Tax rate between the small profits rate and the main rate — this allows you to reduce your rate from the 25% main rate.

To understand how Marginal Relief could support your business, visit the Marginal Relief Calculator on the Gov.UK website.

As all businesses are different, it’s always a good idea to seek accounting advice from a qualified professional before submitting your company tax return.