Corporation tax
It's very important to remember that there will be corporation tax to pay on the company's profits (and there will also be tax at 33.75% due on any overdrawn directors loans which aren't cleared within 9 months of your year end). Whilst your corporation tax return doesn't have to be filed with HMRC until 12 months after your year end, any corporation tax due will be payable 9 months and 1 day after the company's year end.
There are penalties for being late for filing (which you can see here) and you will pick up interest if you are late paying.
Click here to find out how to pay your corporation tax.
There are penalties for late filing of your corporation tax return - you can see what these are here. Interest will also be payable on late payment of your corporation tax and HMRC may also seek to recover any corporation tax due via their debt collection agencies. And whilst HMRC were willing to discuss payment by instalments a few years ago, they take a much harder line with unpaid tax nowadays.
You can download our workbook here to keep an eye on your corporation tax return filing deadline together with the deadline for paying any corporation tax due.
One of the problems a lot of small limited companies have is that they forget that they'll have to pay corporation tax. And so they draw this money out of the company - and that's one of the reasons why the directors often end up with overdrawn loan accounts and they don't have the money to pay the corporation tax when it's due! And, as mentioned above, HMRC can take a very aggressive stance where this happens!
So where possible we recommend you have a separate bank account for your corporation tax - possibly a business savings account. And our dividend schedules also include an estimate of what your corporation tax will be - but beware, this is only an estimate and your actual tax may be higher or lower.
If you're using FreeAgent there's a great summary and corporation tax forecast which you can see here for the current financial year.
If you're using Xero there isn't a corporation tax forecast, however you can download our dividend and corporation tax calculator workbook here to create a forecast and also to prepare your dividend paperwork.
And there's also a video to help you complete this workbook:
Adjustments to profit - deferred tax
When calculating the corporation tax charge for a limited company a number of adjustments are made. The most significant of these is that any depreciation charge on fixed assets (assets which will last more than one year eg computers, plant & machinery etc) will be disallowed and instead the company will be allowed to claim capital allowances.
The capital allowances which a company can claim as a deduction are often far more generous (because of the Annual Investment Allowance) than the depreciation charge. This means that if we calculated corporation tax on the accounting profit it would be higher than the corporation tax charge on the taxable profit in the first year but vice versa in the following years.
Putting through a deferred tax charge is a way of 'evening' out these differences so that the company doesn't overestimate its profit. A provision is created when deferred tax is charged to the profit and loss account and this provision is reduced as the timing difference reduces.
Let's look at an example.
A business has profits each year of £5,000 before any depreciation charge. In year 1 they buy a computer for £1,800 and this is written off in the accounts by way of a depreciation charge over 3 years. So each year there's a depreciation charge of £600 - meaning their accounting profit after depreciation is £4,400. If corporation tax was charged on accounting profit then they would have tax charge of £836 (£4,400 * 19% as at June 2024). And assuming the company's profits stayed consistent for the next two years, year 2 and year 3 would have the same accounting profit after depreciation and the same taxation charge.
However the tax computation is different. Rather than a £600 charge for depreciation each year, 100% of the cost of the computer is allowed in year 1 and then there is no allowance in years 2 and 3. So the tax payable is higher in years 2 and 3 than in year 1.
Let's see how this looks in a table:
Year 1 | Year 2 | Year 3 | Total | |
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Accounting profit before tax | £4,400 | £4,400 | £4,400 | £13,200 |
Add: Depreciation | £600 | £600 | £600 | £1,800 |
Less: Capital allowances (currently 100% first year) | £(1,800) | £0 | £0 | £(1,800) |
Taxable profit | £3,200 | £5,000 | £5,000 | £13,200 |
Corporation tax on taxable profit at 19% | £608 | £950 | £950 | £2,508 |
Corporation tax on accounting profit |
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Difference - put through the accounts as a deferred tax charge/(release) |
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Deferred tax provision on balance sheet | £228 | £114 | £0 | |
Total tax charge per accounts - corporation tax and deferred tax |
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So the deferred tax charge is just a way of accounting for the timing differences due to the different corporation tax rules - and over time the corporation tax charged will be the same whether it's calculated on the accounting profit (£4,400 per year) or on the taxable profit (£3,200 in year 1 and £5,000 in years 2 and 3).
And the deferred tax provision on the balance sheet is £228 in year 1 but reduces by £114 in year 2 and £114 in year 3 - so at the end of the 3 years there is no provision left.
For more information on the difference between your bookkeeping and your taxable profit, read our useful guide here.
And, provided you give us the information we require to our deadlines (and are up to date with our fees!), we will aim to produce your accounts and corporation tax return within 60 days of your year end - so you've got plenty of time to make sure you can pay your corporation tax.
To find out how to pay your corporation tax, and the references you will need, just click here.