Corporate tax is a tax levied on the profits of limited companies. This also applies to foreign companies with a British branch office. The current rate is set at 19% for the financial years 2021/22 and 2020/21.
A UK based company pays Corporation Tax on its profits in the UK and around the world, while a foreign company with the UK based branch pays income tax only on the profits it makes from its UK operations.
If a company is making a loss or not trading, it does not pay Corporation Tax. However, it will still be necessary to keep accounting records to prepare annual accounts and any required tax returns. A company tax return is only required if the company is trading.
Why should you pay Corporation Tax early?
HMRC pays you interest (currently 0.5% as of 1 April 2021), known as "credit interest", for the early payment of the Corporation Tax. HMRC generally pays interest from the Corporation Tax payment date to the payment deadline. The earliest due date for HMRC interest payments is six months and 13 days after the start of your accounting period.
For example, if your accounting period starts on 1 January 2020 and ends on 31 December 2020, you can pay Corporation Tax any time after 13 June 2020 (that is, six months and 13 days after the start of your accounting period) and 1 October 2021 (deadline for payment set by HMRC).
HMRC can pay you interest for the period from 13 June 2020 to 1 October 2022 at an annual rate of 0.5%. The amount of Corporation Tax you paid is, of course, an estimate since your business year is still in progress.
Keep in mind that interest income must be included in your annual accounts and is therefore taxable.
Early payment is better than the late payment
While you will be given nine months and one day after the end of the year for your company to pay Corporation Tax, there are fines to be paid if you are even a day late, so don't risk. Paying early means you won't pay extra money to the tax inspector.
What are the downsides of paying Corporation Tax in advance?
The main disadvantage of paying Corporation Tax early is the loss of cash flow and the ability to reinvest in your business or even lose potentially higher returns elsewhere. So it won't make you rich or really help your business grow, but you can feel better knowing that your tax affairs are in order.
It is best to talk to an accountant who can advise you based on your situation. If you have any questions, please contact Persona Finance (firstname.lastname@example.org).