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What is corporation tax and who pays it? Rate set to raise at start of new tax year


What is corporation tax and who pays it? Rate set to raise at start of new tax year

In light of soaring inflation and rising interest rates, many argue that the proposed hike in the company tax rate from 19 to 25 per cent, starting next month, is the last thing they need as they work to aid Britain in overcoming its current economic crisis.

Former prime minister Boris Johnson has hit out at Prime Minister Rishi Sunak’s Government’s plan, saying the corporation tax should instead be slashed to below Ireland’s 12.5 per cent rate.

Mr Johnson said: “We should think not about raising corporation tax but cutting corporation tax to Irish levels or lower and really turbocharging investment to drive levelling up across the whole country.”

Entrepreneur James Dyson said: “The Government has done nothing but pile tax upon tax on to British companies… Is it any wonder that the economy is teetering on recession?”

Archie Norman, chairman of Marks & Spencer, said: “Corporation tax is the banner headline tax and sends a strong signal so it matters, but the total tax climate is what really matters.

“The UK needs a clear, long-term, nailed-on, supply-side strategy.”

But what is corporation tax and who pays it? Here’s everything you need to know.

What is corporation tax?

Corporation tax is the main tax that a company must pay on its profits and any gains it makes from selling assets such as land, property and shares that have increased in value.

Sole traders, as well as partnerships, don’t pay corporation tax. Instead, they pay income tax on their business profits, as well as capital gains tax on any gain from the sale of assets.

Individuals are responsible for making sure they pay the right amount of tax and for keeping accurate company accounts, and are responsible for filing the company tax return by the deadline.

To be potentially liable to pay corporation tax, a business will be one of the following:

  • A limited company
  • A foreign company with a UK branch or office
  • A club, co-operative, or other unincorporated association, for example, a community group or sports club

What is the corporation tax rate?

In the United Kingdom, companies must pay 19 per cent corporation tax on their profits – that is, the money they make in that accounting period, with any overheads and expenses deducted.

Corporation tax rates are not fixed and can change, so it’s important that the correct rate is applied to any accounting period.

In order to make sure this is all correct, it’s important to check the dates of the accounting periods on financial statements or on the Government’s website.

On September 23, 2022, the Government said that a previously announced increase in the corporation tax from 19 per cent to 25 per cent from April for companies making more than £250,000 of profit would no longer go ahead.

However, the increase is now set to go ahead and will be 25 per cent from April 2023.

Who pays corporation tax?

Limited companies that are UK-based must pay corporation tax.

Companies that are not UK-based but trade here must pay corporation tax but are only taxed on the profits they make in the United Kingdom.

It isn’t just limited companies that have to pay corporation tax – any sort of club with members must also pay it, such as holiday clubs, sports clubs, and friendly or provident societies if they are not incorporated.

Charities and associations are also subject to corporation tax, as well as groups of individuals carrying out a business, such as co-operatives.

When does corporation tax increase?

The rate of corporation tax will rise from April 1, 2023, the Chancellor confirmed.

Find out how Jeremy Hunt’s Budget will affect your finances with our tax calculator.

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