Corporation Tax for New Directors Explained

The first corporation tax bill can catch out even experienced sole traders. Money may be sitting in the company bank account, but it is not all yours to spend. Corporation tax for new directors starts with understanding that your limited company is a separate legal entity, with its own profits, records, deadlines and tax responsibilities.

For a contractor, tradesperson, landlord or new business owner, getting the basics right early avoids the familiar year-end scramble: missing invoices, unclear card payments and an unexpected bill from HMRC. The aim is not to turn you into an accountant. It is to give you a practical grip on what the company owes, when it owes it and what records support the figures.

What corporation tax actually applies to

Corporation tax is paid by a limited company on its taxable profits. Broadly, that is the company’s income minus allowable business costs and certain tax adjustments. It is not charged on turnover. A company that invoices £100,000 but has £55,000 of genuine business costs is taxed on the profit after those costs, subject to the relevant rules.

This is different from your own personal tax position. As a director, you may take money as salary, dividends, repayment of money you previously put into the business, or reimbursement of business expenses. Each route has different tax treatment. Corporation tax is the company’s tax; income tax and National Insurance can arise personally depending on how you take money out.

That separation is where many new directors come unstuck. Paying for a personal purchase from the company account does not automatically make it a company expense. It needs to be recorded properly, usually through your director’s loan account, and it may create tax consequences if left unresolved.

Corporation tax for new directors: rates and profit thresholds

The headline corporation tax rate is 25% for companies with profits above £250,000. A 19% small profits rate can apply where taxable profits are £50,000 or less. Companies with profits between those levels may qualify for marginal relief, which creates a gradual increase rather than a jump straight to 25%.

Those thresholds are not always as simple as they look. They are reduced for short accounting periods and shared between associated companies. For example, if you own or control more than one company, the small-profits and main-rate limits may be divided between them. This is worth checking before assuming the 19% rate applies.

For most owner-managed companies, the practical point is to budget from the start. Do not treat the balance in the bank as profit, and do not treat profit as available cash. VAT, payroll, suppliers, loan repayments and corporation tax can all be due before you can sensibly decide what is available as dividends.

Your first deadlines after setting up a company

Companies House and HMRC have separate requirements. Registering a company does not mean every corporation tax task has been completed automatically.

HMRC normally needs to be told that the company has started trading within three months of trading beginning. Trading can include buying or selling goods or services, advertising, employing someone, earning interest or otherwise starting business activity. A dormant company is different, but it should only be treated as dormant where it has had no significant accounting transactions.

Your company will have an accounting period, usually ending on the accounting reference date set when it was incorporated. The first period can be longer than 12 months for accounts purposes, but corporation tax returns cover periods of no more than 12 months. This can mean two corporation tax periods in the first set of accounts.

The core corporation tax deadlines are straightforward:

• Pay corporation tax nine months and one day after the end of the accounting period.

• File the Company Tax Return, known as the CT600, within 12 months of the end of that period.

• File statutory accounts with Companies House by the relevant accounts filing deadline.

• File a confirmation statement each year, even if very little has changed.

The payment deadline comes before the CT600 deadline. That catches people out. Waiting until the return is due before looking at the figures can lead to interest and pressure on cash flow. A sensible approach is to estimate the liability as the year progresses and set money aside regularly.

Which costs reduce the company’s taxable profit?

An expense must be incurred wholly and exclusively for the purposes of the trade to be deductible for corporation tax. In normal working life, that often includes materials, tools, subcontractor costs, accountancy fees, business insurance, advertising, software, phone costs with a business element, professional subscriptions and mileage or travel that is genuinely for business.

Some costs need more care. Entertaining clients is generally not deductible for corporation tax, even though it feels like a business expense. Fines are usually not deductible. Everyday clothing is normally not allowable, although protective clothing or a recognisable uniform may be. Travel from home to a regular workplace can be treated differently from travel to temporary sites or client visits.

For vehicles, equipment and larger purchases, the answer depends on the facts. Capital allowances may give tax relief, rather than claiming the full purchase as an ordinary running cost. Cars have particularly detailed rules based on emissions and private use. If a company provides a car or other benefit to a director, a benefit-in-kind charge may also arise personally.

Keep receipts, invoices and a clear note of the business purpose. A photograph of a receipt saved to bookkeeping software is far more useful than a faded slip found in the glove box 11 months later.

Salary, dividends and the director’s loan account

Taking money from your company is not a one-size-fits-all decision. A salary must be processed through PAYE, with payroll reporting to HMRC and the right treatment of tax and National Insurance. Dividends can only be paid from available distributable profits, not simply because there is money in the bank. They should also be supported by appropriate paperwork.

If you put personal money into the business to get it started, the company can usually repay that amount to you without it being salary or a dividend. Record it accurately through the director’s loan account.

The risk is using the company account as a personal wallet. Unplanned drawings can build up as an overdrawn director’s loan. Depending on the amount and timing, this can trigger a tax charge for the company, personal benefit rules or additional reporting. It is usually much easier to decide how you will pay yourself each month than to untangle a year of miscellaneous transfers afterwards.

Keep records that make the return easy to support

Good bookkeeping is not about producing neat-looking reports. It tells you whether you are making a profit, what you owe and whether the numbers in the tax return can be supported if HMRC asks questions.

Use a dedicated business bank account and put business income and expenses through it wherever possible. Reconcile it regularly rather than relying on a year-end bank statement. Keep sales invoices in order, record supplier bills, separate personal spending, and review unpaid customer invoices so that your accounts reflect what is actually happening.

If you are VAT registered, VAT needs its own attention. Output VAT collected from customers is not income for corporation tax purposes, while VAT recovered on costs is not normally an expense. Mixing VAT figures into sales and costs is a common way to distort the profit figure.

Construction businesses also need to keep CIS records in step with their accounts. CIS deductions suffered may be recoverable against PAYE liabilities in the right circumstances, but they are not simply a corporation tax expense. The treatment depends on whether your company is operating PAYE and the records available.

Plan before the year-end, not after it

The best tax planning happens while there is still time to make a decision. Before the accounting year ends, review expected profit, outstanding expenses, planned equipment purchases, pension contributions and how much you have taken from the company. The right action depends on the company’s cash position, future workload and your personal income, not just a desire to reduce this year’s tax bill.

For example, buying equipment purely for tax relief is rarely a good deal if the business does not need it. Equally, leaving a profitable year untouched until the filing deadline may mean missing sensible planning opportunities. A practical review can also identify whether dividends have been declared correctly, whether payroll is up to date and whether the director’s loan account needs attention.

New directors do not need to fear corporation tax, but they do need a routine. Keep records current, ring-fence money for the bill and ask questions before moving money out of the company. That leaves you free to concentrate on the work that brings money in, with fewer surprises when the accounts are due.