Why Is My FreeAgent Corporation Tax Estimate Wrong?

A FreeAgent figure that looks too high can be alarming, particularly when cash is tight after VAT, wages, fuel, materials or subcontractor costs. If you are asking, why is my FreeAgent corporation tax estimate wrong?, the answer is usually that the software is working from incomplete, incorrectly coded or not-yet-adjusted bookkeeping. It is an estimate, not the final Corporation Tax calculation submitted to HMRC.

For a working director, the distinction matters. A £3,000 difference on screen may be a genuine tax bill, but it could just as easily be depreciation, an uncategorised purchase, a duplicated bank transaction or an expense that needs an accountant’s adjustment at year end.

Why your FreeAgent Corporation Tax estimate may be wrong

FreeAgent calculates its estimate from the records currently held in your account. It cannot know whether every transaction has been checked, whether a cost is wholly for the business, or whether specialist tax treatment applies unless the records and settings tell it so.

The estimate is useful for keeping an eye on likely tax. It should not be treated as a promise of the final amount due. Your statutory accounts and Corporation Tax return may include adjustments that do not appear in everyday bookkeeping.

Your bookkeeping is not complete yet

This is the most common reason. Bank feeds make bookkeeping quicker, but they do not make every entry correct. A payment may be sitting in the bank feed waiting to be explained, or it may have been posted to a general expense category when it should be equipment, director’s loan, wages or a repayment of money the company owes you.

Check whether sales invoices have been raised for work completed, not just money received. If your company uses accrual accounting, income and costs are generally recorded when earned or incurred, rather than when cash changes hands. This can catch out contractors and small limited companies that naturally judge the business by the bank balance.

Also look for duplicated income or expenditure. It is easy to match a bank receipt to an invoice and then enter the same receipt manually. The same problem can arise when receipts are uploaded more than once or a supplier payment is both imported and entered as a bill.

The accounting period is not the period you have in mind

Your company’s year end may not be 5 April or 31 March. Corporation Tax is calculated for the company’s accounting period, which is normally shown on the accounts and confirmation documents, not for the personal tax year.

FreeAgent’s estimate can therefore look out of step with what you expected based on recent work. Perhaps you have had a strong few months after a quieter start to the company year, or perhaps a large annual cost has not yet been entered. Always check the date range being used before making decisions from the figure.

A new company can be more complicated still. Its first accounts period may be longer or shorter than 12 months, and the Corporation Tax periods can be split. In those cases, a quick on-screen estimate needs more careful review.

Depreciation is not normally a Corporation Tax deduction

FreeAgent may show depreciation in the profit and loss account for bookkeeping purposes. However, depreciation is not usually an allowable deduction when calculating Corporation Tax. Instead, tax relief is often claimed through capital allowances.

For example, a company buying a computer, tools, machinery or a van may receive tax relief through the Annual Investment Allowance or another capital allowance. The exact treatment depends on what was bought, when it was bought and how it is used. Cars have their own rules, with the available relief affected by factors including emissions.

This is one of the clearest examples of why accounting profit and taxable profit are not the same thing. The final tax calculation may add back depreciation and claim the appropriate allowances separately.

Some expenses are not allowable in full

A cost can be genuine business spending but still receive different tax treatment. Client entertaining is a familiar example: it may be a sensible commercial expense, but it is generally disallowed for Corporation Tax. Fines, penalties, some legal costs and private elements of expenditure can also require adjustment.

The reverse can happen too. You may have paid a valid company expense personally and not yet claimed it back. If it is missing from the records, the profit - and therefore the estimated tax - may look higher than it should.

For taxi drivers, tradespeople and directors who use a vehicle for both work and personal journeys, the details matter. The company should not simply claim every fuel, repair and insurance cost without considering ownership and private use. Getting this wrong can affect Corporation Tax, VAT and benefit-in-kind reporting.

VAT entries may be distorting the figures

If your company is VAT registered, the bookkeeping setting must reflect how VAT is treated. Input VAT on eligible purchases is not usually an expense if it can be reclaimed. Output VAT collected from customers is not normally company income. Incorrect VAT coding can make profit look too high or too low.

The Flat Rate Scheme needs particular care. Under the scheme, you normally pay HMRC a percentage of your VAT-inclusive turnover, rather than reclaiming VAT on routine purchases in the usual way. FreeAgent needs the right VAT settings and codes to produce meaningful reports.

Do not assume that a VAT return being filed means every transaction has been coded correctly. A return can be submitted with an error in it, especially where costs, deposits, reverse charge VAT or purchases from overseas suppliers are involved.

Payroll, pensions and director transactions have not been fully posted

A director’s salary is generally a company cost when it has been properly processed through payroll. Employer National Insurance and employer pension contributions may also be deductible. If payroll journals have not been posted correctly, the Corporation Tax estimate may be overstated.

Dividends are different. They are paid from post-tax profits and do not reduce Corporation Tax. If dividends have been treated as a business expense, the accounts and tax estimate need correcting.

The director’s loan account is another regular source of confusion. Money taken from the company is not automatically a dividend or an expense. It might be repayment of money you previously put in, salary, a dividend, reimbursement, or a loan. The correct answer affects both the company records and your personal tax position.

The Corporation Tax rate may not be what you expect

Since April 2023, companies with profits up to £50,000 may generally pay Corporation Tax at the small profits rate of 19%. Companies with profits above £250,000 generally pay the main rate of 25%, with marginal relief available between those thresholds.

Those limits are reduced where there are associated companies or a short accounting period. That means a company owner with more than one company cannot simply assume each company receives the full £50,000 and £250,000 thresholds.

FreeAgent can provide a helpful estimate, but the rate and marginal relief position should be checked where profits are close to a threshold, there are associated companies, or the accounting period is unusual. A small shift in profit can alter the calculation more than you might expect.

What to check before relying on the estimate

Start with the profit and loss report for the full accounting period. Look for obvious gaps: unbilled work, missing supplier costs, large or unusual categories, and transactions left unexplained. Then compare the bank balance, VAT position, payroll reports and director’s loan account with what has actually happened in the business.

Pay particular attention to capital purchases, vehicle costs, entertaining, personal payments and dividends. These are areas where the bookkeeping view and tax view often differ. Keep invoices and receipts, even for purchases made on a personal card, so there is evidence for the treatment used.

It is also worth checking that the company details, year end and VAT scheme in FreeAgent are correct. A sound set-up at the start saves considerable time when accounts are due.

When the estimate needs an accountant’s review

A review is sensible before declaring dividends, making a large purchase, closing the accounts or setting aside money for HMRC. It is especially useful if profits have risen sharply, you have bought equipment or a vehicle, you have CIS income or subcontractor costs, or you are unsure what money taken from the company represents.

The final Corporation Tax bill is based on statutory accounts and a Corporation Tax return, not just the number shown in your bookkeeping software. Corporation Tax is normally payable nine months and one day after the end of the accounting period, while the return is generally due 12 months after the period end. Waiting until the deadline is close leaves less room to correct records and plan properly.

At Short And Sons Accountants, we regularly help limited company directors turn a worrying software estimate into a figure they can understand and budget for. A quick review of the records can identify whether the issue is an error, a missing cost or simply a normal year-end tax adjustment.

The best approach is not to ignore a figure that looks wrong, nor to panic and pay based on a rough estimate. Keep the records current, question anything that does not reflect real trading, and get the tax calculation checked before it becomes an expensive surprise.