A  regular question we get from our Limited company clients at Crunch is, “Is Corporation Tax a direct tax?”.  With a literal smorgasbord of different taxes flying about nowadays (VAT, PAYE, Income Tax, Corporation Tax... the list goes on), it’s very easy to get confused with how they all work.

However, don’t hate us for saying this, but understanding what kind of tax you’re paying is something you simply must do if you want to make smarter decisions for your business. No matter how boring it may be…we actually think tax is pretty darn sexy!

So let's learn what direct and indirect taxes actually mean with regards to Corporation tax, to clear up the confusion once and for all.

*Want to put yourself a step ahead of the competition, and get your Corporation tax handled by expert accountants that can save you £££s? Then check out our awesome specialised corporation tax service.

What are direct and indirect taxes?

Before we can answer whether Corporation Tax is a direct tax, it helps to understand the two main types of taxation in the UK, direct and indirect.

Direct taxes are paid straight to the government by the individual or business responsible for them. The key thing here is that the person (or company) paying the tax can’t pass the cost on to someone else. You earn income or make a profit, and you pay tax on it. It's as simple as that.

{{ltd-guide}}

Common examples of direct taxes include:

• Income Tax – paid by individuals on their earnings from employment, self-employment, pensions or rental income. Usually collected through PAYE or paid via Self Assessment. If you’re wondering how much Income Tax you’ll pay, you should check out our free calculator.
  
  
• Capital Gains Tax – paid on the profit when selling an asset that’s gone up in value. Assets include things like shares, property, or business assets. You’re only taxed on the gain itself, not the full price. You can use our Capital Gains Tax calculator to work out how much CGT you’ll owe.
  
  
• National Insurance Contributions (NICs) - a direct tax on earnings paid by employees and employers to fund state benefits such as the NHS. Wondering how much NI you’ll pay? Check out our free National Insurance calculator.

Indirect taxes, on the other hand, are different. These are collected by a third party (usually a business) and then passed on to the government. In this case the cost is passed along, usually to the customer.

The most familiar example is VAT (Value Added Tax). Businesses charge VAT on their goods or services, but the customer ultimately foots the bill. The business then sends that VAT amount to HMRC.

So, basically:

• direct taxes come straight out of your pocket (or your company’s profits)

and,

• indirect taxes are baked into prices and paid by consumers.
  
  

Now let’s look at where Corporation Tax fits into all this.

So, is Corporation Tax a direct tax?

Yes, Corporation Tax is a direct tax. It’s a tax paid by Limited companies on the profits they make from trading, investments, or selling assets. 

The company itself is responsible for calculating how much Corporation Tax is owed, usually by deducting allowable expenses, and paying it straight to HMRC. The cost can’t be passed on to customers or anyone else, it comes directly out of your company’s profits.

To see how this differs from an indirect tax like VAT, here’s a quick side-by-side comparison:

So, while both taxes involve businesses, they work in very different ways. Corporation Tax reduces your profit; VAT increases your prices.

Why the distinction is important for your business

Knowing whether a tax is direct or indirect might seem like a technical detail, but it actually makes a big difference to how you manage your business finances.

That’s because…

• It affects your profit margins – direct taxes like Corporation Tax come out of what your business earns, so understanding them helps you forecast and plan ahead for your Year End bill.
  
  
• It shapes your pricing strategy – indirect taxes like VAT influence how you price your products or services, since they’re built into what your customers pay.
  
  
• It helps with cash flow planning – you’ll need to set money aside throughout the year for Corporation Tax, whereas VAT is typically collected and paid quarterly.

Pro tip: To avoid surprises, set aside money for your Corporation Tax throughout the year rather than waiting until the bill is due. Crunch can help by calculating your liability automatically and alerting you in advance. 

Examples of other direct and indirect taxes (UK)

To make things crystal clear, here’s a quick overview of the main types of direct and indirect taxes you might come across in the UK:

Direct taxes are generally based on income, profits, or gains. Money your business (or you personally) have already made.

Indirect taxes are typically charged on spending or consumption. The more people buy, the more tax is collected.

{{payroll-guide}}

Corporation Tax rates

Corporation Tax is paid by Limited companies on the profits they make. That includes trading income, investments, and any chargeable gains from selling assets like property or shares.

The amount you pay depends on how much profit your company makes during its accounting period. 

This is how it’s calculated*:

*Please note that these thresholds are based on having just one company. If there are associates, then thresholds will be divided by related companies.

You’ll need to work out your company’s profits after deducting allowable expenses, then apply the right rate (or combination of rates) to calculate your tax bill. Curious what expenses are disallowable expenses for Corporation Tax? Check out our article which covers what expenses you can’t claim for with Corporation Tax. 

Corporation Tax is usually paid once a year, and most small businesses have nine months and one day from the end of their accounting period to pay what they owe.
‍

The direct truth about Corporation Tax

Corporation Tax is a direct tax, paid directly by Limited companies on their profits. No middlemen, no passing the cost to customers, just a straightforward (if slightly painful) bill to HMRC.

Knowing the difference between direct and indirect taxes might not make tax season your favourite time of year, but it does help you plan ahead, protect your profits, and avoid any unwanted surprises.

‍