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A few weeks back, we examined the tax that freelancers can expect to pay, touching on the distinctions between trading as a Sole Trader or a Limited Company and how these respective legal structures will impact upon your tax liabilities.
Something that Limited Companies are liable for which Sole Traders aren’t is Corporation Tax – essentially a levy payable on the profits that a company makes. Whilst we’ve summarised it before, it’s pretty complex – so here’s a brief overview of this tax tidbit, outlining how it’ll impact upon you as a freelancer.
At it’s crux, Corporation Tax is like the business equivalent of income tax, with the amount you’ll need to pay increasing in line with your profits. There are two rates – the lower rate (also known as the Small Profits Rate) and the upper rate (the Main Rate). These break down as follows…
The lower rate of Corporation Tax applies to Limited Companies posting profits of up to £300,000 (i.e the majority of freelancers). If you’re sitting within this bracket, you’ll currently face forking out 20% of any profits earned to HMRC. Bear in mind that you’ll only be paying Corporation Tax on profits, not revenue – so only on the money left once your costs have been deducted from your revenue.
This comes into effect for businesses with annual profits of £1,500,000 or more – so very few freelancers – and currently sits at 23%. This rate is due to decrease to eventually match the lower rate in 2015.
Now, for Limited Company freelancers earning between those two thresholds things get a little complicated. The tax rate you’ll pay on any profits will rise gradually up to the £1.5million threshold, but you may be able to claim ‘Marginal Relief’ in order to pay less Corporation Tax. Read more about this on the HMRC website here.
If you’re a freelancer who’s just formed a Limited Company, then within three months of starting your business you’ll need to register your Limited Company to pay Corporation Tax. You can only do this once you’ve got your company’s Unique Taxpayer Reference, which will usually arrive to your registered address a few days after incorporating. Once you’ve received this, you’ll then be able to register to pay Corporation Tax via HMRC’s online platform.
Next, you’ll have to deal with the deadline for payment. The deadline for payment of Corporation Tax is different from that of other major taxes, such as Income Tax or VAT, with it falling before the deadline for the filing of company tax returns.
Generally, Limited Companies have to pay their Corporation Tax within nine months of their company’s accounting period ending, but if you’re in your first year of trading, the first payment deadline will fall one year and nine months after incorporating. After that, you’ll be in the circle of paying up within nine months of your company’s tax accounting period ending.
You might avoid a fine if a close relative died shortly before the self assessment deadline, you've been seriously ill, or if you had major IT problems.