As a business owner of a limited company, you will be working hard to grow and be profitable whilst being aware of tax reliefs available and tax charges liable by you personally and your business.
All profits you make in your limited company are subject to a corporation tax rate of 19% in the current 2019/20 tax year. If you want to pay your corporation tax bill early with HMRC so as to plan ahead and not get caught out by a hefty tax bill later in the year, you have the option to pay your corporation tax bill early, with the added incentive of being rewarded with interest on early repayments.
Tell me more….
Being one step ahead of HMRC is no easy feat with tax reporting and payment obligations due at different times of the year for a typical limited company.
To encourage good practice and reward profitable businesses, HMRC allow limited companies to pay their corporation tax bill early if they wish. The incentive for businesses is that HMRC will pay you interest at the current going rate, known as ‘credit interest’, and they will do so from the date you make payment to the payment deadline of your corporation tax bill.
And if you really want to be super organised and efficient, HMRC are willing to reward you with up to six months and 13 days of credit interest, from the start of your accounting period.
As a limited company, you can choose whatever accounting period you wish, but by way of an example, if your accounting period begins on 1st January 2019 and therefore ends on 31st December 2019, you would be able to pay your corporation tax bill for that year as early as 13th June, and you would receive credit interest to and including the 1st October 2019, the deadline at which HMRC set the corporation tax bill payment.
It is worth noting that any payment you make early towards your corporation tax bill will be an estimate, and only confirmed as the accounting year progresses.
The only caveat with the credit interest payments is that it will need to be declared on your annual company accounts and will be subject to tax.
What is the standard deadline for your corporation tax bill?
Standard timing for payment of your corporation tax bill is nine months and one day after your previous accounting year-end. If you miss this deadline, HMRC will impose penalties from the very first day after the deadline, so rather than be in the good books with HMRC by paying early and benefiting from credit interest. We therefore advise our limited company clients to consider an early payment where possible on their corporation tax bill.
If profits decline substantially in a given tax year and you have over-estimated when paying your corporation tax bill early, HMRC will only charge you the 19% corporation tax rate on profits you have actually made and will reimburse you any over-payment.
The risk to pay early is low versus paying late, and the benefit of credit interest when paying early should be considered seriously.
It is worth noting that the credit interest rate is not particularly high – currently sitting at 0.5% and therefore any credit interest payments you plan to make won’t make a huge amount of difference to your bank balance, but of course planning ahead and building a good relationship with HMRC are all positive steps. You may decide however to invest your profits back into the business to help growth, for example, or keep a level of cash flow to keep your business running profitably.
The decision is of course up to you as the owner of a limited company, but certainly paying your tax bill early will at the very least give you comfort knowing your tax affairs are in order for that year.
We can help
We strongly recommend you discuss the tax affairs of your limited company with an accountant who can provide tailored advice and support on your personal and business tax affairs, such as Southside Accountants. Please contact us to see how we can help.
Written by Shaima Todd