After you start a company in the UK, you must pay corporation tax to HMRC on profits which are deemed taxable, within the accounting period. When it comes to actually submitting your payment, you might be wondering whether it’s best to use your personal credit card or your company card. Does it even matter? And if so, why?
Throughout this piece, we’ll dive into what corporation tax consists of here in the UK, how to go about paying your corporation tax bill, and explain why you should always use your company card (if possible).
What is Corporation Tax?
Taxes make societies go round. They’re used to divert much-needed funds towards public goods and services: education, infrastructure, healthcare (in the UK, at least), and more. But there’s only so much revenue you can gain from taxing individual citizens—that’s where corporation tax comes in.
Corporation tax is currently set at 19% of all annual taxable profits. It was due to fall to 17% from the tax year starting on April 1st, 2020, but for obvious reasons, the government has decided to keep the rate at 19%. The idea behind corporation tax is that companies tally up how much profit they made in the past year, deduct all qualifying expenses, and pay 19% of the total sum left over to HMRC.
When identifying your company’s total annual profit, you should consider the following. Let’s take a look at the example for each type of taxable profit using Steven’s carpentry business, Decor8 as an example.
- Trading income: The money you make from carrying out your trade
- Investment income: Any money that you make from investments.
- Chargeable gains: When you sell an item for more than it initially cost you.
Steven owns a boutique carpentry business, Decor8, that manufactures and sells custom-made furniture. Over the past year, the business has accrued £1,000,000 worth of sales.
Steven decided to invest £10,000 worth of Decor8’s capital in the London Stock Exchange, making a grand total of £500 throughout the year.
Steven decides to sell his unused, specialist CNC machine to Asif for £5,000 (£1,000 more than it initially cost him).
In total, the trading profits, investment profits, and chargeable gains comes out to £1,001,050. So wait—does that mean Decor8 would have to pay 19% of £1,001,050? Not exactly.
Companies can legally reduce their corporation tax bill by subtracting all tax-deductible expenses—in other words, expenses that have been made in order to keep their business running. These include things like:
- Staff salaries and subcontractor costs
- Renting an office space
- Utility bills (phone, internet, electricity, etc.)
- Business-related travel expenses
- Professional services (such as accounting, banking, or advertising services)
Decor8 spent a grand total of £300,000 on allowable expenses this year.
This means, the Corporation Tax that Steve needs to pay on his company Decor8 is:
19% x (£1,001,050 - £300,000) = £701,050
You might be wondering why certain expenses aren’t subject to corporation tax. Think about it: the government wants to encourage businesses across the UK, whether they’re small independent boutiques or large multinational behemoths. However, if they tax every single thing that a business does in order to keep on operating, then this will discourage people from running their own businesses. In turn, this would have a catastrophic impact on the country’s economy.
How Do I Pay Corporation Tax?
It’s worth pointing out that if your company has an annual turnover under £1.5 million, you’ll have to pay your Corporation Tax bill in full nine months and one day from the end of your accounting period.
Oyin’s software consultancy has brought in £750,000 during her accounting period (from the 1st of March 2019 to the 28th of February 2020). Having deducted all allowable expenses, her corporation tax bill comes out to £9,500. She must pay this sum before the 1st of January 2020 (9 months and 1 day from the end of her accounting period.)
If your revenue exceeds £1.5 million, however, then you must pay off your bill in 4 quarterly instalments instead of one lump sum.
Rajesh runs an online sports stock market that has brought in £2 million between the 1st of March 2019 and the 28th of February 2020. After deducting all allowable expenses, his corporation tax bill comes out to a grand total of £285,000. He will therefore have to pay four quarterly instalments, each worth £71,250.
Okay, let’s now explore how to actually go about paying your Corporation Tax Bill—and whether you should use your personal credit card or company card. The first thing to note is that paying your bill is slightly more complex than simply entering your card details and pressing ‘Pay Now’.
First, you’ll need to register for Corporation Tax within three months of starting to do business. This is a fairly simple process—it shouldn’t take you much longer than 10 minutes to complete online.
Second, and most importantly, make sure to keep accurate accounting records throughout the year. HMRC doesn’t look fondly upon alleged mistakes—if they think you’ve forgotten to include certain revenue streams, then you could face serious financial and legal penalties. So make sure that your accounts are in order throughout this year. This will ensure that you avoid any potentially devastating mistakes when working out your end-of-year company tax return, which details precisely how much tax you have to pay. If you know that you’re too busy to make sure your transactions are properly recorded, let our experienced bookkeepers help you with it.
Once you’ve worked out what your bill is, you come to the third step: paying it. Note that HMRC stopped accepting personal credit cards back on the 13th of January 2018 when it comes to paying corporation tax bills. You can still use your personal debit card if you so wish, but this probably isn’t such a great idea.
When running a business, you should always keep personal and business expenses entirely separate, or risk running into neverending accounting confusion trying to work out which purchases were personal or business-related.
Make sure that you have your own business account set up well before the time comes to pay your dues to HMRC. There’s actually a small fee if you use your company credit or debit card. While the government hasn’t stipulated the precise amount, it’s estimated that a £2,000 payment would incur a fee of roughly £1.50. Interestingly enough, however, there’s no fee if you decide to use your own personal debit card.
What if I Pay With My Personal Debit Card?
There’s nothing wrong with paying with your personal debit card, but it may end up being an overly complex process. It’s never a good idea to blur the lines between personal and business finances.
Imagine you use your personal card to pay for your commute every day in and out of work. This is obviously a personal expense—few companies (if any) pay for their employees' commuting costs. One day, however, you need to go see a client for an important meeting, which requires hopping on multiple trains and buses.
These travel expenses have only occurred because you’re trying to conduct business. Therefore, that means that they’re allowable expenses—not only should you be reimbursed by your company, but you also shouldn’t have to pay any tax on these purchases. You take a look at your bank statement for that precise day and it simply says “TFL - £25.60”. You have no idea how much the business trip cost in total as it’s simply been lumped in with your other personal travel expenses.
Of course, this is far from the most serious accounting problem—in the worst case scenario, you’ll only lose £25.60 worth of allowable expenses. But imagine if this happens at scale with far more expensive items. If you have hundreds of employees all paying for various trips to see clients, unsure as to which expenses relate to business travel and which are personal, then you’re going to have a nightmarish situation on your hands.
Financially stable companies do the basics right. They separate business and personal expenses, marking a clear line in the sand between the two. This helps them prepare their accounts more quickly and more confidently, and it also ensures they don’t run the risk of falling foul of HMRC.
But that’s not all. You also have to consider the fact that paying your debit card might have other unwanted consequences. Your Corporation Tax bill will be quite a hefty one-time lump payment. Therefore, you need to make sure that you have enough money in your account—and even if you do, you need to ensure that no other automated payments are due to be taken on that day.
Perhaps you’ve got just enough to cover your bill but you forget that rent’s also due on the same day, and that your car insurance and utility bills come out of your account the following day. If you end up missing any of these payments because all the money in your account has gone towards your Corporation Tax bill, then your credit score will suffer as a result.
So why take the risk?
And if you do pay with your personal debit card, remember: keep the receipt.Then, you can simply expense the business and pay yourself back using your business credit card. Or if you don’t yet have a business account, go and set one up right away. After you’ve opened an account you can then pay yourself back immediately, providing you have the funds.
Small Habits Go A Long Way
When paying your corporation tax bill, you have three options: your company credit card, company debit card, or your personal debit card. The one major reason why you should use a company card is that it’s far easier from an accounting administration perspective.
This might seem like a small distinction. However, small habits go a long way. Set up your company the right way and open your own company bank account. This will prevent you from mind-numbingly going through your previous transactions trying to identify which were business-related and will ensure that nothing gets missed off your company tax return. Most importantly, it will help you remain compliant with HMRC at all times.
If you’re looking for more crucial advice on how to run a business, as well as expert accounting support, then get in touch with us today.