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By: Ikedi Ani-okoye.

Corporation tax introduction

Corporation Tax is a tax on a company's taxable profit. A company being any limited company whether by shares or guarantee, members clubs and associations, trade and housing associations, co-operative groups. A companay tax return consists of the completed Corporation Tax Return CT600 and the annual financial accounts and documents which support the tax calculation.

Sole trader tax

Sole traders pay income tax while a limited liability company pays corporation tax which is a tax payable on the company net profit. The taxation advantages and disadvantages change from year to year as government policy in relation to tax rates and allowances change.

Prior to 5 April 2006 there was a considerable tax advantage in a company formation as the first £10,000 of taxable profit made by a limited liability company was zero compared to being self employed where the normal tax allowance as an individual might be £4,895 and 8% national insurance contributions also being charged on net self employed profits.

Companies paying Corporation tax

Many small companies have paid corporation tax at the 19% rate of corporation tax, and have then extracted profits using a combination of a small salary to cover the personal allowance, and the remainder of the profits extracted via dividends. This is still likely to be a popular strategy to extract profits as its ensures that full use is made of salary to utilise the personal allowance, with dividends, (generally a lower tax option) making up most of the extraction.

CONCLUSION

If your corporation turns out more money that can be considered higher than the reasonable salary for you as a president or CEO of the company, then obtaining an S corporation tax status might be the right choice.

This is because an S corporation passes profits directly to the owner, which means corporate tax is not assessed on the business. The profits can be filed in the owner’s personal income tax. In a C corporation, your profits will be doubly taxed. As the owner of the company, you will have to pay corporate tax, as well as an individual income tax on your profits.